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Presentation: Legal Considerations in Real Estate
PRESENTATION at the INTERCONTINENTAL HOTEL
" WHY PANAMA "
LEGAL CONSIDERATIONS IN REAL ESTATE By Ricardo Eskildsen
United States Panama Business Council (USPA) and
Panamanian Association of Realtors (ACOBIR)
February 16, 2004
Panama's northern Caribbean islands of " Bocas del Toro " is what global real estate experts consider "Emerging Growth Real Estate". Investment in real estate in the Island is growing on daily basis and some buyers are purchasing lots via internet, other are coming down, reviewing the property and purchasing lots with titles, directly here in Panama. We recommend the later, of course ( See http://www.bocasmarina.com and http://www.bigcreekvillage.com). In the past two years we have witness that the Smithsonian Tropical Institute (from Washington D.C.) has invested and purchase property, building their own infrastructure and move their Caribbean Cientific Laboratory to Isla Colon, in Boca del Toro.
In the prestigious "International Living Magazine" we have also read that " Boquete " in the Chiriquí Providence located in the height Coffee Mountain of Panama, at approximately 1,000 meters above sea level, has the quality and the sustain development characteristic, to be highly recommended as one of the best retirements destination in the World. Evidence to the success in real estate development in the area is the retirement community of "Valle Escondido" in " Boquete ". (see http://www.internationalliving.com/panama/ )
All of the above comments by definition has the potential to produce exceptional long-term profits without the volatility of investment such as stocks, bonds, mutual funds or even traditional domestic real estate investments. The Basic reason for such comment is the combination of the following realities:
a. Political and Democratic re-stabilization over the last 14 years in Panama,
b. The growth of global communications infrastructure (Internet), the privatization of telephone communication and the electricity systems ( Foreign companies, including Constellation Power (U.S.), Union Fenosa (Spain), and Enron, bought up 51% of the country's power industry). The mobile services have been awarded with exclusive concession to prestigious firms such as: Bell South and Cable and Wireless, both for ten years.
c. The enactment of Law 8, 1994 which established new incentive structure to investors in Tourism and the reorganization of Panamanian Institute of Tourism (IPAT), has proof a successful initiative and today the IPAT is managing a 10 million dollar budget, for the second consecutive year, to promote Panama as - as a great tourism destination .
d. The Financial Center established in 1972, which allow Panama to be recognized as a serious Banking Center has not only responded well to international necessities but has establishes precedence to support domestic investment in the Country, with the US dollar as the currency. On the other hand, the Superintendent of Bank has been able to guarantee that funds coming in or out of the territory are not exploited by Narcotraffic or Terrorism organizations.
e. The Canal which has remain as a non profit entity, has maintain a sound relationship with the United States, base on the Canal Treaty of 1977, which provided the necessity to keep the Canal neutral to all Nations.
More reasons WHY PANAMA is a good destiny for investment are: 1) the tropical weather, without the usual earthquake which are common in Central America or Hurricanes also common in the Caribbean Sea, 2) the low cost of living, 3) the reliability and efficiency you don't find in other Latin American countries, with " anglo-saxon " commercial practices, 4) the favorable offshore banking laws, and trained international attorneys in both languages: English and Spanish, 5) the stable economy (with the U.S. dollar as the currency), 6) the government investment incentives that slash tax rates and fees for entrepreneurs... and give retirees discounts on everything from doctor visits to utility bills, 7) the diverse geography (from mountain ranges to tropical islands...from a booming metropolis to vast jungles), and 8) the fact that it is still a relatively undiscovered paradise.
In Panama city, at the beginning of this year 2004, everyone was talking about the impact that "Survivors" the famous US TV show is going to have on the various Pearl Islands resorts and projects. Contadora (one hour boat ride from Balboa Port and from the Intercontinental Hotel Marina) is one of the most famous Island development, where the Sha of Iran stay once after the collapse of his Monarchy, and is the vacation Pacific Ocean area where most of the elite business community of Panama, have a summer home. Last year with the support of the IPAT and all of the owners of various Island and project in the Pacific, - together - cover the cost for the Master Plan study for the Archipelago. After the research of more than 12 month by the re known " German Tourism Organization for Development and Investment " from Muchen, Germany, known as GATO AG, presented the plan and the President Mrs. Mireya Moscoso released it officially in the month of November 2003 in a Centenial Ceremony.
Lets remember that the ownership of real property and/or private investment on it, is guaranteed by the Constitution of the Republic of Panama in Article 44. It reads: " ... Private Property is guarantee as long as it is acquired in accordance with the Law by natural person or legal entity."
The Civilian Code in general terms and specifically Article 3 of Law No. 13 of 1993 (Condominium Law) as it has been amended, does confirm that the owner of a real property, has the right to use his property in all and in any type of legal act between living persons or by cause of death, the owner may also transfer and/or mortgage property, etc.
