By: Andrea Hütt, partner, Land & Business Attorneys
Costa Rica’s stable and peaceful political environment, as well as its vast natural beauty gives the country a significant competitive advantage for foreign investment in emerging markets, especially for real estate developers. The metropolitan area of San Jose has strong activity in the office, industrial and retail markets, while the remaining areas of the country are driven mainly by the tourism industry, and therefore real estate development in those areas is focused around sea-side properties and national parks.
The resort hotel, condominium, and second home markets in these areas, which have progressed at a feverish pace over the last ten years, have slowed down as a result of the worldwide economic crisis.
Below we provide you with a description of the types of land ownership in Costa Rica, so you can have a general idea of the available structures that would accommodate your needs as a developer.
What are the different types of land ownership in Costa Rica? Does the law treat them the same? Do they each have the same advantages for a real estate developer under Costa Rican law?
No, each type of land ownership conveys different ownership rights and unique advantages for a developer. Real property in Costa Rica may be owned and developed by using or combining the following structures: 1) fee simple, 2) condominium, 3) maritime zone concessions* and 4) timeshare. A developer should analyze the characteristics of each of these four types of ownership when structuring a development, taking into account the developer’s goal and its potential purchasers.
1. Fee simple title: is a form of freehold ownership and it is the broadest interest possible that can he held in a real estate property, though it is limited by certain government powers such as taxes, eminent domain, and zoning restrictions. It could also be further limited by encumbrances and liens.
2. Condominium: is a property right which combines fee simple title and joint tenancy rules. The condominium unit owner is the sole owner of the “unit”, but also one of many mutual owners of certain “common elements” which are used and enjoyed by all unit owners. (Such as elevators, parking lots and/or swimming pools).
3. Maritime Zone Concessions*: the Maritime Zone is a 200 meter (656 feet) wide strip of land running parallel to the coastline, starting at the median high-tide line. Properties in this zone, with a few exceptions, cannot be privately owned or transferred in fee simple. However, there is a legal procedure to acquire concession rights granted for a set time period, but subject to the terms and conditions of Maritime Zone Law.
4. Timeshare/Fractional: is a form of ownership or right to the use of a property in which multiple parties hold rights to use the property, and each party is allotted a period of time (typically one week, and almost always the same time every year) in which they may use the property. Units may be on a part-ownership or lease/”right to use” basis, in which the timeshare owner holds no claim to ownership of the property.
Analysis of the Advantages and Considerations of Each Type of Land Ownership
A. Fee Simple Title
Fee simple title is the broadest interest possible that can he held in a real estate property and there are no express or implied limitations on foreign individuals or corporations to acquire real estate through fee simple title.
Even though it is a safe and sound alternative for buyers, it is not recommended for developers who intend to implement their own set of specific regulations and restrictions regarding lifestyle and aesthetic issues for the development.
According to Costa Rican law, fee simple titles can only be limited by certain government powers such as taxes, eminent domain, and zoning restrictions, or by private actions such as encumbrances and liens which the owner has consented to. Hence, any further restrictions/limitations for the use and enjoyment of the property will be considered as unenforceable, and the Public Registry will most likely reject them being recorded. For instance, if a fee simple title property is subject to a zoning restriction regarding the maximum height of the building and a mortgage in the first degree or an access easement created by the owner, the mortgage and the access easement will be recorded. However, the limitations or restrictions regarding the use of the house, such as the maximum height of the building, cannot be imposed in a fee simple situation and will be rejected by the Public Registry. Therefore, developers seeking greater control over their real estate projects over time (especially for operational and aesthetic reasons) should avoid this structure and choose the condominium alternative.
Condominium is a form of property tenure where a piece of real estate (house, lot, office, etc.) combines the advantages of fee simple title over the condominium units or lots with the use of and access to common facilities/services which are subject to joint-tenancy rules.
Hence, condominiums are an excellent option for developers who seek to provide to their buyers the security of a fee simple title while at the same time be able to implement covenants, conditions and restrictions for the operation, maintenance and lifestyle guidelines that the Developer wishes to maintain.
In addition to residential and resort condominiums, the condominium structure is commonly used in connection with the development of hotel, “condo-hotel,” offices, industrial and retail projects.
The applicable condominium laws and regulations allow the condominium unit owners to freely convey, mortgage, encumber, or lease their unit. However, they are subject to the condominium by-laws and must not interfere with the quiet use and enjoyment of the property by other unit owners or engage in other uses which threaten the health, safety and welfare of the building. The exterior decoration and facade of the units must be uniform and cannot be modified. Furthermore, the unit owners are required to proportionately contribute to the expenses incurred by the condominium for administering, maintaining and operating the common areas. For example: insurance premiums, expenses related to the administration of the condominium, maintenance and cleaning of the building and the common areas, and authorized repairs or improvements made to the building or the common areas.
These laws and regulations provide a basic framework with the minimum standards mandatory for every condominium, but do not limit the developer’s capacity to include additional or more specific covenants, restrictions and limitations as long as they do not contravene the minimum set of rules set by the law. This makes it possible to create or adapt specific rules needed by the developer.
