(with property included or just the business)
By MSc. Licda. Kristi Penland Murrell, March 2017
Purchasing a business in Costa Rica can seem like an uncertain endeavor, especially if you believe everything you read on the internet. However, the process should be enjoyable and educational. In this explanation, my goal is to guide you step-by-step on what is the modern and standard process of purchasing a business in Costa Rica. This specific article is about purchasing business, whether it be a restaurant, hotel, start-up, or any other type of business.
The process normally begins an offer for the business. This process usually consists of the realtor(s) presenting an offer on your behalf, based on the asking price. This can be countered between Buyer and Seller. An accepted offer is one signed by both Buyer and Seller that contains the basic conditions and terms. The offer is not to be confused by the binding Sales and Purchase Agreement, but is a letter of intent to show interest and the basic items of acceptance.
Here is an article that I wrote regarding the Offer to Purchase process which includes purchasing any type of property. It is also found on our website under Articles. However, in this specific article, it does not separate the purchase of the business from the purchase of the property. You may be only buying the business, which means taking over an existing lease or you may be purchasing the property where the business is located as well as the business itself.
Congratulations! You finally have found the property of your dreams. The view, the house, the acreage and whatever else toots your horn. If you are working with a Realtor, then you most likely have signed an Offer to Purchase with the terms and conditions of the purchase. This OTP typically includes Seller and Buyer information, property ID number (“matrÃcula”), survey number (“plano”), size and brief description. In this OTP or LOI, there are some aspects that need to be agreed on at this point and they are mainly:
Correct identification of the Property. (property ID number and survey number)
This document, once signed by both Parties, (either together or in counterparts) is then sent to Buyer and Seller’s attorney, requesting Buyer’s attorney to begin the SPA. Normally the Realtor will include: Additional information for the Parties, copy of the survey, and any other vital information for the attorney to create the document.
Article written by Kristi Penland M., November, 2016.
After the Offer to purchase has been accepted by the Parties, then the Seller and Buyer proceed to a Promissory Sales and Purchase Agreement. This is a binding agreement between the parties and normally drawn up by the Buyer’s attorney and reviewed by Seller’s attorney. This contract normally requires that the Buyer place 10% of the purchase price into Escrow, as earnest money during the due diligence term of the contract. Sometimes this amount is more and sometimes it is less, depending on how it was negotiated in the Offer to Purchase. The Promissory Sales and Purchase Agreement, commonly referred to as the “SPA”, uses all the terms of the Offer to Purchase “OTP” and adds more information and other legal clauses. The SPA also includes the purchase price, terms of the due diligence, a broader description of the property and business (or just the commercial endeavor and what it includes), as well as Buyer’s specific requests and Seller warranties.
What is due diligence? The due diligence term is the time for the Buyer to review the property and business or just the business while under contract (SPA). This study is normally done between the Buyer’s attorney and the realtors. The due diligence itself varies depending on the budget of the Buyer and the type of property and/or business. There is standard due diligence that is required by law for attorney/Notary Public to do upon the offer and to check again at Closing. The required ones are mainly the review of the registered Title and survey to ensure that no liens or annotations are on the property when it consists of a purchase of property and others that are required by law when purchasing a Business.
Those as well as other Due Diligence studies may include (at Buyer’s discretion):
Buying the Property and the Business or Just the Business: When the purchase of Property includes the purchase of the business and commercial activity and not just the property, then the purchase of the business has specific regulations before the local tax authorities, as well as if only the Business is being purchased (without the property).
The regulations regarding the purchase of the business are put in place not only to protect the Purchasing party, but also to protect the tax office, Municipality and suppliers that provide products or services to the business.
According to the Code of Regulations and Tax Procedures in Costa Rica (Código de Normas y Procedimientos Tributarios), there are sanctions and penalties to the parties that do not follow the procedures as provided to this regard in the Commerce Code of Costa Rica (Códgo de Comercio), Arts. 479-489, and Diectrix 22-2003.
Depending on the type of business and company, there are notices that may need to be presented in a national newspaper, allowing 15 days for any party to file their claim for payments due. Therefore, the price of the business should not be paid by Purchaser, until the 15 days have passed and any pending amounts according to the claims in those 15 days, have been paid off by Seller. Furthermore, the Costa Rican tax administration should provide, at formal and written request of Seller or Seller representative, a note stating that the business is current with the local tax administration.
What is included with the business?
Beyond the Property- if included- (due diligence items as follows to review), what else is included with your purchase of the business?
