Securities and Financing

MORTGAGES AND FINANCING ON REAL ESTATE

One of the best and definitely the most common mechanism for financing to be implemented when a piece or several pieces of land are given as security for the payment of a loan is the mortgage.  The mechanism of the trust is also commonly used.

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 individuals.  Although banks tend to be somehow cautious and restrictive when financing foreign individuals, -a tendency that is slowly loosening- it is fairly common for real estate sellers to grant a loan directly to their buyers so the transaction is facilitated.

It is also becoming a growing practice mainly for individuals with substantial funds available wanting 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 for them, as well as a good opportunity for land developers.

It is important to know that mortgages cannot be a financing instrument for all land deals.  Particularly in the case of concessions, in which fee simple ownership does not apply and their “owners” have a right which can be somehow assimilated to a renewable lease from the government for a specific period of time, a mortgage cannot, in practice, be put in place.  In these cases, financing becomes severely jeopardized and parties have recurred to the trust as an alternative mechanism, which, we need to warn, is not risk free.

Trusts

Trusts are fairly commonly being used nowadays as mechanisms to establish security on properties to respond for the payments of loans, but are not as widely accepted and relied upon as mortgages.  Although we are sure some colleagues will disagree with our opinion, we believe that the lack of substantial legal treatment of this instrument in Costa Rica, in addition to a common carelessness while construing the trust agreement and choosing a trustee can lead to many problems, misunderstandings and eventual litigation.  Our first choice for real estate security continues to be the mortgage.

Implementation

Mortgages require, in order to be implemented, a formal document, which needs to be signed by the borrower and by the land owner –in case they are two separate parties- before a Costa Rican Notary Public and to be entered into such Notary’s Protocol Book.  They can be stipulated in any currency and there is no legal requirement to express them in Costa Rican colones.  In case of the use of foreign currency, the inclusion of particular language as to applicable exchange rates and forms of payment is usually important.

Useful Hints And Contents On Mortgage Documents

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 for the loan document to break down the total amount between 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 so the parties can be served.  This matter is crucial since a bad choice of address, especially for the debtor, can substantially delay or even make impossible the triggering of a foreclosure procedure and jeopardize collection.  It is a good practice, for example, to expressly indicate that the borrower will be served at the offices of its 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, so expectations and guidelines to follow are clearer.  A provision on the possibility of pre-payment is also recommendable, since if this was not agreed upon signature of the loan and the mortgage, this 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 such land owner accepts this by signing the loan and mortgage document.  It is also feasible to add additional security to the loan, including personal warranties by individuals 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 to sell the land without the creditor’s authorization –the contrary can lead to a situation in which multiple additional parties must be served to trigger 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, and the above indicated provisions, as well as many others and 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, so their best interest is protected.

As a rule of thumb, it is also recommendable to check the Public Register’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.

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