The down side of condominium ownership is that the studies, approvals, documents and permits to create a condominium are expensive and time consuming, meaning several small to medium sized developers (or developers who need to complete the project in a short timeframe), frequently dismiss this option.
In summary, using a condominium structure is the best alternative for developers who aim at providing security to buyers as well as at implementing specific rules for high quality standards and who are willing to spend more money and time in structuring their ideal real estate project.
C. Maritime Zone Concessions:
Concessions are similar to a lease agreement granted by the Government to an individual or corporation for the use and enjoyment of certain beachfront properties or other properties located within the Maritime Zone
The Government of Costa Rica, acting by and through the local Municipality, grants to the Concessionaire the use and enjoyment of property located within the restricted area for a period of time between 5 to 20 years, provided that all the requirements established by the Maritime Zone Law are met by the Concessionaire (including payments for the special yearly tax or fee to the Municipality). First, the concession must be approved by the local Municipality, then by the Tourism Board, and lastly by the Public Registry.
According to the Concessions Law, a concession may not be granted to or held by: (i) foreigners who have resided in Costa Rica for a period of less than five years, (ii) companies domiciled outside of the country, (iii) Costa Rican companies organized exclusively for foreign stockholders, (iv) companies with bearer shares, or (iv) Costa Rican companies with more than 50% of their equity belonging to foreigners.
From a buyer’s perspective “acquiring” a maritime zone concession is not as safe as buying a fee simple title or condominium unit, because they will be subject to a lease-type relationship with the government that allows for early and unilateral termination or non-renewal by the government after the expiration term.
For a developer, it may be a less appealing structure than the previous two for these reasons: (a) applicable restrictions to foreigners; (b) very restrictive authorized use for the land; (c) possible unilateral or early termination by the Government upon non-compliance with the concessionaire’s obligations; and (d) obtaining permits and entitlements is a highly time-consuming and complex process.
D. Timeshare/Fractional Ownership
Fractional ownership divides a property into more affordable segments for individuals and also matches an individual’s ownership time to their actual usage time. A fractional share gives the owners certain privileges, such as a number of days or weeks when they can use the property.
Timeshare ownership is not regulated in Costa Rica. Unfortunately, unlike other countries such as Mexico or the United States, fractional interest or timeshare structures are not subject to regulations as a type of real estate interest. Instead they are treated as a contractual relationship, which is not subject to registration by the Public Registry.
However, due to the high demand for timeshare products in the Costa Rican real estate market, developers have tried to implement the timeshare structure via the following methods:
- Co-tenancy. A property may be sold to multiple parties as tenants-in-common with an additional agreement in place between the co-tenants regulating the use and time of each owner. In this structure, each owner has an undivided percentage share in the property, and a non-exclusive right to occupy the property. Because this additional agreement is a private agreement between the parties, rather than a property right that runs with the land, there is no way to guarantee that the agreement will be binding on subsequent purchasers.
- Corporate Ownership. Title to the property is vested in a corporation with each purchaser owning a percentage of the capital stock equal to the number of weeks that owner will occupy the property. Once again, it is necessary to implement an additional agreement between the shareholders regulating the use and time of each owner. Like the co-tenancy agreement discussed above, the shareholder agreement is a personal agreement that is not incorporated into the shareholders rights and, therefore, is not binding on new owners of corporate stock unless expressly accepted.
- Lease Agreements. Timeshare arrangements may be based on a lease agreement (usually for forty or fifty years). Each purchaser will buy a leasehold interest for one or two weeks per year, giving that purchaser the right to occupy a designated type of unit during a designated week or season. This right to occupy the property for short time periods, however, may not be enforceable in court.
The absence of timeshare law in Costa Rica raises several concerns for the prospective developer and purchaser:
First is the issue over enforceability due to the fact that the rights are not registered at the Public Registry. This means the courts will not know how to govern or enforce these private, personal timeshare agreements which may conflict with existing leasing, co-tenancy, and condominium laws. To our knowledge, there is no statutory or case law in Costa Rica addressing these issues.
Second, the timeshare industry suffers from a long history of abusive and fraudulent sales tactics. Consumer protection laws in other countries contained in timeshare statutes not only protect purchasers, but also benefit developers by enhancing public trust in the timeshare market.
Third, due to the absence in Costa Rica of a statutory framework establishing timeshares as interests in real property, financing may not be available or cost-effective.
Lastly, operating a timeshare (or quasi-timeshare) operation outside of an established legal framework creates uncertainty as to how the courts will interpret the arrangement, and whether the State may impose regulations on the industry at some point in the future.
For these reasons, the use of a timeshare structure for real estate development in Costa Rica should be discouraged until there is a specific law on the matter or until the Public Registry begins accepting the recording of timeshare rights as a legitimate real estate claim.
As you can see, each type of land ownership has its own advantages and disadvantages which could be used or avoided depending on the needs and goals set by the developer. The key questions any developer should ask themselves beforehand are:
What type of purchaser is my main target?
How could I implement a legal structure appealing to such a target?
What is my timeframe and budget for implementing the legal structure for the real estate project?
Once the developer has responded to these questions, local counsel will be able to prepare a proper legal structure (perhaps by combining two or more of these structures) so that the final product is tailored specifically to address the developer’s needs.
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