Mortgages and Financing in Real Estate Deals
With a booming real estate market in the country, prospective buyers naturally are interested in what financing options are open to them. Certainly the best and most common financing mechanism for acquiring property is the mortgage.
Use of Mortgages
Usually, people associate mortgages with banks, and do not realize that in Costa Rica this type of financing can be obtained not only from banks but also from third parties, either companies or private parties. Though banks tend to be somewhat cautious and restrictive when financing foreigners – a tendency that is slowly easing up – it is fairly common for real estate sellers to grant loans directly to their buyers to facilitate the transaction.
It is also becoming more common for people with substantial funds available, who want to take advantage of the attractive interest rates under which they can place loans in the local market, to provide financing for land deals. This practice can be very lucrative, and if mortgages are correctly and carefully implemented it can be a good investment strategy, as well as a good opportunity for land developers.
It is important to know that mortgages are not available for all land deals, particularly in the case of concessions, in which fee-simple ownership does not apply and “owners” are granted a renewable lease from the government for a specific period of time. In these cases financing becomes severely jeopardized, and parties have as an alternative resorted to the trust, which,we need to warn, is not risk free.
Trusts are being used fairly often nowadays as mechanisms to establish security on properties to guarantee payments of loans, but they are not as widely accepted and relied upon as are mortgages. Though I am sure some of my colleagues will disagree, I believe the lack of substantial legal treatment of this mechanism in Costa Rica, as well as common carelessness while drawing up the trust agreement and choosing a trustee, can lead to many problems, misunderstandings and eventual litigation. My first choice for real estate security continues to be the mortgage.
To be implemented, mortgages require a formal document, which must be signed by the borrower and by the landowner – if they are two separate parties – before a Costa Rican notary public and entered into the notary’s protocol book. They can be drawn up in any currency, as there is no legal requirement to use Costa Rican colones in such agreements. If foreign currency is used, it is usually important to address applicable exchange rates and forms of payment in the document.
Documents: Useful Tips
One single loan can include, as security and under the same mortgage, several pieces of land. Nevertheless, it is very important to know, especially if you are the lender, that local law requires the loan document to break down the total amount among each property, allocating specific individual values to all of them. This requirement has important practical consequences, since it can influence, among other things, how partial releases might occur, which may not always coincide with the lender’s business plan.
Another important item to take into account when structuring a mortgage is the establishment of contractually agreed domiciles at which the parties can be served notifications.
This matter is crucial, since a bad choice of address, especially for the debtor, can substantially delay or even make impossible the initiation of a foreclosure procedure and jeopardize collection. It is good practice, for example, to expressly indicate that the borrower will be served at the offices of his or her attorneys, which are usually open to the public and an easy place for notifications to be delivered.
It is advisable, in this case for the protection of the borrower, and especially if he or she will be conducting a development project, to establish clear rules for partial releases of the mortgage on particular pieces of the land, so sales can be made. The more specific these rules are, the better for all parties, and the clearer the expectations and guidelines to be followed. A provision on the possibility of prepayment is also recommendable, since if this is not agreed upon signature of the loan and mortgage, the matter will be left to the sole will of the creditor.
It is possible to secure a loan with land belonging to a third party, as long as the landowner indicates acceptance by signing the loan and mortgage document. It is also feasible to add additional security to the loan, including personal warranties by parties other than the borrower, thus reducing the risk of collection problems.
Other suggested provisions on the loan and mortgage document, especially if you are the lender, would be a prohibition against selling the land without the creditor’s authorization (the contrary can lead to a situation in which multiple additional parties must be served to initiate foreclosure and can compromise effective collection); as well as to automatically include any future improvements on the land as part of the security, and the requirement of sufficient insurance coverage for any construction on it.
In general terms, not all mortgages are the same. The above provisions and many others, as well as special consideration to the specific terms of the loan, its possible development and the characteristics of the land and buildings on it, need to be carefully taken into account, both by borrower and lender.
As a rule of thumb, it is also recommendable to check the National Registry’s database once the mortgage document comes out registered to make sure it was correctly recorded, since it is common to find mistakes in amounts, maturity dates, interest rates and other conditions.
For more legal advice, contact Lang & Asociados at 204-7871 or visit www.langcr.com.
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