I INTRODUCTION TO THE LEGAL FRAMEWORK
i Ownership of real estate
There are three main ways that an investor (either a physical person or a legal entity) may participate in the real estate market in Argentina:
- Ownership of the real estate property: the 'real estate property right' is one of the limited in rem rights in Argentina. Although property rights have no time limits, they have to be exercised according to the terms and conditions set out in the Argentine Civil and Commercial Code (the Code).
- Participation as a shareholder in a company that owns real estate: this is the typical way to participate in the ownership of a property with a long-term commercial purpose (e.g., hotels, shopping centres, office buildings).
- Participation in a real estate trust: is a common way of temporarily participating in the ownership of real estate, for example, during the construction of the project. Trusts are generally meant as vehicles to guarantee parties' interests on real estate projects. In fact, in Argentina, trusts have been the most frequently used structures to counter the lack of banking finance in the past few years. It is worth noting that real estate investment trusts (REITs) do not yet exist in Argentina, at least, not in the same way as they are known in other countries (for example, offering tax benefits).
ii System of registration
Legal title to real estate requires the execution of a sale deed that is passed before a notary public and the transfer of the property.
Legal title is effective from the date of grant. However, to be fully enforceable against third parties, the title must be filed and registered with the real estate register of the relevant province.
The main information and documents that must be registered in the public real estate registry are (1) public deeds creating, transferring, declaring, modifying or terminating interests in real property; and (2) judicial decisions establishing attachments or other precautionary measures on real property, or restraining orders preventing the owners from disposing of the property.
Persons with a legitimate interest in discovering the legal status of the property, precautionary measures or restraining orders can request a special judicial authorisation to obtain a copy of the relevant title deed, recorded in the college of notaries in the province where the deed was granted.
The information available at the real estate register can be obtained through reports or certificates issued by it.
There is no specific state guarantee concerning the accuracy of records made by officers based on public deeds or other documents. However, any party incurring loss owing to a registration error can sue the state for damages caused by the inaccuracy of the real estate register. In any event, it is worth mentioning that the system of registries is considered to work to a high degree of accuracy in Argentina.
Title insurance is not yet available, and it is unlikely that it will be available in the near future.
iii Choice of law
The Code foresees that any personal or in rem right to be granted or modified involving real estate located in Argentina shall be ruled as per the laws in force in Argentina. The Code further states that these matters shall be of the exclusive competence of the Argentine justice system.
II OVERVIEW OF REAL ESTATE ACTIVITY
Many key changes in the economy and in the business atmosphere in general have taken place in the last few years. These changes have been very significant in the real estate market. From a market where no bank financing existed and projects were financed largely by private investors and through the pre-sale to final customers, Argentina is currently developing not only a 30-year mortgage market to finance principally the purchase of first homes, but also lines of financing for developers willing to build up their projects. This is a completely new scenario not only for the developers and investors, but for the real estate market as a whole.
In previous years, real estate projects – especially residential projects – were directed mainly to the wealthier classes because, until 2015, to be able to acquire real estate in Argentina, one had to have funds on hand. For this reason, the emergence of financing, for both offer and demand, has been very well received by the local market. However, in 2018, inflation in Argentina increased, and this financing, which is linked to inflation, has been harder to implement. The belief is, however, that bank financing will eventually return in the medium term.
Further to the above, the good news regarding the Argentine market is that everything is yet to take place. Looking closely at the different sub-sectors of the market, there is room for expansion not only in the residential and office areas but also in the shopping centre and hotel markets. This will be further explored in Section VIII, below.
III FOREIGN INVESTMENT
In Argentina, there are several restrictions on foreign citizens and companies, as well as certain requirements set for other persons, for the acquisition, lease or other kind of possession of real estate in the 'border security zones'. Regulations determine which areas are included under this regime.
A special authorisation must be granted to complete the corresponding purchase in favour of foreign citizens and companies (both local and foreign), of border security zones. The procedures for this authorisation may require between four and six months, although in some cases it may take longer.
It should be noted that, pursuant to Argentine legislation, local companies controlled by foreigners are considered as foreign companies (thus, differing from the regular principles regarding company regulation). Therefore, they are also required to obtain this 'permit', except for the acquisition of real estate located in urban centres.