If you are only purchasing the business:
It is important to verify the current state of the property where the business is located, therefore, your attorney would want to review some of the aspects below, however, not all of them will be completely necessary. If the property is in a lease under the business name, this may need to be reviewed with the Lessor, prior to the purchase of the business. The conditions and aspects of the lease also need to be reviewed and approved by the Buyer of the business during the due diligence term, therefore a copy of the lease should be provided by Seller, along with the contact information for the Lessor. It may be that the owner of the business is also the owner of the property and only the business is being sold. If that is the case, this needs to be stipulated carefully in the agreements and contracts between the parties, if the business is to continue in the same location. What model will be used? A lease or rental agreement? Will there be an option to purchase?
Furthermore, when purchasing a business along with property, or if purchasing just a business alone, you would want to do the following reviews:
If you are purchasing the property as well as the business:
Soil studies- this study involves engineers testing the soil to verify that the soil will support building or the type of project you have planned. The price varies depending on the company, the property location and how many parts of the property you need tested. This is coordinated normally with the realtors and Buyer’s attorney. It is important to request in advance, that the study be in English, if you don’t speak fluent Spanish. Also, this should be schedule right after the contract (SPA) is signed, as it can take 3 weeks to get the final report.
Zoning Use study (Uso de Suelo) this is one of the standard documents when there is no construction or when there is construction but the buyer would like to build more. This is a document issued by the local Municipality stating that the property location, per the zoning plan, is apt for the type of building you plan to do. This document also states the percentage of construction allowed per the type of Use granted. This document is required upon building, but is not a building permit. It expires after one year, therefore if you build within the year of closing, you can use it. If not, you will need another one when you apply for building permits. This document usually takes one business week to obtain from the local Municipality.
Title Study and Study of registration of Survey: These two items are standard and required to be done by the closing attorney/Notary Public upon creation of the SPA and also on the day of closing, in case something has changed between the contract date and closing date. The National Registry database provides key information for the title, including: Property registration number, registered boundaries, natural description, basic location, size, survey number and any registered easements, (right-of-ways), historical references, restrictions, annotations, mortgages, liens and any other registered item that affects the title. The survey registration review is to confirm that the registered survey is the one that is listed on the title and that there is no advisory on the survey that means there is an issue with the survey regarding other property. The Buyer’s attorney will order any of the documents that are listed in the national registry as they are available for review and confirm the location of the right-of-ways and investigate regarding any annotations, liens and mortgages that may be on the property- all of which should be disclosed to Buyer in the beginning if shown on title.
What is an easement (right-of-way)? An easement, called “Servidumbre” in Spanish, refers to the right of access from one property to the other. There are many varieties of easements, including right of passage with vehicles, water easements, electric easements, view easements, ecological easements, and more. Each property owner designates a portion of their land which should be defined by a specific length, route and width, so that water pipes can run over another’s property or so that electrical lines can run through a property. These easements can also be done on a mother property and then when the subdivisions of lots are done, the reference to the mother property is included on the newly subdivided lots, but do not actually touch them physically. Therefore, the easements need to be reviewed carefully during the due diligence process.
Access: During the due diligence process, access to the property needs to be confirmed. The survey will show the access that was used to make the survey- which may be a public road or an easement.
What is a survey? The survey is the actual drawing of the property, which is registered with the technical criteria including GPS points, measurement and reference to property registration, by a licensed Topographer in Costa Rica. If the property is to be subdivided from a Mother Property, then the survey may need something called a Visado, which is an additional Municipal seal for subdivision. This needs to be checked right away, upon doing the SPA as well.
Taxes: The attorney will check to make sure the property is free of taxes as well as the Seller Corporation, if the property is held by Seller in a corporation. It is common for the property taxes to be prorated at closing, if paid in advance by Seller, or for unpaid taxes to be paid at closing, from proceeds. If paid at closing, normally the Escrow agent will make the payment for the parties.
How are property taxes calculated in Costa Rica? Property taxes (for land) are calculated at 0.25% of the registered value. The registered value will become the purchase price after the purchase is completed, therefore it will be 0.25% of the purchase price. To apply for investor status for Residency, the registered property value must be $200,000 USD or more.Â Therefore, at $200,000, your yearly property taxes would be approx. $500.00 USD. Keep in mind that when you go to build on the property, the building permit amount will be added to the value as a construction value and will also be taxed yearly. You can pay your property taxes yearly or quarterly. They can be paid at the local Municipality, online with most of the national banks or if you have a payment service set up with a local Escrow company, they can also assist with the payment.
What is corporate tax? Corporate taxes were put in place in 2012 and then declared unconstitutional by a due process error when creating the tax law. However, the tax law was published again on March 23rd, 2017 (new Law 9428). Â According to the new law, the corporate tax depends on the income and commercial activity of the corporation. A corporation that is only holding an asset and has no income, will pay about $120.00 per year, due during the first month of each year. Active corporations (meaning those who do business and are registered as active with the tax office will pay the corporate tax on a scale depending on the income the corporation makes each year.)
