INTRODUCTION TO BUYING PROPERTY
Real estate transactions are among the most important and valuable events in our lives or business. The process of buying a home or entering into a real estate investment should and can be fun and exciting, and bring us financial rewards and pleasant experiences for years to come. However, buying property in Costa Rica requires placing large portions of assets at stake and assuming substantial personal and financial commitments. Therefore, it is important to proceed with caution and care. Especially when buying property in a foreign culture with a system, language and values we don’t fully understand. It can be a frustrating experience and may seem at first fraught with risk.
You don’t have to be a resident to buy property in Costa Rica
It is not necessary to be a resident to own property here in Costa Rica. The laws and constitution of Costa Rica, with the exception of property located in the Maritime Zone, affords foreign investors the same rights as nationals in property ownership; as long as the proper procedures are followed. This Guide to Buying Property in Costa Rica is designed to provide information to potential investors of all types of real property in Costa Rica about the buying process and what you should know prior to investing.
Types of Property and Property Rights
Costa Rica offers a large assortment of real estate to choose from. Single family homes, condominiums, residential lots, town homes, farms, beachfront, raw land, industrial, commercial, and time share properties are all available in Costa Rica. Below is a brief description of the types of property ownership you will encounter and their inherent rights and/or restrictions.
1. Fee Simple (Pleno Dominio Absoluto)
Fee Simple ownership is the most comprehensive type of property ownership in Costa Rica. This concept of ownership is similar to the concept of Fee Simple in the United States and other common law countries. Under Fee Simple ownership, foreigners have the same rights as Costa Ricans to the full right of use and enjoyment (usufruct), and to materially own the property. The owner can lease, improve or transform it in accordance with the law and sell it or pass it to heirs without restriction.
2. Condominiums and/or Urbanizations
Condominiums are generally found in larger apartments and townhouse projects; although, they can also be established among a cluster of what may appear to be single-family homes or finished lots in what might be known as an urbanization in other countries. Costa Rican law provides for specific rules on how condominiums are established and allows the developer to construct roads, infrastructure and public areas and to establish architectural standards and integrity. Common and privately owned areas are established. Covenants, conditions and restrictions, or by-laws, are recorded over the entire project. Fee Simple ownership applies to condominiums where the condominium properties are reflected individually and as a part of the overall Mother property, with the Mother property containing the common areas, roads and infrastructure with the additional restrictions as contained in the by-laws. Although the covenants, conditions and restrictions are intended to protect the integrity of the development, it is crucial to thoroughly understand them before finalizing a purchase agreement.
3. Buying Time Shares
A fractional ownership interest in a subdivided single unit, with the right of use for an agreed upon time period each year (usually a week or more), is generally referred to as a time share property. In most cases, the same rights of ownership as in a condominium apply, but with the additional limitation of a period of time for its use and enjoyment. Timeshare properties are not widely available inCosta Rica.
4. Maritime Zone Property – Concession Only
The majority of beachfront property in Costa Rica is known as concession property. The right to use and occupy concession property is regulated by the Maritime Zone Law #6043 (Ley Sobre la Zona Maritimo Terrestre) and its reforms of 1977. The law designates the first 200 meters measured from the mean high tide line as the Maritime Zone (ZMT) and applies to coastal properties along the Atlantic and Pacific sections of the country; as well as, islands, estuaries, pinnacles of rocks, mangroves and areas exposed during low tide. In essence, concession property located within the Maritime Zone is owned by the state and its occupancy and use is administered by the individual municipalities with supervision of the Costa Rican Institute of Tourism (ICT). Concessions must be approved by the Costa Rican Institute of Tourism (ICT), the Agrarian Development Institute (IDA) and the Housing and Zoning Institute (INVU) depending upon which zone the concession property is located.
The Maritime Zone is divided into two distinct areas:
a. The Public Area (Zona Publica) is the first 50 meters going inland from the mean high tide line. Ownership and construction, unless approved by the government, of any type is prohibited. Additionally, the area is open to the public for their use and enjoyment. There are no totally private beaches in Costa Rica.
b. The Restricted/Concession Area (Zona Restringida) covers the next 150 meters extending inland from the Public Area. It is in this area that the local municipal government grants leases for occupancy and use, known as concessions, for renewable terms ranging from 5 to 20 years. With proper permits, the owner of a concession may build and develop the property according to the approved regulatory plan.
Ownership of a concession is not the same as fee simple ownership; it is a lease with specific rights of transfer. With few exceptions, foreigners do not have the same rights as Costa Ricans in purchasing and owning concession properties. Under the law, foreigners may not have a majority ownership in a concession unless they have had 5 years of legal residency in Costa Rica. If ownership is in the name of a corporation or partnership, a Costa Rican citizen must be the owner of at least 51% of the shares and the capital contribution. Corporations with bearer shares, companies or corporations not domiciled in Costa Rica or whose shares or capital investment comprise more that 50% foreign ownership are not legally entitled to purchase concession properties. It is also possible for a corporation owned by a Costa Rican to purchase a concession and then place the shares in trust with a reputable trustee, such as a title and trust company, to be held for the benefit of a foreign beneficiary.