Another restriction on foreign citizens and companies is related to the acquisition of rural land. In December 2011, the National Congress enacted Law No. 26,737 (the Rural Land Law), which sets forth the Protection Regime of the National Domain over the Property, Possession or Control of Rural Land in Argentina. The Law was further regulated by Decree No. 274/2012 and by Decree No. 820/2016.
For the purposes of the Rural Land Law, 'foreigners' are, among other things: (1) foreign individuals, with or without a current address in Argentina (with certain limited exceptions foreseen in the Law); and (2) foreign or local legal entities whose capital is owned by foreigners – companies or individuals – in a percentage higher than 51 per cent or in proportions that are sufficient to control the local company.
The Law provides five restrictions for foreign rural land owners:
- foreign individuals or legal entities may not own or possess more than 15 per cent of the rural lands in Argentina;
- foreign individuals or legal entities of the same nationality cannot own or possess more than 30 per cent of that 15 per cent;
- foreign individuals or legal entities may own up to 1,000 hectares in the 'nucleus area', or the 'equivalent surface' in other regions of the country (the Decrees specify those lands that are considered as 'nucleus');
- foreign individuals or legal entities may not own or possess rural lands containing or bordering large and permanent bodies of water, unless specifically authorised; and
- foreign individuals or legal entities cannot own or possess rural lands that are located in border security zones, unless specifically authorised.
The Law also provides that the National Registry of Rural Land is empowered to initiate administrative proceedings to investigate possible breaches of the Law.
Notwithstanding the above, real estate property that is not located in a rural land zone or in a border security zone has no restriction for foreigners' acquisition, lease or possession.
IV STRUCTURING THE INVESTMENT
As mentioned in Section I, above, there are three main ways through which an investor can participate in the real estate market:
- the direct acquisition of real estate;
- the participation as shareholder or partner in a company that owns real estate; and
- under a real estate investment trust: in which case, the real estate investment will be canalised through the investor's interest in a real estate investment trust, to later obtain the deed of the plot or unit subject matter of the transaction, or the result of its commercialisation through the trustee.
In most cases, the decision on how to take part in a real estate transaction is not taken by the investor, but, on the contrary, is often taken by the seller or the developer based on quite diverse issues, especially tax reasons.
In every case, it should be analysed whether the stamp tax is applicable. It is recommended to seek advice on this aspect and on any and all other accounting or taxing matters before executing any kind of agreement.
From a legal point of view, when real estate is purchased, together with the assessment of permits, tax status and technical viability of the premises or the project, the certificate of title issued by the real estate registry should also be obtained, with the purpose of proving ownership and existence of taxes levied on the property. In all cases, before the execution of any arrangement it is advisable to carry out a detailed audit or due diligence on the various aspects regarding the transaction:
- aspects related to the parties of the transaction;
- aspects related to the object or purpose of the transaction (real estate, ownership background, its conditions, the legal and administrative status, the environmental situation, etc.); and
- aspects related to the target project or development (feasibility, applicable regulatory framework, etc.).
This legal audit should be completed simultaneously with other similar analysis and studies carried out by other areas or specialties: notary public, accounting and financial advisers, architects, engineers, land surveyors, etc.
On the other hand, the decision to acquire shares in a company implies a more complex analysis: besides the above-mentioned real property assessment, a profound investigation (also due diligence) should be carried out within the legal, accounting, fiscal and financial framework of the target company, with the purpose of learning about its situation, the contingencies or liabilities held by the target company, etc., and thus, for example, being able to negotiate discounts or adjustments of the purchase price or to avoid, or at least mitigate, future contingencies.
Finally, when acquiring shares in real estate developers, the analysis should include the review of the criteria used by the promoter to assess the different projects in which he or she takes part (generally, through real estate subsidiaries or trusts), because those criteria may sometimes differ from the ones applied by the investor in his or her own accounting and practices. Eventually, this will bring a different result in the valuation process of the target company or the asset.
V REAL ESTATE OWNERSHIP
As a federal country, Argentina has three spheres of government that may share jurisdiction over planning control and uses assigned to real estate property. The type of investment to be held on the said properties will determine the jurisdiction entitled to follow and control the developing processes, so establishing the competent authorities.
As an example, planning control issues regarding real estate construction investments are, in general, assigned to local authorities (usually municipalities) who tend to regulate these matters using edification or zoning codes. These regulations determine the possible – and so authorised – uses for the property they control. Sectoring and activity availability are generally defined according to population and geographical issues, providing restrictions within developing businesses and possible changes of use in relation to the original intended use of the properties.