Read more about the corporate tax on our website under: Articles or News.
Therefore, in this case when purchasing a Property with a Business or just a Business alone, the corporate tax needs to be current by the Seller for the transaction to be done properly. During the due diligence term, proof that the Seller is current with such tax should be provided. It can also be verified online by going on to this website and including the name (where it says RAZON SOCIAL) and the corporate ID number, where it says NÚMERO DE CÉDULA JURÍDICA:
This should be verified at the beginning of the due diligence process as well as on the day of Closing.
Utilities and services: The attorney with information supplied by the Seller’s attorney and the realtor(s), will verify what utilities and services are installed on the property and verify if they are current up to closing. It is also common to prorate the electric, internet, cable TV, etc bills at closing. Furthermore, when possible, the services are transferred over from Seller to Buyer at Closing. Many of these services can be checked online prior to closing as well.
What is the water service like in Costa Rica? This is always an important item of due diligence. Per Costa Rican law, only the government can issue the right of use of water. Water is a public asset and cannot be privately owned. However, there are ways to have authorization of use of the water or obtain water service from the government. The following ways are: Obtaining a service from A y A (Acueductos y Acantantarillados- Similar to Water and Sewage-),in this case from the Aqueduct (water) department. This means that the property is located in an area where A y A has infrastructure and can offer a service with a meter. Normally this is available in the more developed regions of the country, including cities, towns and along major highways. The second option is to obtain a service from an ASADA. An ASADA is a water association that is regulated by the government, allowing A y A to de-centralize their direct involvement over the sources and administration. An ASADA is formed by members of the community who then follow the guidelines of A y A to create a water system including local sources of water. ASADAS will sometimes take already existing systems that have been created in the rural areas, require improvements by the owner/developer and then take them over as part of the ASADA system and offer services to the original developer as well as any others that are close to the system. The government does limit the amount of ASADAS being formed, as A y A can only direct and assist so many at a time. Therefore, if you are close to an ASADA (within two kilometers), then you would not create a new one, but rather join an existing one. With ASADA water, you also have a meter and pay the ASADA for the service. The third option is to acquire a concession for water for a hand-dug well (Artisan well), perforated well, stream, river or spring. The source should be on your property and normally the concession will be granted for 10 years. The water department of the Ministry of Environment and Energy (MINAE) is the entity that grants the concession. It involves presenting the proper permits, (if it is a well for example, perforation permits), documents pertaining to property ownership, environmental and water studies and application forms. There are several types of water concessions, residential, industrial, those designated for Condominium use, among others. In other cases, which is common in residential developments that are in rural areas and not under a Condominium regime, but rather developed and evolved on easements or agricultural parcels and right-of-way, you can find a general concession (one approved concession on the remainder of the original property) that services the rest of the subdivision, therefore all of the other lots. This is not the ideal way to provide water service, however, in areas, where A y A is not present or where there are ASADAS within the 2 kilometer radius but they are not accepting new projects or the investment is too much for both parties for the acceptance to happen, the community of that development runs and manages the water source for all of the lots.Â However, water cannot be charged for by individuals and therefore, only the maintenance of the system, pumps and electricity can be requested to the lot owners that receive water from the general concession. These last types of developments will eventually have to join an ASADA or directly with A y A when the infrastructure is available. In the meantime, the concession over the source should remain valid and the dues (canon) paid for accordingly by the Developer or owner where the source is found.
Verification of Survey or New Survey: A survey, as explained above, is a registered sketch of the property, including vital information of the property and done by a licensed topographer. However, over the years the technology for creating surveys has changed and therefore the accuracy of surveys need to be confirmed. Plus, over the years bordering fences may be moved casually or purposely and therefore the actual boundaries need to be checked as well. When there are significant differences in the area or boundaries, sometimes a new survey is recommended, or if the survey is more than ten years old. A new survey’s cost depends on the size and location and usually takes 2 months for registration.
Declaration of Property in the local Municipality: Per Costa Rican Municipal Code and law, properties need to be declared before the local Municipality every five years. The declaration is basically a form that is filled out including areas that have been built, size of the property, owner information and declared value. During the due diligence, Buyer’s attorney checks to see if the property has been declared and if it has not been declared, normally will request that Seller do so, prior to Closing. The Municipalities are as of recently charging a penalty for properties that are not declared every five years.
Environmental and Municipal permits: A property that has moved earth or removed trees should have an earth movement permit, at minimum, from the Municipality and possibly permits authorizing the movement of earth in areas that are considered to have jungle, forest, steep slopes or close to bodies of water.
