(This the first post in a three-part series about real estate ownership in Panama and Isla Palenque’s vacation homes. For the other two sections, see Real Estate Ownership II: Panama Primer and Real Estate Ownership: Sidebar.)
We’ve got a long list of FAQ from prospective home buyers about forms of ownership for their vacation home, so I figured it might be helpful if I wrote a blog entry (or three) about it.
To answer the most common question we hear… Yes, anyone can own real estate in Panama. Unlike Mexico and some other countries where non-citizens must go through a convoluted banking trust legal structure to obtain ownership of coastal properties, in Panama a non-citizen can own land or a home. No ifs, ands, or buts about it.
In addition, you can own homes or land in Panama through lots of different legal mechanisms:
Simply as an individual (e.g. I, Ben Loomis, can own land),
Or through a legal entity – a company (as Amble has done for one part of Isla Palenque), a trust (as Amble has done for another part of Isla Palenque), or a foundation – and maybe through other legal entities that I don’t know about.
All means of ownership have different pros and cons, and the decision to own land through a legal entity is typically chosen for tax and/or liability reasons.
We offer two forms of vacation home ownership on Isla Palenque, and everything we offer for sale is on titled land. (Likewise, roughly 95% of all other structures are being built on titled land. Because of Panama’s laws regarding marine, beach, and ROP structures, 5%ish of our other structures are not built on titled land.)
Our Villa Estates are constructed on separately deeded and titled lots. Each lot ranges in size from a little over half an acre (0.2 hectares) to about one acre (0.4 hectares). At closing, each lot will be deeded over to the purchaser along with the built home. This is the simplest, easiest-to-understand form of ownership at Isla Palenque.
Our Casitas and Canopy Homes are being built in groups on larger lots, with each lot containing from 8 – 14 homes. Even though the Canopy Homes are completely free-standing, detached homes, and even though the Casitas are duplexed in “townhouse” style, the idiosyncrasies of Panama’s zoning laws require that these homes be sold in a condominium ownership structure called a PH (Propiedad Horizontal). The main reason for this is that a minimum amount of “road frontage” is required to create each separate lot, and that the “nestled in nature” essence of Casitas and Canopy Homes requires a design that cannot meet this technical road frontage constraint.
Accordingly, Casitas and Canopy Homes are being sold as part of a legal condominium. Each individual homeowner is purchasing titled land, but they are purchasing a larger lot of titled land, and sharing it with 7 to 13 other homeowners. They are also purchasing an “exclusive right to use” area around their home, which sits inside the titled lot and which creates essentially the same rights as an individual title would. This kind of structure is exactly the same as what you get when you buy into a condominium or townhome in the United States: there is some “common area” that all homeowners share, and a specific piece (your apartment or townhome) that is your alone to use.
Likewise, the development as a whole can be seen in a similar way. All of the lots for the homes, as well as the lots for the hotel, back of house area (service area), etc., each sit adjacent to or inside a larger common area which contains the roads, nature preserve, and other areas. Everyone who owns a lot, or portion of a lot, also owns a small piece of this large common area.
A standard condominium structure is governed by a set of legal documents which lay out the rules for use and maintenance of the common area. In the same way, the larger common area and all the lots and homes on the island are governed by a set of documents and rules called a “Master Association.” Each person who buys a home on Isla Palenque becomes a member of this association, subject to its rules, but also with rights to vote on annual budgets and similar issues. So, whether you buy a Villa Estate with its own separately deeded lot, or a Canopy Home which sits inside a larger lot shared with others, there are restrictions on the usage of that lot and rights and obligations associated with ownership of the lot (just as there are with all homeowner’s associations and condominiums). These include – for example – easements guaranteeing the right of access to your lot, easements allowing the Master Association to enter your lot to repair utilities, the obligation to help maintain the roads, and rules stating who is allowed to use their lots for commercial purposes, what signage you can or cannot have in your yard, etc.
The first class I took while in graduate school for real estate development (literally the first, as it started at 8 a.m.) was called “Legal Issues in Real Estate Development.” I was dreading this first class; it sounded so boring. But to my surprise, it was one of the most interesting classes I took at MIT, taught at a very conceptual level and covering the most fundamental issues associated with real estate.
On the first day, the professors introduced the idea of real estate property rights as a “bundle of sticks.” Unlike ownership of simple assets like cars, computers, iPods, etc., ownership of real estate always comes with restrictions, whether they are the restrictions associated with the zoning laws of the community in which the property is located, or laws ensuring your neighbors can have “quiet enjoyment” of their own property, etc. And more often than not there are multiple people with claims on your property. Anyone who has a mortgage knows that the bank has rights over their property; granted, the bank is very, very limited if you keep up your payments, but nonetheless, any property with a mortgage has at least two entities with claims on the land.
And when you get into commercial real estate transactions, rights can get chopped up in even more ways. An example almost everyone is familiar with: someone who leases an apartment has handed certain rights over to someone else. But the rights of real estate ownership can get pulled apart even more: a person can have mining rights over a tract of land, but no right to put buildings on it, for example. There are skyscrapers in Manhattan built on 99-year land leases, with additional underground rights (easements) and air rights handed over to the city, and with restrictions on usage set by zoning and other local ordinances. And these skyscrapers in turn, usually have commercial tenants with their own leases and rights, mortgagors with certain rights, etc. This complexity, and the ability to legally separate different rights (i.e. the “sticks”) from the overall set of rights (the “bundle”) associated with the property is why it is useful to think of real estate ownership as a bundle of rights and not some sort of indivisible absolute right.
When you buy a home on Isla Palenque and sign the Master Association documents and covenants, you essentially give a few sticks over to the Master Association, with the understanding that everyone else does so as well, which ensures that the community’s standards will be upheld (for example, ensuring that your neighbor won’t be building a 10 story pink building next to you or opening a late-night bar).
However, in addition to helping you understand how the Master Association works from a legal point of view, the “bundle of sticks” metaphor can also help you understand the different forms of Panama real estate ownership, which I’ll explain in the next post.