Pursuant to the Code, damage caused as a consequence of the development of dangerous activities are subject to a liability regime similar to that applying to damage caused by or with dangerous objects. Anyone who performs a dangerous activity may be held liable for damage caused to the environment as a consequence of such activity.
In that respect, any injured person may seek damages from the owner or keeper of an asset that produces environmental damage. Likewise, the transferor of an asset that has a defect and later causes environmental damage may be liable even after the transfer. A five-year statute of limitations applies to environmental damage.
The owner or keeper of a dangerous object or activity that causes damage to the environment may be excused only in case of force majeure or when a third party or the victim has contributed to the damage. The Code provides joint liability for damage caused by a person who is part of a group or by an activity performed by a group.
Also, under Law 25,675, in the case of collective environmental damage caused by legal entities, liability can be extended to their managers, director, statutory auditors or other officers who participate in the company's decision.
In Argentina, there are three different levels of government authorities that can levy taxes, the main ones being the federal government and the provincial government. Hence, the acquisition of real estate property may be subject simultaneously to different taxes imposed by the different levels of government.
Regarding federal taxes, the sale of real estate property is subject to income tax or to tax on the transfer of real estate, as the case may be, as follows:
- sales performed by local legal entities: subject to income tax at a 30 per cent rate (25 per cent rate as from 2020) over the effective net income (gross sale price versus acquisition cost minus the expenses incurred to obtain such gains);
- sales performed by foreign legal entities: subject to income tax at a 35 per cent rate that the seller could choose to apply over (1) a 50 per cent net presumed income, thus reaching a 17.5 per cent effective rate on the gross sale price; or (2) the effective net income (gross sale price versus acquisition cost minus the expenses incurred in Argentina to obtain such gain);
- sales performed by individuals residing in Argentina or abroad regarding real estate property acquired by them before 1 January 2018: subject to tax on the transfer of real estate at a 1.5 per cent rate over the gross sale price;
- sales performed by individuals residing in Argentina regarding real estate property acquired by them as from 1 January 2018: subject to income tax at a 15 per cent rate over the effective net income (gross sale price versus restated acquisition cost minus the expenses incurred to obtain such gain). The sale of real estate used for housing is exempted from income tax; and
- sales performed by individuals residing abroad regarding real estate property acquired by them as from 1 January 2018: subject to income tax at a 15 per cent rate over the effective net income (gross sale price versus restated acquisition cost minus the expenses incurred in Argentina to obtain such gain).
As a principle, the sale of real estate property is not subject to VAT. Nevertheless, if the seller of a construction built on his or her own property is considered to be a 'construction company' pursuant to the definition set forth by the VAT Law, said principle will not apply and the sale of the building on the property may be subject to VAT (the value of the building by itself and not the land could be subject to this tax). The general rate is 21 per cent; however, a reduced rate of 10.5 per cent may be applied to the sale of residential real estate property.
Concerning provincial taxes, the acquisition of real estate property may be subject to stamp tax. This tax is levied on the execution of agreements and is estimated on the economic value of the agreement. The applicable rate differs from one jurisdiction to another, ranging from 2 per cent to 5 per cent. It should be further borne in mind that there is a local tax to be paid on the ownership of real estate property.
iv Finance and security
The most common forms of securities granted over real estate property in Argentina are through mortgages or a trust.
According to the Code, a mortgage is an in rem right of guarantee. The mortgage connected to the affected real estate property continues in the possession of the owner of the property. If the owner does not comply with the obligations of the mortgage, the creditor will have the faculties of persecution and preference to collect the credit guaranteed. The maximum term of existence of a mortgage is 35 years, and it can be renewed as many times as needed.
The trust is also regulated in the Code. There is a trust agreement whenever a party (or 'grantor') transfers or undertakes the obligation to transfer the property of certain assets to another person (or 'trustee') who is obliged to manage that property in trust in benefit of another person (or 'beneficiary') who is established in the contract, and to transfer that property in an established period of time or upon the fulfilment of an established condition, to the beneficiary or to another third party. The trust is just an agreement and not an entity (as are the 'trusts' in common law terms). Trusts are just agreements that create a separated patrimony in the head of the trustee, to be governed as per the rules foreseen in the trust agreement. The trust has a maximum term of 30 years after the execution of the trust agreement, and can be renewed as many times as needed. As a guarantee, a trust is more practical than a mortgage, because the terms of its execution may be specifically foreseen in the agreement itself, while the mortgage may just be executed through an auction process.