Setback Certifications (INVU): Costa Rican water laws state that building is restricted from a creek, stream or river. The restricted area depends on the slope of the property, density of forest and location of the property. The restriction area ranges 15 meters to 50 meters from the bank of the stream, creek or river. Therefore, in the due diligence procedure, Buyer’s attorney, if the survey shows a body of water on the property or the new survey to be done shows one, may request a seal from the Institution of Residence and Urbanism, (INVU) stating where the setback ends. This stamp usually takes about 3 weeks to obtain. Most surveyors can give you an estimate of the setback status, but the official confirmation is from INVU.
Other types of setbacks: There are other types of setbacks such as springs and wells. The setback for a spring is significant. It is 100 meters radius, meaning nothing can be built, altered or even cleared within that radius. If the spring is used for a community use (tapped into and registered as a source of use), then the setback is 200 meters radius. When dealing with a well, the setback can be up to 40 meters.
Forestry Report: When purchasing property where there is jungle or forested areas, it may be important to get a forestry report. This is a report where a qualified Forestry Engineer and possibly a Civil Engineer walk the property and mark possible protected areas as well as located any springs, wetlands and important bodies of water. Normally the report will contain information that will show the areas that are feasible for development and those that would require special permits to develop. Reference: Forestry Law 7575.
RIA: A Ria is an area composed of land considered to be delicate to the ecosystem because it is within 200 meters of an estuary, or basically where the river meets the ocean. These areas are protected by the Maritime Zone law and Public Water laws in Costa Rica. However, unlike maritime zone (200 meters from the beach), many of the properties that are affected by RIA are titled lands. Due to government mistakes and years of possession, titles were granted to properties that are in RIA. However, the government published the exact coordinates in the Official Gazette for several parts of the country, pointing out the exact location of the protected areas and some Municipalities are now denying permits or the renewal of permits based on the law and restrictions. Therefore, if you are looking into purchasing property that is close to a river, but also to a beach, it is important to rule out the RIA factor with your attorney. There are some exceptions, as there are with Maritime zone property, such as if the title was granted before the law was in effect. All of this can be verified by your attorney during the due diligence process. Reference Maritime Zone Law, 6043.
HOA Fees, Condo Fees and Road Fees: If the Property is registered in a Condo regime, then there will be Condo dues that need to be reviewed, along with the Condo regulations. Many times, especially in the beach areas and more rural areas, the communities, although not Condo, organize themselves in Residential communities and create informal or voluntary CC&Rs (Covenants, Conditions and Restrictions) for the use of the property. Although not easily enforceable, most communities and land owners realize that they are in place for good reason and decide to abide. Normally the CC&Rs include monthly or yearly dues, same as the Condo regime and many times try to follow the same structure as a condominium. Â Furthermore, in some of the developments and in rural areas, the neighbors come together to repair the public roads and internal project roads or easements of the community. Therefore, these items are verified and the Buyer’s attorney usually would request a letter of good standing from the Developer or Administrator as well as confirmation of the amount of yearly dues, copies of the Condo Association regulations or community CC&Rs as well as proof that the seller is current with all dues, formal or informal.
Employee presence and liquidation: Although employment is specific to the Employer, it can be a hassle to a new Buyer if the employee who was the gardener for the property or caretaker, finds himself or herself out of work with no notice. Therefore, even if you are planning to hire the caretaker, gardener, housekeeper, etc, they need to be terminated first by the Seller, either at Closing or prior to closing and then can be hired by you with a new contract. By terminated, this means that they are entitled to a few benefits that the law requires an employer to provide when terminating an employee. The amount and type of liquidation varies on what has been paid and how the employee has been notified but normally consist of: Notice, Unemployment, Proportional Christmas Bonus and Proportional Vacation pay as well as any unpaid salaries, overtime and holidays that were worked. Our recommendation is that if there are employees, that your attorney review the liquidation and termination documentation, even if it is drawn up and paid directly by Seller’s attorney.
Insurance for property: It is a good idea to confirm with a local insurance agent that the property you are purchasing is in an area where you can get the insurances that you desire for your future building. There are some limitations to insurances depending on location, slopes and other factors. Keep in mind that Costa Rica does not insure property itself, but does insure buildings, vehicles and objects.
National Commission of Emergencies, CNE: There are properties that are located within areas that could be affected by slides, floods or that already have been and therefore are marked as danger zones and uninsurable areas. Normally these areas would be somewhat close to bodies of water, however, if in doubt, consult with an attorney who can request a study with the National Commission of Emergencies.
Each business and property has its own special characteristics that merit specific research, therefore the land you are looking for may not need these studies or you may choose to waive some of them.
At Uvita Law Firm, we are experienced in the research field and have a broad range of professionals that can assist with the technical studies needed for the purchase process and of course to assist after purchasing. The idea is to make the process as smooth and secure for our clients as possible. For more information, contact us at: Info@UvitaLawFirm.com