A sound precedence with the United States in real estate ownership is the experience Panama had that lasted the whole last Century with the Canal operation. Base the U.$. Dollar as the legal currencyin Panama, real property investment were developed, by the
Americans since the separation from Colombia in 1903. We saw the construction and maintenance of the cities which surrounded the Ports facilities at the entrance of the Panama Canal, cities known as Balboa (Pacific Side) and Cristobal (Atlantic Side). All private investment by the American citizens and the U.S. Federal Government and the value and appraisal thereof, were fully protected and in some cases, private properties were re - sold and purchase by local, while the relationship lasted until December 31, 1999, due to the 1977 Treaties.
The Interoceanic Region Authority (ARI) was created by Law in 1994, to assure a smooth transition into the local economy of all reverted areas from the Americans. Success stories are many of such transformation. The old U.S. Air Force Base of Albrooke todays presents a sophisticated residential complex with tennis court, shopping malls, churches of many denominations, and other interesting amenities, for those families which have purchase old military houses in the area. The private sectors of Panamanians are full responsible for such success.
Other interesting stories in the reverted areas is Amador. This old U.S. Army Base, today is an important commercial area. Thank to the investment from the government in new roads and parking spaces, and zoning regulations, has become a international re known terminal for Crew Ships in the Pacific Ocean (investment by the local private sector) and Balboa, has also become an important privately held Container terminal, invested and managed by the Hong Kong group, The Hutchinson Wampoa.
But a land mark, for the area of Amador, will be the BRIDGE OF LIFE MUSEUM, designed by the renowned Arquitect Frank O. Gehry, which construction officially began on February 3rd, 2004 (See http://www.biomuseopanama.org/ ).
Investment on Real Estate by foreigners from any nations, is permitted but with certain limitations based on National Security grounds as mentioned in the Constitution of Panama in Article 286. This article limits natural or legal entities and/or national whose capital in whole or in part are from foreign sources, to own real property located within 10 kilometers from the Country borders. The restriction can be extended to certain, but not necessarily all, island property.
The current market conditions offers real estate opportunity to investors and developers to obtain short and long term profit from the investment. Real estate price values tend rise much quicker as long as the legal infrastructure protects those involve in the industry. Base on the above, I will mention the legal structure which support the above comments
PUBLIC REGISTRAR OFFICE
This is an institution inherited from the Spanish Conquistador, which we are proud to promote, still today. The first regulation appeared with the enactment of Law No. 2, 1916.
This Public Office provides the information which is what is known in the United States as Title Insurance, but with the limitation, that this public office, does not offer insurance. The reason been that in Panama, the property owners do not dispute, what officially is confirmed by the Public Registrar Office, via a ownership Certificate. But, the Public Registrar does has the capacity to allow anyone to request a Title search on any recorded property. In any events there are legal grounds to have a traditional Title Insurances Company (such as Firs American Title Insurance Company) operate in Panama through a subsidiary or through a local agent and to issue a Title Insurance, base on the data provided from the Registrar.
As for Bank finance to purchase real estates, this transaction need also to be recorded in the Mortgage Section of the Public Registry. And once the proper Notarial Deed is approved and receives the stamp of registration/recording, the original Mortgage Deed will have all the privilege that the Law offers to Mortgage Bank. This recorded Deed will be proof of credit in any Circuit Court of the Republic, in case of foreclosure or other civil claims against the debtors, for not complying with the terms of the loan, if this is the case. While the property remains with the mortgage recording, any Certificate of Ownership issued from the Public Registry will show such information. Same will be apply in case of litigation or legal attachment to the property (know in the U.S. as liens against the property).
Further to the above, the Civilian Code regulate in article 1573 and forward the administrative matters of this institution. All Title Deed of purchase of property must be recorded in the Registry and still today, the reliability of such records have received the good acceptance from all parties concern. Never the less there are pending litigation or opposition to such record, and that is the matter to be resolved by the Circuit Court within the Judicial System.
The Registrar Office was modernized, not only with a new building of four floors, in 2003, but also is proud to include the latest internet and digital technology. The Ministry of Government in July 7th, of 1999, enacted Resolution No. 99 - 8 which allowed the Registrar to be a independent organization.
GRAND PARENT CLAUSE:
Panama has also established Legal mechanism to protect foreing and local investors against possible future legislation which may affect their investment. To protect investors for potential amendment of the status quo when the investment was effectuated, in 1998 the government of Dr. Ernesto Perez Balladares, enacted Law 54, known as the Judicial Security Law. This legislation guarantee a 10 year protection to those investors which have apply and have been duly registered in the Ministry of Commerce and Industry of Panama, after the proper evidence of an investment of not less than a US$2,000,000.00. Within the framework of the mentioned Law, we find the following areas which are protected by this Law, to wit: construction, reforestation, marine development, electrical plants which generates electricity, and others investment that the Ministry may consider appropriated.