VI LEASES OF BUSINESS PREMISES
In Argentina, commercial leases have a minimum two-year term and a maximum 50-year term.
As mentioned above, inflation is still a problem in Argentina, though measures are being taken to solve the problem in a definitive way. As from 1991, Argentine legislation prohibits currency update and price indexation. Inflation (and the resulting indexation prohibition) is mitigated in leases with a price escalation system in which the price is pre-stated for the first two or three years. When the term is longer, parties agree on having a further negotiation process and if the latter fails, an expert (broker's) determination of the price for the years following such process is established.
Leases are strongly protected by law. If the landlord transfers the property to a third party, the existing lease shall prevail and the new owner of the real estate will have to respect all the terms and conditions of the lease in force.
Argentine law provides an early termination mechanism of lease agreements, through which the tenant is able to terminate the contract unilaterally after six months of a lease agreement have elapsed. According to law, the amount of compensation will depend on the time when the tenant decides to terminate the contract. In certain cases, however, this conclusion might be somehow altered, depending on the evolution of the new jurisprudence to be developed on the matter, in light of the terms and conditions of the new Code. In October 2018, a bill to amend the lease regulation was submitted to Congress. According to this bill, the early termination of lease agreements would be only available for non-commercial leases. The bill also provides that the regulation established by the Civil and Commercial Code could be modified by the parties of a lease agreement of a certain amount. This bill, however, has not yet been approved.
VII Developments in practice
There are many new developments taking place in the Argentine real estate market. As already described, Argentina is going through a period in which markets are being opened for foreign investors, and many barriers have already fallen, especially regarding foreign exchange restrictions that had obstructed investments (foreign and local) in the market in prior years.
A foreign investor (or foreign developer) entering the Argentine market to develop real estate business should bear in mind, among other things, the following developments that are currently taking place.
i Loans for residential projects
As described above, the mortgage system in Argentina was almost non-existent until mid-2017, and with certain exceptions (see Section VII.ii), to be able to acquire a home, a purchaser required the funds to fully pay the purchase price for a residence. From the second half of 2017, banks (national and private) began to grant 30-year mortgage loans in Argentine pesos for housing. These loans have been further backed by specific regulation from the Central Bank. Until mid-2018, the banks have likewise been flooded with requests from prospective residential purchasers, which, on the other hand, caused an increase of the end price for housing. In mid-2018, inflation increased considerably; therefore, although these loans were, without question, the main development that took place in the real estate market through 2017 and the beginning of 2018, the increase of inflation diminished the demand of these loans.
ii Loans for developers
In the past, developers conducted residential projects through trusts, where the purchasers could finance the purchase of their homes in instalments, as per the financing needs of the construction of the project (i.e., usually in these cases, the developer just received a fee). This way, not only the end purchaser could finance the purchase of a home (although not in long terms), but the developer could also finance the construction of projects as well.
As described in Section VII.i above, though still somewhat reluctantly, loans for developers are being granted by banks – something that was non-existent in prior years. This will also change the way developers structure their projects, opening many alternatives for development that simply did not exist before.
iii New foreign institutional investors and new foreign developers
Since 2016, many foreign institutional investors have entered the Argentine market, investing in immediate projects as well as participating in the shareholding of local developers. Further to this, some renowned foreign developers have entered the market, beginning to develop projects by themselves and also co-developing projects with local developers.
This scenario will surely be disruptive to the market as we have known it in the past. We are currently in a period in which many things are yet to change, and both developers and investors are bound to adapt.
iv New Civil and Commercial Code
In mid-2015, a new Civil and Commercial Code came into force in Argentina, replacing the Civil Code and the Commercial Code that had been in place for 150 years. A new jurisprudence has yet to be developed, and likewise, 'interpretation' of the new Code is still lacking in many areas.
In any event, the new Code foresees new regulation that will impact on the real estate market. These include the following:
- The new Code created a new 'right of surface' that will no doubt be a very attractive tool for developing projects where a construction capacity is available and subject to being commercialised (i.e., not only for pieces of land, but also for buildings already in place). This new tool, in our opinion, has not yet been 'discovered' by the local developers, but once the new right of surface become apparent, it will be a very practical tool to develop projects in ways that are not currently pursued.
