Costa Rica: Spoilt for choice

Author: | Published: 1 Sep 2010
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Costa Rica is well known for its political stability, its centennial democracy and governance by the rule of law. Located in the middle of the Americas, it serves as the joining land between South America and North America. Fifty-two thousand square km in size, this country offers plenty of real estate opportunities to nationals and foreigners.

Real estate property registry

The Real Estate Property Registry, a governmental department of the Ministry of Justice, located in the capital of Costa Rica, contains the database of all the titled real estate properties in the country. It can be accessed from any part of the world via the internet and includes all information related to the real estate: ownership, location, boundaries, area, survey description, related contracts and pending documents. Each real estate property has its own unique registration number that will facilitate its location, including the background and previous transactions made with it. In some cases, it is necessary to review the physical information held in the Real Estate Property Department to determine the history of any given real estate property since its initial registration.

Notary Publics are the officers responsible for recording real estate property transactions. Parties to a contract related to land need to express their willingness before a Notary Public, who will deal with the transaction under the principle of public faith granted by the Government to them. Every real estate transaction, including purchase and sale, transfer, mortgage, gift, registration of lease agreements and usufruct rights, must be executed before a Notary Public, and the Notary Public shall register such transaction in its official book.

Once the parties to the contract have reached an agreement and have executed the desired contract before the Notary Public, his duty will be to register such transaction immediately with the Real Estate Property Registry. Since the documents will be drafted in Spanish, the Notary Public, or an official translator will provide an official translation to the parties. A group of registration officers will validate the transaction and make the proper registration in the entry assigned to any single property. It is the duty of the registration officers to make a provisional annotation over the real estate property once the contract is filed, in order to make a public announcement that such real estate property is subject to a transaction. The Board of Notary Publics, a separate entity in the Ministry of Justice, governs and issues mandatory regulations to the Notary Publics.

Any real estate transaction is subject to approximately 2.5% registration expenses, including the Notary Public and the Real Estate Property Registry fees. In addition, if the transaction implies the conveyance of the real estate property, without taking into consideration the reason for the conveyance of the title over the real estate property, a transfer tax of 1.5% shall be paid to the Government.

The aforementioned rules apply to future buyers of homes and to developers of real estate projects that are willing to acquire raw land in order to make their own development in the country.

No limitations in ownership

Costa Rica is a country devoted to foreign investment. There are therefore no limitations on non-Costa Rican citizens and non-Costa Rican residents owning real estate property in the country. Land can be owned under their personal names or by means of business entities, both local and foreign. In the case of foreign business entities, they must be previously registered with the Business Entities Registry, in order to have the tax identification number required to act legally in Costa Rica for these purposes. Some limitations may apply with respect to coastal properties, as we will explain in more detail.

Setting up a business entity in Costa Rica is not complex. Common options within the Costa Rican legal system are corporations (Sociedades Anónimas) and limited liability companies (Sociedades de Responsabilidad Limitada). The latter have become the most common business entity used for real estate transactions in Costa Rica, since in some countries it works as a passing through entity for tax purposes for the owner. These two business entities shall be incorporated by two incorporators, but once that it is established, they can be owned by one single person, national or foreign, resident or non-resident, individuals or corporations, without any type of special treatment.

In three weeks you can have your own business entity registered in Costa Rica. However, if you need it in a shorter time, you can purchase an already registered company that can be adjusted to your needs immediately. The business entity must have a legal and physical address in Costa Rica that works as the legal domicile for all purposes. The members of the board of directors and/or the officers of the business entity can be foreigners; there is no requirement to have nationals or residents appointed in such positions. Notwithstanding, if this is the case, the business entity must have appointed a resident agent for service of notices. The resident agent must be an active and registered attorney of the Costa Rican Attorney Board with offices open in the country.

Transfers of interests in business entities are private transactions; they are not subject to any type of previous authorization by the Government. In the cases of corporations and limited liability companies, the transactions of the ownership are subject to ordinary taxes of less than one percent of the declared value of the transaction.

The owner of land in Costa Rica is the holder of a fee simple interest over such real estate property. Therefore, they can dispose freely of their property rights at any time. Liens over the land must be recorded in the Real Estate Property Registry in order to be valid and enforceable against third parties. This principle of publicity correlates with the principle of first in time, first in right. The Registry shall provide the party to a land transaction with enough information to make an informed decision. The registration system provides information about the liens, mortgages, security interests, easements and limitations on the title of such real estate property.

If the party is willing to purchase land to make a real estate development of any type, it is necessary for the party to obtain information about the zoning plan where the land is located. This information shall be obtained from the land department of each county.

Development of real estate projects

After purchase of the land, the developer shall start with the design and permits approval phase. Developers shall follow two parallel processes: the environmental clearance, and the development and construction process.

