Some foreigners from the boom days are having to play a shell game today to prove ownership of properties they purchased during those times. The reason is that attorneys before Sept. 28, 2012, loved putting real estate purchases in guarantee trusts.
Most lay people 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.
A trust is called a 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 Sept. 28, 2012, a seller and a buyer would be trustors or fideicomitentes and 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 a 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. Hence the date Sept. 28, 2012.
However, there are some exceptions. Entities registered with the Superintendencia General de Entidades Financieras, the organization that supervises the stability of the country’s financial system, can still use trusts without paying transfer taxes on property.
This all sounds great, so how do foreigners get flimflammed?
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 guarantee trusts. 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 transfered 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 Expats 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 is the owner because it is very easy to forge signatures. It happens all the time in this country. Property fraud is rampant, and the courts are 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.
Guarantee 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 very important to have a copy of the document and understand its terms.
Garland M. Baker, a certified international property specialist, is a 44-year resident and naturalized citizen of Costa Rica. His firm’s team provides multidisciplinary professional services to the country’s international community. Reach him at firstname.lastname@example.org. Baker has undertaken the research leading to these series of articles in conjunction with A.M. Costa Rica. Find the collection at http://crexpertise.info, a free reprint is available at the end of each article. Copyright 2014. Use without permission prohibited