Even successful investors need new insights and expertise. The recent flurry of activity is spurred by many of the same investors who scooped up some of the best deals in the U.S. in the early 1990s. Now they are focusing south of the border, and find that they need new insights and expertise to structure and successfully close a hotel deal in Mexico. 

The "Art of the Deal"... in Mexico.  

The art of doing a deal successfully in Mexico lies in three key elements. (1) applying the traditional fundamentals of due diligence and investment analysis, (2) finding the right structure and vehicle for your Mexican investment, and (3) forging the right team of attorneys, consultants and advisors to bridge the cultural, language and legal differences. 

Generally, there are two basic structures to acquire an ownership interest in a hotel or a resort in Mexico - (1) as an asset purchase, and (2) as a stock purchase. There are distinct advantages and drawbacks to each structure. The choice between an asset and a stock purchase for a Mexican hotel or resort may have a significant impact on an investor's bottom line. 

This article is intended to help provide you with insight on a few of the major issues to consider in structuring a Mexican hotel investment. 

Asset Purchase Considerations. 

As in the United States, a true asset purchase will be recognized by the Mexican federal, state and local authorities as a transaction which will allow the purchaser to avoid some of the most important successor liability issues. 

An investor's due diligence of its hotel investment may be, limited to those matters associated with the operation of the hotel and property-specific matters. In an asset purchase structure, there is little need to perform a detailed review of the corporate level liabilities and other matters typically associated with a stock purchase deal. However, with an asset purchase in Mexico, an investor should look carefully at the records of seller's affiliated companies which often employ the executive and rank and file employees of the hotel. If the seller does have such an affiliated employment company, further due diligence is warranted because the Mexican authorities may impose successor liability in such situations. 

An asset purchase deal in Mexico requires the conveyance of real property by deed, which triggers certain additional transaction costs. First, and most surprisingly to most U.S. investors, is the additional cost of a Notario - an attorney who checks the public records to assure that title is properly vested in the seller. A Notario's fee typically runs 2% to 3% of the gross sales price of the hotel or resort. Many investors are shocked by the amount of the Notario's fee and may even have to revise their pro formas as a result. While we have been successful in negotiating a reduction in the Notario's fees, you will have to use a Notario in an asset acquisition in Mexico. 

The cost of title insurance in Mexico is significantly higher than in the United States and has often resulted in additional six-figure transactional costs for U.S. investors when buying a hotel or resort in Mexico. 

In asset deals, the purchaser also pays an additional acquisition tax based on the value of the hotel or resort as discussed below. 

Stock Purchase Compared.  

In a stock purchase, the purchaser avoids additional transactional costs such as the Notario fees and the additional acquisition taxes. A stock purchase deal also provides a purchaser greater flexibility in structuring the transaction to purchase the shares of the parent company which may well be a U.S. or other foreign domicile entity with distinct tax advantages. 

The biggest problem with a stock purchase transaction is usually the purchaser's assumption of successor liability for all matters relating to the operation of the hotel and even the liabilities of the seller. 

Special Tax Implications.  

The following sets  forth some of the most common tax implications for major hotel and resort acquisitions in Mexico. 

Withholding Tax. In an asset or stock purchase, unless both seller and buyer are Mexican entities, the purchaser must withhold a portion of the purchase price paid to seller - much as under U.S. regulations. However, most transactions are structured with both entities to the transaction being Mexican corpora-tions to avoid such withholding. 

Income Tax. Here again, with either an asset or stock purchase, the purchaser will have to pay income taxes equal to 34% of its net income from the operations of the hotel following the closing. Additionally, the seller would have to pay 34% income tax on any net gain realized in connection with the sale of the hotel (sales price less the undepreciated balance of the assets as restated for inflation). 

Asset Tax. In an asset purchase, when a purchaser buys a hotel with a newly incorporated company, the Mexican government generally will allow the new company to enjoy a 4-year holiday period within which it will be relieved of making any asset tax payments. The asset tax is based on an annual valuation of the enterprise's worth and is payable annually. However, in the event that a newly formed entity purchases all of the assets of a hotel, the Mexican government may take the position that it is not really a new company but is a successor to the seller and ineligible for the 4-year tax holiday. Planning can be very important here. Obviously, this tax does not apply to a stock purchase transaction. 

Value Added Tax. The VAT in Mexico requires the purchaser to pay a value added tax at a general rate of 15% on the portion of the purchase price allocable to the building and other assets which do not constitute real property. There is, however, a process by which the purchaser can then obtain a refund for an amount equal to the VAT paid at the closing of the hotel within a rather short time period thereafter. This tax does not apply to stock purchases. 

Acquisition Tax. The purchaser in an asset acquisition must pay an acquisition tax of approximately 20% of the value of the land and the buildings. This tax is payable at closing, but the amount of the tax varies with the local jurisdiction and is often negotiable with the local authorities. This tax also does not apply to a stock purchase. 

Critical Skills for Success.  

Many U.S. investors will prefer to structure significant hotel investments in Mexico as stock purchases rather than asset purchases in order to avoid the additional transaction costs associated with asset deals. However, stock purchasers must be ever vigilant of the quality and thoroughness of the due diligence its attorneys, consultants and advisors perform given the successor liability implications with structuring a deal in such a manner. 

This brief overview of choosing an investment vehicle and doing deals in Mexico cannot substitute for detailed planning and analysis of your transaction. We would be pleased to provide you with additional information, and more importantly, to sit down with you to discuss your special concerns in doing deals in Mexico. 

Jim Butler and Peter Benudiz lead JMBM's internationally acclaimed premier hospitality practice in a full-service law firm with more than $14 billion of hotel transactional experience around the globe and 50 attorneys focused on virtually every legal aspect of hotels, restaurants, resorts and sports facilities. Peter is both a Senior Member of the Group and Chairman of its specialized Mexico and Latin America Hotel Group.

Even successful investors need new insights and expertise. The recent flurry of activity is spurred by many of the same investors who scooped up some of the best deals in the U.S. in the early 1990s. Now they are focusing south of the border, and find that they need new insights and expertise to structure and successfully close a hotel deal in Mexico. 

The "Art of the Deal" ... in Mexico. The art of doing a deal successfully in Mexico lies in three key elements: (1) applying the traditional fundamentals of due diligence and investment analysis, (2) finding the right structure and vehicle for your Mexican investment, and (3) forging the right team of attorneys, consultants and advisors to bridge the cultural, language and legal differences. 

Can you pass this test? Although, at first blush, the deal structures available to a buyer in acquiring a hotel or a resort in Mexico may appear remarkably similar to those in the United States, hotel investors gain a competitive advantage if they seek counsel from knowledgeable advisors regarding the myriad of subtle distinctions and potential pitfalls in acquiring a hotel or resort in Mexico. 

For example before even making an offer, a would-be buyer should understand the answers to the following questions: