Mexican Reform Will Give U.S. Investors a New Lease on Life

Every few months, Russell W. Bogda likes to escape Los Angeles and relax in his vacation home 100 miles south of the border.

But the Mexican government has welcomed the Los Angeles attorney only up to a point. Like all non-Mexicans, he was not allowed to own his property near the coast; he could control it for only 30 years.

That changed dramatically last week, however, when Mexico announced a sweeping relaxation of restrictions on foreign investment. As a result, some California investors foresee a sharply rising U.S. stake in Mexican hotels, resort complexes, villas, condominiums and other tourist properties.

“Obviously, you want to look at the fine print, but I think it will make more people interested and willing to consider investments in Mexico,” Bogda said of the new rules. “That’s why I was excited.”

100% Foreign Ownership

Under the far-reaching changes, Americans who seek resort homes in Mexico no longer will have to relinquish them after 30 years. A Mexican bank will continue to have ownership through a trust--but at the end of 30 years, the foreigner’s control will be extended for another 30 years.

In addition, Mexico is for the first time allowing 100% foreign ownership of Mexican corporations in tourism and certain other industries. Previously, foreigners were restricted to owning less than half of Mexican enterprise.

“If I can go down and build a four-unit condo on the beach and deal with a 60-year trust and not have to have a Mexican partner, I’ll be more inclined to do it. I think it’s a positive sign,” Bogda added.

Mexico’s incentive is no secret: The rule changes are designed to ease its foreign debt burden, estimated at $108 billion. Tourism is considered an especially effective tool to combat debt because it draws hard currency.

Yet Mexico’s tourism industry has been far smaller than that of nations in Western Europe, for example, “even though it (Mexico) has a giant country like the United States and also Canada in close proximity,” said David G. Ellsworth, a Los Angeles attorney whose clients include foreign developers in Mexico and Mexico’s tourist development and finance agency.

Carlos Hank Gonzalez, the nation’s secretary of tourism, has reportedly said that Mexico seeks to double its income from tourism between 1988 and 1994 to $5 billion, and expects 50,000 new hotel rooms to be built in that time.

Now some believe the changing rules may help usher in some of the development that the debt-ridden nation seeks.

“This obviously makes a very, very big difference,” said Don Gandy, a San Diego consultant who has worked with several developments proposed for Mexico. “More than anything, it indicates a change in philosophy.”

Under the old philosophy, for example, foreign investors had trouble gaining long-term financing for projects, in part because they were limited to minority ownership.

“Now a U.S. or Japanese developer can go down to Mexico and set up their own company without having to find a Mexican partner or get approval from a national commission--and own 100% of the company,” said Ellsworth.

He continued: “The lender’s going to look at it (Mexican development) much more favorably.”

Climate Was Improving

Moreover, the 30-year restriction on control applied not just to choice oceanfront property but to a sprawling band of territory known as the “forbidden zone,” stretching 32 miles inland from the coastline and 64 miles from Mexico’s borders.

The 30-year limit “has been a hindrance on developers going into Mexico to do projects and individuals going into Mexico to buy projects,” Ellsworth said.

Even before the announcement, the foreign investment climate in Mexico seemed to be improving in light of Mexican officials’ friendlier attitude. For instance, the stage is being set for rapid growth in Northern Baja, between Tijuana and Ensenada.

“If you drive up and down the coast, you can see dirt being moved on eight to 10 smaller projects,” said Gandy, adding that “Within the last year, practically every piece of vacant usable land on the water has been put in position for development.”