- Some new property rights were further created; among them, the condominium right (i.e., propiedad horizontal or horizontal property regime), which amended the existing rules regarding those types of rights. This new condominium right rules on the development of all closed neighbourhoods, whether they are plain gated communities or country clubs. Further, the new Code foresees that all closed neighbourhoods not already organised as per the rules of the new condominium right will have to adapt their legal structure accordingly.
- Real estate trusts have been the most popularly used vehicle for structuring real estate projects during the past 15 years. With the new Code, the structure of these trusts will have some amendments that shall not affect their existence or application, but nevertheless should be borne in mind.
- Lease agreements will have a maximum term of 20 years for residential purposes, and of 50 years for all other purposes. This amendment is very positive, because the maximum 10-year term of the prior law had proved to be insufficient in many cases (e.g., when a future lessee had to make a big investment, the 10-year term usually turned out to be very short and inadequate to amortise the capital invested).
- Previously, the constructor (together with certain professionals, such as the architects involved) was the only one responsible for the total ruin or destruction of the work. However, with the new Unified Code, the developer will also have responsibility. We gather that new insurance policies will have to foresee the coverage of these new responsibilities.
As described, the new Code has brought many amendments to the laws and regulations that applied to the real estate market (those described above number just a few of them). This will no doubt impact the way real estate projects are instrumented in the future, and it will be a great challenge for lawyers to be innovative within the new legal scenario.
VIII OUTLOOK AND CONCLUSIONS
It is expected that 2019 will be a positive year for the real estate market in Argentina.
As mentioned in Section II above, there is an optimistic atmosphere in the real estate market, mainly caused by key decisions that are being taken in the economy as a whole that are impacting the sector.
Argentina has an incredibly beautiful landscape with many different types of scenery (i.e., from the countryside to the mountains, from the glaciers to the beaches) and gorgeous cities – especially its capital city, Buenos Aires, with its European architecture and layout. As already mentioned, the good news for anyone willing to participate in the Argentine real estate market is that everything is still to be done. From road infrastructure onwards, the variety of investment needs is ample.
Regarding different subsectors of the real estate market, the status and perspectives are as follows.
i Residential market
The residential market has a great margin for development because there is a large housing shortage, especially for the lower and middle classes. During the past 15 years, this market has almost completely lacked financing, obliging purchasers to pay the whole purchase price upfront when executing the purchase deed. As one can imagine, this could only be done by a very small percentage of the population. Inflation has also left its mark here. For this reason, with the new existing financing for end customers (mortgage financing) and for developers, the opportunities in this submarket are indeed important.
Argentina is one of the top tourism destinations in Latin America. This has pumped the hotel market countrywide, though in many medium and large cities in the provinces of Argentina, as well as in the city of Buenos Aires itself, there are still very good opportunities for expansion, especially bearing in mind the new air routes being granted to new airlines starting business in Argentina.
iii Shopping centres
There are cities in the provinces with a population of over 100,000 that have a very decent income, which have no shopping centres. There are also some big cities with just one or two shopping centres. This market, therefore, has much room for growth.
The office market basically goes hand in hand with the economy as a whole. In this sense, as the economy in Argentina is beginning to grow at a steady pace, there will be many opportunities in the office market (especially in prime building offices with Leadership in Energy and Environmental Design certification, which is slowly growing in our country).
v Rural land
Although Law 26,737, enacted in December 2011, limits the ownership of rural land by foreigners, this may lease rural land without limit, and of course participate in agribusiness pools who invest in Argentina's farmlands. The farm business in Argentina has been historically very promising, although in the past it has been somehow burdened by the incredibly high taxes imposed by the authorities on this market (which is, again, something that is expected to change this year).
As described above, the expectations in the market are high and the opportunities many.
From a strict legal standpoint, the application of the new Code will also bring new scenarios to explore, which may create opportunities that are not yet deeply developed, including the application of the new surface real estate right, the interpretation of the scope for lease agreements, the new guaranty obligations for developers and the new legal structure for condominium projects. The year 2019, and especially the following years, are expected to be very challenging years for the Argentinian market.
1 Pedro Nicholson is a partner and Delfina Calabró is a lawyer at Estudio Beccar Varela.