MINISTRY OF HOUSING:
This entity which was modernized by Law 9, of 1973, has the authority to approve all plans of any urban land development, after the local Municipality has done so. The planning and development of the urban land and residential areas is of the exclusive authority of this Ministry.
In 1990, Executive Decree (No. 66) reformed article 27 of the Agrarian Code (Law 37 of 1962) , which created the General Directorate of Agrarian Reform, responsible of the administration of the Public Property destined for "livestock and agriculture". This mean that the Agrarian Reform has jurisdiction on land throughout the Republic of Panama except those areas stated in articles 27 of the Law: which includes: a) urban land, forest reservation, historic or tourist landmarks, island, and land flood up to a 200 meters extension form the shore (high tide).
TAX INCENTIVE FOR NEW BUILDINGS
Since the enactment of Cabinet Decree No. 109 of 1970, successive legislation have been passed establishing tax benefit to Developers to keep the Construction Industry in a constant growth. At the present there are tax incentive in favor of the developer and in favor of the buyer of real property.
Cabinet Decree No. 44 of 1990 (and its implementation by Resolutions No. 201-1622 of December 12th of 1990 from the Directorate of the Internal Revenue), enunciates that the buyers of (Residential units) a apartment or a house unit, built within the time table set forth in the Decree, is exempt from property tax (improvements value) up to 20 years from the official date of construction. The exemption does not include property tax on land, just refer to the value on improvements or new constructions. The Developer also will benefit from an exemption of income tax, if the earnings obtained from the construction are invested (within a two year time table), into new construction and follows certain condition of the Law. This incentive seems to be similar to the institution in the United States knows as "the like kind exchange".
Additional Incentive to the Financial Institutions:
Mortgage Bank also receive tax break if they issue loans for first buyers of residential units, but under the condition that: a; s the first purchase, b) is a residential unit and the amount of the purchase price is not higher than 62,500.00.
Law No. 28 of June 20 of 1995 (0.G. No. 22810 of June 1995) estate in article 14 which amended previous Law No. 3 of 1985, that the benefits to the lending institutions are: a) 5% discount (also a tax credit to the financial institution) of the maximum interest rate can be awarded if the loan is no more than 25,000.00; b) 3% discount (also a tax credit to the financial institution) of the maximum interest rate can be awarded if the loan is between 25,000.00 and 40,000.00; and c) 2% discount (also a tax credit to the financial institution) of the maximum interest rate can be awarded if the loan is between 40,000.00 and 62,500.00. The mentioned Law establishes an exemption and confirm that ¡t will not be applicable for two years to those Developer who have already initiate their investment base under the fiscal incentive of the previous Law No. 3 of 1985 which benefits were broader then.
Recently, Law 61 of December 2002, the government was force to amend the actual tax incentive for new development thus facing out every 5 years thereon, as of December 2004, the 20 years exception of property tax.
Real Estate Transfer tax has also some benefits as the Law stands today, and the seller may select one of the two formulas to pay capital gain derived from the transfer of real property.
PROPERTY AND TRANSFER TAX
The Fiscal Code refers to:
1. Property Tax as it is regulated by Article 766; the maximum annual percentage of assessment is 2.10% over the value of the land (land value under US$20,000.00 is exempt as per Law No. 36 of 1995); The property tax is also levied on the declare value of the improvement build on the land and the owners must pay according to the official assessment value (which is usually the declare value on the purchase deed).
2. Transfer tax on property is regulated by Article 701 as it was amended by Law No. 31 of 1991 and Law No. 28 of 1995. The Law confirms that the sellers is obligated to pay at the moment of a transfer of a real property transfer tax, but it allows the seller to apply one of two options. He could select the 2% tax of the declared sale price, (is an advancement payment on the capital gain on the transfer) or the 5% tax of the assessment value plus a 10% increase per annum that the owner has owned the real property (is the final payment for capital gain for the transfer);
3. Capital gain tax on transfer is also regulated by Article 701 and if there is no gain on the transfer of a property, the 2% tax paid in advance on the sale price will become a credit for the seller when requested.
4. Inheritance tax was regulated by Article 819. This tax was abolished in 1985 with the enactment of Law No. 22 of 1985.
RENT REGULATION
With the enactment of Law No. 93 of 1973, the owner of apartment or offices units with a monthly rent of US$250.00 or US$500.00 respectively were not allowed to raise the rent unless approved by the Housing Ministry. All the other leasing contracts which monthly rent superior to the amounts here in mentioned, are free to be governed by agreements between the parties. This law remains in force.
In view of criticism of Law No. 93 by the private sector and due to the lack of new investment by developers on rental building in 1984, Law No. 38 of 1984 was enacted and with it de-regulation on the leasing market came into force. This legislation applies to new rental building which started construction after November 16th, 1984, be them commercial or residential
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