The security trust in financing the purchase of real estate
by Giselle Moncada, Associate, Morgan & Morgan, Chiriquí office
Published: May, 2015
Submission: May, 2015
The possibility of buying real estate rests normally on the capacity of an individual or company to acquire debt, reason why credit entities play an essential role in the success of the real estate market. Lately, we have noticed that in addition to the traditional loan guaranteed by a mortgage, there is an offer for loans guaranteed by a security trust.
The vehicle becomes more common every day thus making it essential for consumers to understand it because although it’s been used for such purpose for decades, it’s becoming more popular nowadays to guarantee bank loans.
In Panama, the trust is governed by Law 1 of January 5, 1984, “Whereby matters concerning trusts are regulated in Panama and other provisions are adopted”. This legal figure allows for several uses in the real estate sector as well. Notwithstanding the foregoing, we will focus on the security trust used to finance the purchase of real estate.
Doctrine states that “in a trust with these characteristics, the debtor (trustor) delivers part of its patrimony to a trustee to be kept by the latter, appointing the creditor as beneficiary of the guarantee agreed thereby and to proceed, in case of default, as mandated, to encumber the trust fund. Upon payment of the credit as established in the contract clauses, the trustee shall return the trust fund to the debtor (trustor)”.
The person asking for a loan to purchase property will deliver this to a trustee who will keep it encumbered at the Public Registry until the debtor settles the loan in full. The trust names the creditor as beneficiary since if the debtor defaults the loan, the trustee proceeds to transfer the property to the creditor expeditiously in accordance with the procedures set forth in the trust. However, if the debtor fulfills the obligations under the loan, the trustee returns the property to the debtor evidencing this at the Public Registry. For all purposes, the debtor holds the same rights and obligations of the property owner except for the restrictions established in the trust.
In the event the debtor defaults the loan making its collection impossible, the security trust seems to represent a swift manner to execute the real estate guarantee and more effective the process of converting a bad asset into a good one. This is one of the advantages for credit entities and indirectly, also for consumers seeking more comfortable interest rates since, in theory, a bad or illiquid credit portfolio could affect the structuring of interest and expenses in the granting of loans.
Another advantage is the possibility of designating a substitute beneficiary in case the beneficiary (debtor) dies. Another scenario in case of the debtor’s death is a formal probate process to adjudicate the property.
Such is the usefulness of this figure that on March 18, 2015 Bill 189 was presented to the Assembly of Legislators, which is waiting its first debate at the Commercial and Economic Matters Commission, proposing an amendment to the current trust law. Without going into details, the improvements to be introduced by the Bill include more detail in the requirements that the trust agreement ought to contain, clarification on the exemption to pay the sales tax for the transfer of real estate placed upon trust or in case of return to the trustor or blood relatives up to the fourth degree or second of affinity (although in practice, this tax is not paid upon transfer of the guarantee to the trust or return to the trustor). Among other things, the goal is for this figure to receive the same tax treatment and benefit as mortgages provided that the trustee holds a license issued by the Superintendence of Banks of the Republic of Panama.
Despite its great acceptance among consumers, greater disclosure is needed about this legal figure and its use in financing the purchase of real estate.
 PAPA, Rodolfo G., Trusts for lawyers and accountants, 2014, pg. 300, quotes CAMPI, German, “The Security Trust. Superposition of trustee-beneficiary roles”. Published in the financial supplement for lawyers of Universidad del Cema (Ucema), included in newspaper La Ley of 18/12/2009.
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