It is strongly recommended that the developer performs complete due diligence over the land to determine the suitability of the land to the project in mind for development. As a country that promotes development in accordance with the environment, it is necessary to pass the environmental clearance before starting any ground-breaking activity on the future project. Once the general design is ready, it must be filed with the environmental authority (Secretaría Técnica Ambiental or Setena), which is the main entity of the Ministry of Environment. Setena grants the environmental clearance for the project, and its authorization is delivered directly to the county's Department of Constructions.

Concomitant with the filing with Setena, the developer must file the final design, including the detailed blueprints of the future development, with the Architects and Engineers Board (CFIA). Once the CFIA approves the blueprints, such documents shall be filed with the National Housing Department (Invu). Invu will make a strong and thoughtful review of the proposed project, to determine its legal and technical suitability. Internally, Invu will share the documents with the Health Department (MS), Fire Department (INS) and Water Department (AyA) in order to receive their respective approval. Once the Invu and all the other organizations have approved the blueprints, the developer shall take those blueprints to the county's Department of Construction, for the ultimate approval.

The new trend in Costa Rica is to develop land in condominium projects and/or fractional property projects. The advantage of condominium projects is that the homeowners association of each condominium project works as the maximum governance body. Condominium projects can be established with different targets: residential purposes, commercial purposes, industrial purposes, agricultural purposes, and mixed uses. Once the condominium is registered with the Real Estate Property Department, any single unit of the condominium obtains a registration number that will differentiate that unit from the complex and from the other units.

The owner association constitutes the governing body of the condominium. It can set the bylaws and regulations of the condominium. Most of the bylaws and regulations of the condominium must be registered with the Real Estate Property Department, and the publicity of these regulations provides legal security to the owners of units.

In addition, Costa Rica offers the possibility of registered fractional property whereby the unit is owned by several investors, to whom different weeks during the year have been assigned. The advantage of the fractional property is that you become one of the registered owners of the unit, and you have a registered title over the unit, but the internal regulations of the fractional property co-ownership will be ruled by contracts and easements granted between the different co-owners.

Costa Rica is especially popular with foreigners seeking to buy second homes. Most of them are looking to make an investment in real estate property and to use the unit a couple of times during the year. The main fear they face pertains to who will take care of their units during their absence. In accordance with market requirements, property management companies have emerged to take care of the unit's maintenance. They pay bills and make profits for the owner from income generated by short-term rentals of the unit. In many cases, these property management companies are located within the projects developed, and the package is offered to the buyer at the time of the purchase of the unit.

Financing real estate investors

Non-residents can apply for loans in several banks in Costa Rica if they can prove the source of their income and provide a credit report. The Costa Rican banks have several different options for providing such financing, depending on the income and the conditions that can be offered in accordance with local regulations.

In addition, there are options offered in the market whereby non-local banking institutions offer loans to Costa Ricans, to residents and to non-residents. In these cases, the paperwork to be filed will depend upon the entity that is providing the finance.

Foreigners can offer finance in Costa Rica without being registered and chartered for such purposes, provided that they use their own financial resources. The collateral can be established as a direct mortgage over the real estate property or as a guarantee trust agreement, where the trustee shall be the fiduciary owner of the real estate property until the debt is fully paid. In some cases, the trustee shall be an authorized individual or business organization registered with the local authorities. If the entity providing the finance is a full-service bank or a financial entity approved by the local authorities, both the debtor and the lender will receive some tax advantages.

Special maritime zone regime

The shoreline coast of Costa Rica has a separate regime. The first fifty meters from the high tide line is defined as a public zone and is not subject to appropriation or ownership. The owners or concessionaries of adjacent land to the public zone cannot impose limitations in the use of and access to the public zone.

The adjacent one hundred fifty meters to the public zone is known as the maritime-land zone. It belongs, with exceptions that we will detail, to the County Department where it is located. In this case, the County Department can grant concession or lease agreements over the maritime zone to particulars, if they comply with various requisites.

The main limitation is that owners cannot be foreigners if they have not been residents in Costa Rica for at least five years. In the case of business organizations, the ownership of at least fifty percent of the interest in the entity shall belong to Costa Ricans or to foreign residents with at least five years of residence.

The maritime-land zone is governed by a different set of regulations about concession, use, zoning plans and transfer and assignment of rights. Since the maritime-land zone is land owned by the County Department, the local governments are the ones that should execute the concession agreements with the petitioners that comply with the requisites. Such concession agreements shall be verified by the Costa Rican Board of Tourism (ICT), and upon their approval, the concession agreements are registered with the Real Estate Property Registry.