Because a concession is not a recorded fee simple titled property, extra precaution must be taken in purchasing concessions. Transfer of concession rights must be approved by the local municipality, the Costa Rican Tourism Institute (ICT) and/or the Institute of Land Colonization. As control is primarily in the hands of the local municipality, a thorough review of the file and extensive interviews with the officials in charge of concessions is necessary. Often times an application for concession and not the concession itself is being offered for sale. If only the application (solicitud de concesion) is purchased, the new buyer must complete the extensive process to obtain the concession.
Assuming that all the rules and regulations set forth in the specific use given for the concession have been followed and all tax payments are up to date then the concession holder has the right to obtain a renewal of said concession normally for the same time period given for the original concession. Under these same conditions, the concession holder has the right to sell or bequeath the concession with the express consent of the respective Municipality and the ICT. Other forms of transferring concession property are not recommended.
A small percentage (approximately 5-10%) of the beachfront property located in the Maritime Zone are fee simple, titled property. These properties are not concession properties nor leasehold properties. Instead, the owner has all of the rights, use and enjoyment as any other owner of fee simple property, and is not subject to the restrictions established for the ownership and transfer of ownership of concession properties. There are, however, certain zoning rules that apply to Fee Simple property in the Maritime Zone that are not necessarily the same as zoning in non Maritime Zone properties.
5. The Risks of Buying Untitled Property
99% of the properties in Costa Rica are registered in the public land records of the National Registry (Registro Nacional). Those properties not registered in the National Registry are untitled. Many of these properties have been inhabited by families for generations and may have fence lines and/or boundary markers. However, because they are not registered, there is no way to tell who owns the property or what the property entails. Untitled property should be avoided when buying a property in Costa Rica. Untitled property can become titled property by following specific procedures well established under the property laws of Costa Rica.
Forms of Property Ownership
Title to real property interests in Costa Rica can be held in the name of an individual, the names of several individuals or in the name of a corporation. Holding title in the name of a registered corporation provides greater flexibility in estate and tax planning, limiting liability and overall general management. There are pros and cons to holding title individually or in a corporation. Even if the corporation is not active, the legal books must be kept up to date and yearly accounting and reporting procedures are required. A good attorney can advise you as to the proper course dependent upon your situation and needs.
Corporate shares of the corporation that owns property can be placed in trust with a title and trust company, such as Stewart Title, with specific instructions that allow for management of transactions without the physical presence of the owners of the corporation and automatic transfer on death without the need for probate. Based on your situation, your Attorney can explain to you which form of corporation is right for your situation and help set up the articles of incorporation with specific directives on ownership percentages and the rights and duties of each officer of the corporation.
For convenience, when either it is not possible for the founders and board to be in Costa Rica at the same time and place to sign the articles, or when it is not possible or convenient to wait for a new corporation to be properly registered, attorneys and notaries often offer a “shelf” corporation. This is a new, legally formed corporation without prior activity, normally formed by the officers and staff of the title company and held on the shelf without use until needed by a client. In the case of a property transfer, the buyer must sign the deed. When taking title to property in a shelf corporation, the title company officer who also holds power in the shelf corporation, signs the deed on behalf of the corporation and then immediately relinquishes his power in the corporate books and a new public document (protocolización) is signed appointing new officers with appropriate power. This document is then recorded in the National Registry.
Is it better to purchase the shares of the corporation that currently owns the property rather than transferring title to a new corporation? While it does save money on transfer taxes, considerable caution should be taken. When you acquire the shares of a corporation you not only acquire the assets, but the liabilities as well. Proper research, the nature by which the corporation acquired the property and protective documentation may reduce this risk.
Regardless of whether you purchase property in your personal name or in the name of a corporation under your control, at the time you purchase the property you should always record the sale at the actual amount that was paid for the property. It is important to follow this step in order to create the actual tax cost basis for the property.
The Purchasing Process and How Property is Registered
Properties are transferred to the buyer from the seller by the execution of a transfer or conveyance deed (escritura de traspaso) before a Notary Public. Unlike notaries in other legal systems such as the United States or Canada, whose authority is generally limited to the authentication of signatures, notaries in Costa Rica must be an attorney and are responsible for preparing and supervising the execution and recording of all publicly registered documents. All acts of the notary are recorded in their government controlled notary book. Depending upon a notary’s professionalism, and the clarity and security he provides, the process may range from merely appearing at their office and quickly signing documents and exchanging money, to a much more sophisticated process involving clear and concise purchase agreements, professional escrow services, extensive title searches and reports, owner’s and surveyor’s affidavits, trust agreements, prompt recordation of documents, certified money transfers and title insurance.
