The Real Estate Law Review: Argentina
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 and office buildings); and
- 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. Notably, 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 (e.g., 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 as follows:
- public deeds creating, transferring, declaring, modifying or terminating interests in real property; and
- 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.
Overview of real estate activity
The economic and the business atmosphere in general has suffered many changes in the past few years. These changes have been very significant in the real estate market. Typically, in Argentina, no bank financing exists and projects are usually financed largely by private investors and through the pre-sale to final customers. This was interrupted during 2017 and until mid-2018, when a 35-year mortgage system was developed to finance the purchase of first homes. Unfortunately, this 'mortgage boom' ended because of an inflation and economic crisis in 2018, which still continues in Argentina combined with the covid-19 pandemic that caused an almost nine-month quarantine and worsened the pre-pandemic economic situation.
Real estate projects – especially residential projects – are directed mainly to the wealthier classes and typically to those who have enough savings to be able to access a new home.
For almost three consecutive years, due to the economic crisis (including the worldwide pandemic), prices of real estate notoriously decreased. For those with savings though, this was an investment opportunity.
In addition to the above, the good news regarding the Argentine market is that everything is yet to be done. 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 is further explored in Section VIII.
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.
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. This 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:
- foreign individuals, with or without a current address in Argentina (with certain limited exceptions foreseen in the Rural Land Law); and
- 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 Rural Land Law provides five restrictions for foreign rural landowners. Foreign individuals or legal entities:
- may not own or possess more than 15 per cent of the rural lands in Argentina;
- of the same nationality cannot own or possess more than 30 per cent of that 15 per cent;
- 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');
- may not own or possess rural lands containing or bordering large and permanent bodies of water, unless specifically authorised; and
- cannot own or possess rural lands that are located in border security zones, unless specifically authorised.
The Rural Land 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.
Structuring the investment
As mentioned in Section I, 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 REIT, in which case, the real estate investment will be canalised through the investor's interest in a REIT, 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 relating to:
- the parties of the transaction;
- the object or purpose of the transaction (e.g., real estate, ownership background, its conditions, the legal and administrative status and the environmental situation); and
- the target project or development (e.g., feasibility and applicable regulatory framework).
This legal audit should be completed simultaneously with other similar analysis and studies carried out by other areas or specialities: notary public, accounting and financial advisers, architects, engineers and land surveyors, among others.
However, the decision to acquire shares in a company implies a more complex analysis: in addition to 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, among other things, 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.
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 that 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 is subject to a liability regime similar to that applied 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. Similarly, 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 the event 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.
Furthermore, 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 progressive rates ranging from 25 per cent to 35 per cent (depending on the legal entity's annual net income) 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:
- a 50 per cent net presumed income, thus reaching a 17.5 per cent effective rate on the gross sale price; or
- 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 the 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, this 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, generally ranging from 2 per cent to 5 per cent;
- there is a local tax to be paid on the ownership of real estate property; and
- turnover tax applies on the amount of gross income resulting from commercial, industrial, agricultural, financial or professional and onerous activities carried out within the respective local jurisdictions on a regular basis. Therefore, if the sale of real estate does not qualify as a 'regular activity', this tax, in principle, would not apply. Furthermore, generally, the jurisdictions state that the transfer of fixed assets is not taxable.
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.
Leases of business premises
In Argentina, commercial leases have a minimum three-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 but, on 11 June 2020, Congress approved Law 27,551, the new Lease Law, which modified the Code regarding lease regulation, mainly with respect to residential leases. The new Lease Law waives currency update and price indexation prohibition. The Lease Law also provides an indexation calculation formula for residential leases. Notwithstanding this, inflation (and the resulting indexation prohibition) has always been mitigated in leases, especially in commercial leases, with a price escalation system in which the price is pre-stated for the first two or three years. The Lease Law clarified the lease price situation. 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.
Although the Lease Law was enacted to provide the residential lessee with more protection, the desired objective was not achieved. On the contrary, the imposition of greater obligations on the landlord, the increase in the minimum term of the lease and the introduction of a fixed adjustment mechanism have led to a reduction of offer in the market, which together with the sustained high demand, have led to an increase in rental prices or even to landlords opting not to offer their properties.
