(This the second post in a three-part blog entry about real estate ownership in Panama and Isla Palenque’s vacation homes. It can fruitfully be read on its own, but is best understood in the context of the other two sections: Real Estate Ownership I: Isla Palenque and Real Estate Ownership: Sidebar.)
As I described in the first post of this blog entry, real estate property rights can best be understood as a “bundle of sticks.” In addition to helping one understand how a Master Association and other condominium legal structures work, the “bundle of sticks” metaphor can also help illuminate the different forms of property ownership within Panama, each of which can be seen as providing its own particular “bundle.” If you read the first blog entry, feel free to skip the next section (I’ve set it apart).
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.
Panama real estate has three recognized forms of property ownership: “title,” “concession,” and “rights of possession.” The first two forms are common throughout the world, and the last form is common throughout Central America and other emerging economies where an official title registry has yet to cover the entire country. At Isla Palenque we have a property “trifecta”: each of these forms of ownership come into play in different areas of the island.
Title in Panama is pretty much exactly like title in every other country. It confers the most rights to its owner, though there are (as always) restrictions set by zoning, local ordinances, etc. Title in Panama is well-respected enough that one can obtain title insurance, reinsured through such well-regarded American companies as Stewart Title, Chicago Title, and First American. About 60% of the land on Isla Palenque is titled, and this is where all of the first three phases are being built.
Concessions in Panama are basically long-term leases from the government, usually established for specific uses. For example, in Panama (as in most countries) all water areas are considered state-owned. (In fact, if we want to be technical, all coastal areas are state-owned, from high tide to between 10-22 meters (32-72 feet), depending on the exact coastal conditions.) So if one wants to build a dock or marina (as we are doing), one needs to apply to the government for a concession: typically a 5- to 15-year lease of an area of water that allows one to build certain structures. In our case we have 15-year concessions that allow us to build some docks and concrete wharfs/ramps.
Other common forms of concession in Panama are mining concessions, agricultural concessions, and tourism concessions. These can range from just a few years to 90 years (similar to the example in my previous post of the 99-year land lease in Manhattan). And while technically such concessions are only for a specific period of time, the law (as I understand it) is such that if the government were to choose to not renew a concession on which one had made improvements, the government would be forced to compensate the person who made the improvements. Between this required compensation and the fact that the government collects annual concession fees and taxes from the commercial usage of many improvements, the state has a lot of incentive to simply renew such a concession once granted.
So, as with long-term land leases, concessions to run restaurants in public areas, or the kinds of agreements often associated with mineral rights (all standard concepts in the US and throughout the developed world), concessions in Panama do not provide the full array of rights associated with title, but generally allow the owner to do what they want inside the designated area. For many business purposes, a concession is as good as title.
Rights of Possession
The final form of real property ownership in Panama is an archaic remnant of colonial times called “rights of possession” (ROP), and while it is the form of ownership with the smallest bundle of sticks, it does still provide certain critical rights.
ROP is land that the state recognizes has been occupied and maintained by someone, and by recognizing this stewardship of the land in writing, the government confers – quite literally – the right to possess the land, but not much else. ROP contains the essential elements of property ownership: the right to live on the land and the right to keep others out. In addition, one can take existing ROP and use them to apply for title or a concession, eventually parlaying the rights associated with ROP into more rights.
Historically, ROP is associated with poor landowners and small-time farmers, and I suspect the fact that much land in Panama remains ROP reflects that historically these poorer, less-educated people were not in a position to handle all of the legal bureaucracy and paperwork associated with obtaining a full title. ROP is transferable, just as with title or concession, and a reasonably functioning market for ROP land exists in Panama. But one is not going to get title insurance or a bank loan for ROP land, and from a technical point of view, there is not much one can do with ROP land, although in practice people do all sorts of things with it.
From a technically legal point of view, ROP allows one to build a small house, do some subsistence farming, make trails, and otherwise use the land in a “temporary,” more or less reversible way. However, in practice people often do much more with their ROP land, making the de facto rules about ROP much more permissive, regardless of the de jure law. Cala Mia, the funky little “eco-resort” just 3 kilometers (2 miles) from Isla Palenque, for example, is built entirely on ROP land. And Red Frog Beach in Bocas Del Toro is actually selling ROP land (and buildings built on ROP land) to prospective customers.
In fact, while many people might feel a little insecure about ROP when they first hear about them, once one sees how they are used in practice, and with the understanding that all real property is in fact just a “bundle of rights,” even people from the United States and Europe quickly become comfortable enough with the concept to build commercial businesses on them, sell them, and otherwise stretch the boundaries of what is the de jure law into what is the de facto law.
That said, we at Isla Palenque are hewing to the technical letter of the law with respect to our ROP land. The approximately 40% of Isla Palenque that is currently ROP land will be very lightly used (mostly as the nature preserve and other outdoor uses). We are neither building on ROP land (with the very slight exceptions explained below) nor are we selling ROP land. The titled area of Isla Palenque has enough area for us to build the initial hotel, all of our infrastructure, and around 180 homes. Since we project that this will take at least eight years, and since we are in process of applying for title to the ROP area (with a back-up plan to apply for a 70-year tourism concession), we have the ability to take a less risky path than the likes of Cala Mia and Red Frog, and the ability to ensure that what we sell to our homeowners isn’t just 99% secure, but 100% secure and insurable.
Have no doubt: we are using (and have the exclusive right to use) the ROP land on Isla Palenque, but given the nature of our development – low-density with a large nature preserve – we can use much of this land for its long term intended purpose such as trails, some small organic farming, and similar non-intrusive enjoyment of land in its natural state. And though we will be creating some small amenities on the ROP land – providing outhouses in the remote areas of the trail network, and creating some “luxury camping” style amenities for example – the small amount of “building” we are doing on the ROP land is all done through a semi-proprietary system of partially prefabricated “low-impact structures” that can be removed from their sites in a day and with no visible impact on the land.