By: Pablo Guillermo Gómez Sáinz and Daniel Ascencio Rodríguez
As a result of the nearshoring* scenario that Mexico is currently experiencing because of the global picture, an increase in real estate transactions is expected, including real estate operations pertaining to the sale, purchase, construction, adaptation and/or lease of industrial warehouse spaces for foreign companies that choose Mexico as a destination for their operations.
The above implies that companies coming to Mexico will have to carry out – with much greater frequency and rigor – due diligence processes for real estate transactions to calculate the risks in the acquisition and/or lease of industrial warehouses for their industry and/or administrative offices, among other types of real estate transactions.
Therefore, we present some of the essential aspects that should be taken into consideration when carrying out due diligence processes in real estate transactions.
First. Any person interested in these type of transactions shall bear in mind that the main purpose of a due diligence is to identify the legal relevant issues of the property subject to a purchase, sale and/or lease which may affect their legal certainty (whether in the position as purchaser, seller or party involved) when concluding a transaction, whether as a result of an existing mortgage loan, an easement or any other encumbrance or legal situation of the property itself that may affect the cost or value of the relevant transaction, and even its viability.
Second. It is of the utmost importance to verify that the party appearing as the seller of the property is effectively its current owner or, given the case, that it bears the rights to lease it or to carry out the relevant transaction on behalf of the actual owner. For this reason, Roman Law named the difficulty of proving the chain of ownership leading up to its current owner as the “probatio diabolica”1. This is one of the reasons that justify the existence of Public Registries of Property. In transactions in which the subject of the matter is real property, or specific rights over said real property, the Public Registry of Property that corresponds to its domicile must be contacted to request and obtain a certificate of registration folio and a certificate of freedom of encumbrances. The main advantage of obtaining the certificate of registration folio is that it refers to all the transfers of ownership of which the property has been the subject, including those trusts to which it was contributed; if said transfers of ownership were not duly registered in the corresponding Registry, then they shall not be effective against third parties. On the other hand, the benefit of the certificate of freedom of encumbrances is being able to verify whether encumbrances over the real property exist, such as easements, or if the property has been placed as collateral for the fulfillment of other obligations.
The confirmation as to whether the real estate has been placed in a trust acquires relevance when we keep in mind that trusts are one of the most widely used legal institutions in the real estate sector, and they may range from infrastructure and real estate trusts (commonly known as FIBRAs) to real estate development trusts (sometimes called “A + B Trusts” in legal practice). In these trusts, the ownership of a real property is contributed to the trust to develop a residential development, shopping center, housing community, industrial zone, among others, with the purpose of granting the trustors themselves benefits as trustees/beneficiaries of the trust; these benefits may range from the capital gains derived from the economic appreciation of the developments, to the cash flows generated by the lease of the premises, houses or apartments resulting from the management of the development.
Third. Third. Another issue to take into consideration when taking part of a real estate transaction is the obtention of relevant permits, certificates or authorizations required for the property subject of the deal and for the purpose to which it shall be destined. These documents may be subject to federal, state, or municipal jurisdiction, and the applicable legislation is the one of the domicile of the real property. Thus, the necessary documents for the regularization of the property before the corresponding authorities shall vary depending on its domicile. Examples of these documents are the certificates of due payment of the property tax and/or due payment of water services, the documents related to the marking and delimitation proceedings, the Zoning Certificates or the Certificates of Accreditation of Land Use by Acquired Rights (which in Mexico City depend directly on the Mayor’s Office that corresponds to the domicile of the property). The lack of these documents may result in important sanctions imposed by the corresponding authorities, such as the rescission of agreements, suspension of works, partial or total closure of works, demolition or partial or total removal of construction projects, loss of government incentives, revocation of licenses and/or permits granted, among others.