Concession agreements are for a maximum term of twenty years, and they can be renewed at the end of such period. In addition to that, any concession is granted if _and only if_ there is a zoning plan of that area. In the concession agreement, the petitioner agrees to use the land according to the zoning plan, and moreover, in the case of undeveloped land, make a development according to the zoning plan in a reasonable period of time.

There are few exceptions to the mandatory regulations of the maritime zone. In the Province of Guanacaste, in the northwestern Pacific coast of Costa Rica, the Government decided decades ago to establish a special area for the development of tourism-related projects, called Papagayo. Even though these areas are owned by the ICT and granted in concession to investors, the limitation on ownership by foreigners was not included. In this area, a foreigner can be the beneficiary of a concession land even when the foreigner is not a resident in the country.

The second exception is found in a few properties that were legally registered by their owners, following the judicial titling procedure, with the Real Estate Property Registry before the 1940. This was when the first law relating to the public zone and the maritime zone was established. This specific group of properties also includes some registered Real Estate Properties granted by the Spanish Crown to relevant families during the colonial period, properties that have survived until our days.

Another exception is made for a group of properties that were recorded during a special term granted by the law during the year of 1971. This window of time was created by a reform to the maritime-land zone laws, and was effective only during one year. The possessor of the land had to follow the judicial process to register the land in that year and to obtain the registration with the Real Estate Property Registry.

Finally, the third exception is included in the Maritime Zone, and it designates as registered land the maritime-land zone of some specific cities that are described in the law and that constitute a reduced amount of capital cities of certain counties.

It shall be noticed that these last three exceptions are not simply exceptions to the regulations and rules of the maritime zone; they imply that the land was registered not as a concession but as a real estate property and so, in such cases, you have registered owners rather than beneficiaries of concession rights. Therefore, the registered owner of such real estate properties is governed by a completely different set of rules than the ones that are holders of concession rights.

Inheritance rights

If a foreign investor not residing in Costa Rica personally acquires real estate property in Costa Rica and dies, the laws of the jurisdiction of the territory shall prevail in this specific case, and it shall be necessary to open an estate liquidation process in Costa Rica. Choice of law and choice of forum shall be considered futile in cases that are related to real estate property located in Costa Rica because of the governance of our internal regulations. The executor of the will or the trustee appointed in the foreign country shall open an inheritance process in Costa Rica, before the Court's system or a Notary Public office, if the law permits the latter.

However, in the case that the foreign non-resident is the owner of an interest in a business organization in Costa Rica, and the business organization was the vehicle used by the investor to own real estate property, the aforementioned model is disregarded and the participation of the foreigner in the business organization is not considered ownership of real estate property in Costa Rica. In this case, the executor or trustee will be governed by the laws and within the jurisdiction where the estate is being executed.

Costa Rica is naturally open to foreign investment, since our laws permit the free movement of capital and interest from residents and non-residents within and outside the country without major limitations. In addition to that, our centennial democracy and peaceful regime are the best credentials to support the commitment to receive foreign investment. Our real estate market was hit, like all other markets, by the world crisis, but the prices of most homes and land remained at the same levels. This shows that the market is a strong market at this time and this is the reason why Costa Rica can be considered a real estate paradise.

Author biography
Alberto Pauly
Gutiérrez Hernández & Pauly

Alberto Pauly was admitted by the Costa Rican Bar Association and by the Notary Public Board in 1977.  His practice has been focused on the attraction of foreign investment, representing both national and foreign corporations in Costa Rica.

He has had a distinguished career as conciliator, arbitrator and as organiser in alternative dispute resolution programs.  He also collaborated broadly in organising and implementing the Costa Rican Chamber of Commerce’s Arbitration and Conciliation Centre.   In the real estate sector, Alberto has advised foreign investors in their ventures in Costa Rica. 

He has organised trust and escrow structures, not only to provide project finance in cross-border transactions, but also to facilitate the purchase of units and lots by foreign investors.  He has expertise in advising projects from the initial investment until the delivery of final units.  In addition to that, Alberto provides legal services to hotel and tourism sector industries in the country.

Author biography
Guillermo E Zúñiga
Gutiérrez Hernández & Pauly

Guillermo E Zúñiga was admitted by the Costa Rican Bar Association in 1997 and by the New York Bar Association in 2004, after obtaining his Master in Laws in Georgetown University, with a specialisation in international project finance. 

Guillermo has advised energy power developers in Costa Rica, mainly in wind energy projects, and his expertise includes the draft and negotiations of the development contracts, as well as the legal management of such contracts. 

Guillermo has taken part in the development of real estate projects with participation of foreign and national investment.  The services he has provided include drafting project development contracts, finance contracts, trust agreements, credit letters and agreements between development partners, and also collaborating by finding investors for the projects under development.  

In the last year, Guillermo has advised tourism and real estate developers, in order to restructure their companies and to make it possible their existence during the world crisis.