Since its approval, the Lease Law has been widely criticised. At the time of writing, it was announced that a project to amend the law will be sent to the National Parliament, and that even the possibility of suspending the application of this new law for 180 days is being analysed. The aforementioned are issues yet to be confirmed, and the market remains expectant of further announcements and measures.
Developments in practice
Argentina continues going through a period of transition since the new government took office in December 2019. The markets are still waiting for the government's signals to foreign investors. Unfortunately, as mentioned above, the covid-19 pandemic has deepened the economic crisis, and foreign exchange regulations continue to be in force. A foreign investor (or foreign developer) who is 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 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. New jurisprudence applying the Code regulations has yet to be developed and, similarly, '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 becomes 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. Furthermore, 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); and
- 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 previously described, the new Code has brought many amendments to the laws and regulations that applied to the real estate market (those described above are 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.
ii Vaca Muerta
Vaca Muerta, is the second non-conventional gas reserve and the fourth non-conventional oil reserve worldwide located at the provinces of Neuquén, La Pampa, Mendoza and Río Negro, with a surface of 35,000 square kilometres. Currently there are 1,050 active wells, and official estimations suggest that by 2055 there will be 25,000 new wells. At present, only 4 per cent of the oil and gas fields are under exploitation, which indicates that this is just the beginning. This is good news for the real estate market, since the population at the City of Añelo (a small city but still the main city of Vaca Muerta, located at 105 kilometres from the capital city of Neuquén) is constantly increasing, and many workers travel on a daily basis to the city of Añelo from different cities nearby. This means that there are many opportunities in the real estate market. These cities need real estate planning and have high housing demand as well as infrastructure since many oil and gas companies are locating their employees at Vaca Muerta. Furthermore, this activity is not limited to Añelo but also impacts on the whole area surrounding it, especially the city of Neuquén.
Outlook and conclusions
As mentioned in Section II, there is an atmosphere of expectation in the real estate market, mainly caused by key decisions that shall be taken in the economy after the covid-19 pandemic is normalised, that could impact the sector as a whole.
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 sub-sectors 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. The cost of construction has decreased and remains stable, and for this reason, there are currently many mid-size residential developments under construction with financing from the developers themselves, mainly through structural mechanisms such as real estate trusts. This continues to slowly move a market that has been very quiet in the past few years. As expected, 2021 was a positive year for this submarket, with new projects being promoted. It is highly desired and expected that, in 2022, some sort of economic policy will be promoted that shall allow more people to have access to real estate and housing opportunities.
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.
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. There are 16 shopping centres in the City of Buenos Aires, 27 in the Province of Buenos Aires and 30 spread throughout the other provinces. The covid-19 pandemic has affected the activity of shopping centres, which had to remain closed for seven months. This inevitably led to an increase in vacancies. Notwithstanding the aforementioned, since the reopening of the shopping centres, there has been a recovery in their occupancy levels, mainly due to the negotiation of the mall operators with their lessees, as well as the arrival of new brands that are investing in the recovery and growth of the activity. Therefore, this market 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 begins to grow, there will be many opportunities in the office market (especially in prime office buildings with Leadership in Energy and Environmental Design certification, which is slowly growing in our country). The office market continues to restructure already existing buildings to adapt to health and sanitary requirements as a result of the covid-19 pandemic. The sanitary crisis affected not only the development of new office projects but also the existing office market. Although there has been a drop in office occupancy, there are already signs of recovery. Companies are promoting the return of their employees to workplaces and this goes along with projects to enhance the value of existing spaces. Companies are developing projects to adapt their offices, focusing on airy and bright refurbished offices, where employees feel comfortable to work. At the same time, some companies have decided to downsize or move to smaller offices. Others have moved in search of proximity to employees, lower costs and tax benefits, as well as to use smaller spaces. Undoubtedly, it is a market that will continue to change with potential to be exploited.
v Rural land
Although Law 26,737, enacted in December 2011, limits the ownership of rural land by foreigners, they 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 in the coming years).
As described above, the expectations in the market are high and the opportunities many.
From a strict legal standpoint, the application of the Code has brought multiple scenarios to explore, which create opportunities that are not yet deeply developed. This includes the application of the surface real estate right, the guarantee obligations for developers and the legal structure for condominium projects, all of which are beneficial resources that can be used by those seeking to develop projects involving rural lands.
1 Pedro Nicholson is a partner and María Luz Hitters is a lawyer at Estudio Beccar Varela.