Room. Fourth. In the context of the climate crisis we are currently undergoing, legislators have taken note of its relevance and, for several years now, have decided to impose obligations and sanctions aimed at taking care of the environment and to handle pollutants and waste. Both the General Law for the Prevention and Integral Management of Waste (Ley General para la Prevención y Gestión Integral de los Residuos) and the General Law on Ecological Balance and Environmental Protection (Ley General de Equilibrio Ecológico y la Protección al Ambiente) grant authority to the Federation, the federal entities, Mexico City, the Municipalities and the territorial divisions of Mexico City related to the “preservation and restoration of the ecological balance and environmental protection”E and to the “prevention of site contamination and its remediation”G. In this sense, such Laws, their Regulations and, as applicable, the related Mexican Official Standards (Normas Oficiales Mexicanas), establish obligations for persons carrying out specific developments or activities regulated by these same laws; for example, the obligation to carry out an environmental impact study in cases in which certain works or activities are carried out. The penalties applicable to environmental and waste management matters may range from very significant fines to the temporary or definitive, total or partial closure of the developments, for which reason it is important to consider these obligations. Therefore, it is important that an environmental study be conducted before acquiring the ownership or right of use of a real property.AND and “prevention of the generation, use, comprehensive management of waste, prevention of site contamination and its remediation”g. In this sense, said Laws, their Regulations and, where applicable, the related Official Mexican Standards establish obligations for people who carry out specific works or activities regulated by these same laws; For example, the obligation to carry out an environmental impact study in cases where certain works or activities are carried out. The sanctions applicable in environmental and waste management matters can range from very significant fines to the temporary or definitive closure, total or partial, of the work, so it is important to consider them. Therefore, it will be very important that an environmental impact study be carried out before acquiring ownership or use of a property.
Fifth. The location of the real property, its safety situation, and the measures prevailing in the zone are also other topics to be considered in the due diligence. Another challenge that entrepreneurs must face in Mexico within the national Nearshoring landscape has to deal with the particularities of public security – particularly on highways – in the country. As multiple national media outlets have pointed out, highways are frequently the target of assaults, which implies the loss of merchandise, vehicles and even human lives, since, on many occasions, the assailants do not limit their acts to merchandise and may threaten or harm the drivers themselves. Expansión (a Mexican business magazine) published an article3 citing statistics from the National Chamber of Freight Transportation (Cámara Nacional del Autotransporte de Carga or “CANACAR”, for its name in Spanish), which states that the investment in security has resulted in a 15% increase in operating costs incurred by companies. The same article includes data from the Executive Secretariat of the National Public Security System (Secretariado Ejecutivo del Sistema Nacional de Seguridad Pública or “SESNSP”, for its name in Spanish) which shows a 19.2% increase in robberies to truck drivers in January, 2023, compared to the previous year.
Preliminary conclusions. The abovementioned aspects point out the importance of carrying out a due diligence process of the real property involved in real estate transactions, which is becoming increasingly relevant in Mexico due to the nearshoring.
To summarize, it is essential to take into consideration the following aspects during a due diligence process:
- Verifying that the parties of a specific transaction have the necessary and/or sufficient legal capacity and/or authorities to enter into the transaction;
- Obtaining the relevant permits, certifications and/or authorizations to carry out real estate developments and/or projects, as well as productive or business activities;
- Pay special attention to the environmental and waste management obligations related thereto, as they may result in important sanctions; and
- Take the particularities of the Mexican business and public security ecosystems into consideration, specifically in connection to the dangers present on Mexican highways and roads and the costs involved in the theft of merchandise and assaults on drivers, which are ultimately reflected in the cost of the final product or service, or – even worse – in the loss of human lives.
Notes::
Nearshoring is a practice whereby companies transfer, either by themselves or through third parties, the totality or a part of their production or supply chains to either the country that will be their final market or to a third country close to it. Nearshoring is the name given to the strategy by which companies relocate all or part of their production chain to a place closer to final consumers with the purpose of reducing costs in the supply or production chains, and to avoid setbacks. logistics.
Bibliography:
[1] Torres Manatou, M. (2020). Real Estate Due Diligence. In MO Zárate Martínez, Real Estate Law in Mexico(pp. 105-130). Tirant lo Blanch Mexico.
[2] Fernández Martínez, LG (2020). The Trust as a Real Estate Investment Structure. In MO Zárate Martínez, Real Estate Law in Mexico(pp. 291-314). Tirant lo Blanch Mexico.
[3] De Luna, T. (2023, March 10). Road Insecurity Increases and Contributes to the Increase in Inflation. Expansion. Retrieved on November 28 from: https://expansion.mx/empresas/2023/03/10/inseguridad-en-carreteras-aumenta-y-contribuye-en-inflacion
Consulted legislation:
[A] General Law of Credit Titles and Operations.
[B] Civil Code for the Federal District.
[C] Urban Development Law of the Federal District.
[D] Regulations of the Urban Development Law of the Federal District.
[E] General Law of Ecological Balance and Environmental Protection.
[F] Regulations of the General Law of Ecological Balance and Environmental Protection in Matters of Environmental Impact Assessment.
[G] General Law for the Prevention and Comprehensive Management of Waste.
[H] Regulations of the General Law for the Prevention and Comprehensive Management of Waste.
