MEXICO: An Introduction to Real Estate

Leaving behind the global downturn in economic development due to the pandemic, “nearshoring”, the strategy of companies to manufacture closer to the market where they sell their products and make supply chains more efficient, has had a significant impact in Mexico for more than a year and a half now, due to its proximity to the United Sates, one of the world’s major markets and the ease of merchandise transportation from this location, boosting economic activity in the country with foreign investment and export growth. The beneficial effects of this trend are expected to continue in the next couple of years and, therefore, contribute to the growth of, among others, the industrial sector in Mexico, which in turn will face several challenges regarding the shortfall in available industrial buildings and the development of infrastructure around those buildings, particularly the sufficient supply of electricity and water services.

Another booming sector is hospitality, where steady growth has been seen and hotel capacities are increasing as tourism’s recovery since the pandemic appears to be solid and luxury resort hotels are trending for both local and international tourists.

Real Estate Entities  

The Mexican real estate industry has evolved rapidly since the creation of the fideicomiso de infraestructura y bienes raíces (FIBRA) and certificados burstiles fiduciarios de desarrollo (CKD), both are types of investment vehicle listed on the Mexican Stock Exchange and the international markets, allowing individual and sophisticated investors to participate in equity in the real estate sector, similar to real estate investment trusts in the United States. Furthermore, small developers have become institutionalised players and large international investors have entered the country through joint ventures with local real estate operators or directly by setting up operations in Mexico.

The traditional real estate business of developing, owning, or holding, and managing assets has transformed into a business of management for fees, where developers have seeded their properties into FIBRAs and become their property managers and operators, focusing in some respects on the returns from fees charged to the FIBRAs.

CKDs made their entrance into the Mexican market in 2009, providing an investment alternative for qualified players (including Mexican pension funds, known as AFOREs, therefore many real estate private equity firms have set up and launched their own CKDs in the capital market to gain access to AFORE funds) with better risk tolerance (long-term projects with no fixed returns). CKDs are basically securities issued by a trust listed on the Mexican Stock Exchange, with a maximum expiration term to be repaid of no longer than 50 years. CKDs are fully regulated by the Mexican Securities Commission, and can only be subscribed to by qualified institutions.

Although a CKD is the perfect vehicle with which to speculate in land bank acquisition and construction, which, once stabilised, may be disposed of to a FIBRA in exchange at a favourable capitalisation rate, in some cases funds are utilised to acquire stabilised assets as well.

In 2011 Mexico’s first FIBRA was listed on the Mexican Stock Exchange and today there are more than 14 FIBRAs on the market. A FIBRA consists of a Mexican trust that issues securities (real estate trust securities (CBFIs)) that are placed on the capital markets for general public investment. They are regulated by the Mexican Securities Commission, with certain particularities, including that a substantial part of their capital must be invested in rent-generating properties.

Although there is not yet general asset specialisation by all FIBRAs, some of them specialise in certain asset classes. Even though there has been only one merger between FIBRAs so far, in the near future there may be further consolidation of FIBRAs, and more FIBRAs moving to specialise in asset classes.

FIBRAs are definitely the most popular investment vehicle. Especially in the last year, the high demand and occupancy expectations in the industrial sector as a result of nearshoring have strengthened FIBRA growth.

Private equity funds have also played an important role in the development of a sophisticated market in Mexico and are becoming increasingly important. Private equity real estate ventures, commonly structured through a managing company and different special purpose vehicles (SPVs) or project vehicles, are made in Mexico through investment promotion corporations (SAPIs – legal entities that are set up ready to be listed on the stock exchange, if ultimately an IPO is desired; although they are not transparent vehicles and pay their own taxes, foreign investors may still benefit from international treaties with Mexico and avoid double taxation), limited partnerships or Mexican trusts (set up as pass-through vehicles for tax purposes).

Deal Structures 

Some of the most important aspects to consider in sale and purchase transactions are tax effects for both parties and legacy liabilities that may be transferred to buyers. Usually, sellers would prefer to sell the legal entity holding the assets to avoid triggering payment of deferred tax liabilities, and buyers would most likely choose to buy assets directly in a newly formed SPV, seeking to avoid any previous liabilities.

Real estate transactions in Mexico have increasingly followed the US model and it is now common to see:

• letters of intent;

• master purchase agreements with extensive representations and warranties;

• conditions precedent;

• execution of closing documents;

• indemnities with deductibles, baskets and caps; and

•Foreign Corrupt Practices Act clauses.

When a portfolio of properties located in different cities throughout Mexico is the target of an acquisition (a multi-jurisdictional deal), flawless notary co-ordination of the different public registries is required to assure accurate and timely registry duties, information on each property and payment of property transfer taxes. Nowadays most public registries of property and notaries’ offices are in the process of updating and digitising their data, which will make them faster and more user-friendly for due diligence and real estate transactions in general.

Antitrust filings and approval of the Mexican Antitrust Commission are necessary in Mexico if the thresholds under the Federal Antitrust Law are met, even if the acquiring party has no participation in the relevant industry and there is no increase in market share from the transaction. Thresholds take into account the purchase price of the transaction with an impact in Mexico, the assets and sales of the target in Mexico, the capital stock involved in Mexico, and the global assets and sales of participants.

Real Estate Financing 

Two traditional commercial real estate lending structures in Mexico are (i) the standard corporate credit transaction used mostly by banks, where a bank performs a market valuation of the assets based on asset class, construction and location, and determines the proceeds of the loan considering such valuation, and a mortgage and a corporate guaranty are requested; and (ii) a non-recourse, asset-based loan with a loan-to-value ratio based on the valuation of cash flow coming from rents (present and pro forma considering roll-over and down-time periods in terms of asset class, location, market, competitors and inventory). This type of structure usually targets portfolios that are cross-collateralised under a guaranty trust collateral agreement, and if the assets do not have enough cash flow to cover debt service, a lender cannot ask the borrower to complete payment with resources other than from secured properties.

In addition, new lending structures are being put in place to keep up with the needs of real estate players (mezzanine loans, recourse corporate credits, flexibility to asset guaranty releases and substitutions, and unsecured lending transactions).