By: Garland M. Baker B.
Exclusive to A.M. Costa Rica
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Some foreigners from the boom days are having to play a shell game today to substantiate ownership of properties they purchased during those times. The reason is that attorneys before September 28, 2012, loved putting real estate purchases in guaranteed trusts.
Most laypeople have no clue what a guarantee trust is and why it was used so much in the past, and why a property they purchase may be in one. In simple terms, they were used so lenders, especially developers, could circumvent using a mortgage to sell property on credit.
The sure tale sign a property is in a guarantee trust is to look up the folio real number of a property and see if the text EN CALIDAD DE FIDUCIARIO is next to the name. If it is, it is a trust.
Trusts can be a perfect vehicle for getting deals done. They can also be a good way to insure trustworthiness. However, they can be abused and be a vehicle to hoodwink expats out of their valuable property.
Trusts are call fideicomiso in Spanish. There are five basic parts to them: 1.) trustor or fideicomitente; 2.) trustee or fiduciario; 3.) beneficiary or fideicomisario; 4.) trust property or bienes fideicometidos; and, 5.) the trust contract or contrato de fideicomiso. The fourth item, trust property, is the thing administered by the trust. To be valid, a trust must hold some property. Property may be any real or personal property like stocks, real estate, even cash, to name a few examples.
In the past, before September 28, 2012, a seller and a buyer would be trustors or fideicomitentes. They would put a property in question in a trust or fideicomiso held by a trustee or fiduciario for the term of time that it would take the buyer to pay the seller. In this case, both the seller and the buyer would be beneficiaries or fideicomisarios of the trust. The purpose and result of the trust would be that the seller would get paid in full and the buyer would get the property free and clear of any encumbrance. This replaced a mortgage.
This structure was extremely convenient for sellers because a notary transferred assets into the special trust and registered it at the Registro Nacional. There was no transfer tax on this kind of transaction until laws 9068 and 9069, law for the enforcement of fiscal transparency and law for strengthening tax enforcement, made some major changes to Costa Rica’s code of commerce. Article 662 eliminated the tax exemption of property transfer taxes when transferring property between trustor and trustee.
However, there are some exceptions. Entities registered with SUGEF, the Superintendencia General de Entidades Financieras, the organization that supervises the stability of the country’s financial system, can still use trust without paying transfer taxes on property.
This all sounds great, how do foreigners get flim-flammed?
Here is a scenario. Joe and Jane Expat bought a property in 2007. A condominium overlooking the beach from a developer who put all the properties he built in a guaranteed trust. To buy, the couple were required to form an empty company of their own to “hold the property” when it was paid for in full. They decided to and called it Expats in Paradise, S.A. The developer’s attorney created the company and made up a trust contract that stated in essence, “when the condominium is paid for, it will be automatically transferred to Expats in Paradise, S.A.”
Now it is 2014, Joe and Jane paid off the condo. They try to contact the developer’s attorney to have their property transferred to them. They get no answer to their calls. After figuring they are being ignored, they start looking for the legal books of their company Expats in Paradise, S.A. so they can seek legal counsel elsewhere. Come to find out, they were never given the books to the company. They do not even have a copy of the trust.
What are the Expat’s to do? Who owns their property? What would their heirs have if Joe and Jane were no longer around? All good questions!
Whoever has the books of the company are the owners because it is easy to forge signatures. It constantly happens in this country. Property fraud is rampant, and the courts overburdened with cases. Some criminal attorneys say it is in a state of total collapse. The local media lately is full of cases where foreigners have been bamboozled out of everything they own. It seems of late, the only cases getting any attention are the high-profile ones.
Guaranteed trusts in their heyday – before September 2012 – were great financing vehicles. They still work for the people who can afford them and can navigate the legal maze surrounding them. Not so much now for simple folk.
They were also abused during Costa Rica’s boom period, and everyone with property in one should have it checked thoroughly. It is critical to have a copy of the document and understand its terms.
Article first published in A.M. Costa Rica on September 1, 2014.