All titled land in Costa Rica is registered in the public land records of the National Registry (Registro Nacional). The registry assigns a permanent identification number (folio real or finca number) to each property which has been officially recorded. This number consists of a single number from one to seven, indicating the Province where the property is located. An F in the identification number indicates that the property is part of a condominium. This number is then followed by a sequence of five or six numbers, or in the case of a condominium the sequence usually has four numbers, which specifically identifies the property. Finally a sequence of three additional numbers appear, which usually consists of three zeroes indicating that the property is fully owned by one person or corporation, or two zeroes followed by another number indicating partial ownership by by more than one party.
Prior to preparing the transfer deed, the notaries conduct a thorough search of the title in the National Registry to determine if the title is free and clear of defects. The Public Registry Report (informe registral) will provide detailed information about the property; such as, the name of the person or entity holding title, the name of the previous owner, the location of the property, boundary lines, survey number, mortgages or liens, declared value of the property, encumbrances (right of ways or easements), and any other recorded documents that may affect the title.
The property report will normally show an existing registered survey of the property (Plano Catastrado), although there are some properties where a survey does not exist. Currently, property cannot be transferred or mortgaged if the land does not have a registered survey and the survey must be referenced in the deed of transfer. If the property survey is old or has not been updated, it is recommended that a new survey be drawn and registered to properly reflect the property’s boundary lines and actual size in the case of large rural properties. Surveys are drawn and recorded by registered surveyors and the process can take several weeks.
In addition to the performance of a title search, when the property is to be transferred by virtue of changing the ownership of the corporate entity that owns the property instead of changing the actual title holder of the property, it is essential to perform a corporate search in the Commercial Section of the Public Register. This search will verify that the entity transferring the property is in good standing and that the proposed signatory of the transfer deed has sufficient capacities to do so. It is also wise to perform a search to determine if the corporation holds any debts to public institutions and require that the current officer(s) of the corporation sign an affidavit swearing to the fact that the corporation is transferring ownership of the corporation free and clear of all liens and encumbrances.
If one of the parties will not be present at the closing, they can give an authority to another by granting a Power of Attorney (poder) so that they can be represented before the notary public. There are two types of Power of Attorney authorities. A General Power of Attorney gives the representative a broad range of powers to sign on behalf of the individual and must be recorded at the Public Registry. A Special Power of Attorney specifies and limits the transaction and conditions under which the representative may sign on behalf of the individual. The “special” and “general” authorities must be signed before a Costa Rican notary. If the individual is outside of Costa Rica, the power of attorney must be signed before a Costa Rican Consul with the original presented, with proper authentications, to the Notary. In either case, the signed authority should be recorded in the notary’s record book. The “special authorities” are not registered in the Public Registry, because they are only granted for a specific use which expires when a certain condition is met; for example, the sale or purchase of property. A signed proxy letter will grant authority if the property is being transferred by a corporation.
The transfer deed is signed by the buyer and the seller; as well as, the notary public. The deed is recorded in the notary public’s record book and is presented (anotado) to the National Registry for annotation and registration. All prior mortgages or liens must be removed prior to registration of the new deed. Because Costa Rica operates under a “first in time, first in right” system, it is imperative that the notary immediately present the deed for annotation to ensure the rights of the new buyer and to prevent claims by third parties. After the registry reviews the deed and determines that it is legally correct, the property is registered in the name of the new owner.
The public registry will not accept a transfer deed for annotation and registration without the full payment of transfer taxes, documentary stamps, notary fees and property taxes.
The fees for the property transfer, including everything, are as follows:
- Transfer tax – 1.5% of the purchase price or the registered value at the Municipality, whichever is higher
- Registration stamps – .84% of the purchase price or the registered value at the Municipality, whichever is higher
- Legal fees – 1.25% of the purchase price
- New Corporation $650
- Escrow services $550
If you are getting a mortgage then the fee is 1.64% to register the mortgage on the property.
In addition, the registry requires a certified declaration from the municipality stating that the seller’s property taxes and assessments are current through to the date of closing.
How to Protect Yourself When Buying Property
The legal system in Costa Rica provides adequate assurances and protections for foreigners to legally and confidently invest and hold title to property; as well as, the enjoyment of that property over time. However, if the law is not fully followed and the transaction is not properly executed, the risk of loss increases. Therefore, it is necessary to not only be familiar with the legal and transaction process, but to take the following precautions:
Hire an experienced real estate legal specialist
Insist on hiring an experienced real estate legal specialist to represent the transaction throughout the process – from the review of the purchase contract, title search and report, to the final registration of the transfer document(s).
Insist on Escrow
Insist on the services of a reputable escrow agent to act as an intermediary liaison for the disbursement of the funds relating to the purchase. Costa Rican law requires that all escrow agents be licensed by and regulated by the Costa Rican Financial Regulatory body SUGEF. This ensures that all parties to the transaction can be confident that the funds are protected and accurately disbursed according to the escrow agreement.
Use a reputable law firm
Most important, use a reputable law firm. Nothing is more important when it comes to buying real estate, than having a top notch attorney. Ask for references. Do your research.