Real Estate 2023

Last Updated May 04, 2023

Costa Rica

Law and Practice

Authors



Dentons Muñoz is a full-service law firm and business platform that provides services throughout seven offices in Costa Rica, Nicaragua, Panama, El Salvador, Honduras and Guatemala, with teams of highly specialised and experienced legal professionals. The scope of Dentons’ services covers real estate, corporate, M&A, finance, compliance, IP, dispute resolution and controversies, labour, administrative, cannabis and others, as well as escrow, accounting, and tax services. The firm’s commitment to providing exceptional legal services is evident in its successful management of complex, multi-jurisdictional transactions and in its growth as one of the region’s largest business platforms. Extensive experience in the real estate sector has established the firm’s teams as trusted advisers to flag hospitality operations, real estate developers, buyers, and sellers, cementing Dentons as a go-to for Costa Rica’s local and international investors.

Costa Rica is a Civil Code tradition-based system. The most relevant sources of real estate law are the Civil Code, the Commercial Code, development and environmental regulations and applicable case-law.

Costa Rica’s foreign direct investment (FDI) continues its steady growth and this has impacted the real estate market. The new dynamic and the implementation of friendshoring, rightshoring and nearshoring policies has provided Costa Rica with an exceptional positioning to foster new companies and their facilities. The industrial sector keeps growing, with a focus on the following:

  • built-to-suit facilities for specialised manufacturers, including high-end laboratories and manufacturing plants;
  • last mile warehousing to meet the demand of e-commerce and online sales;
  • logistics warehousing development for regional distribution centres; and
  • free zone parks.

Also, the real estate market has shown record performance in the luxury resort development, high-end beach front condos, hotels and houses. Some of Costa Rica’s main destinations have seen record numbers of square metres developed and in sales after the COVID-19 pandemic. The market is now hosting (will be hosting) hotels such as Waldorf Astoria, One & Only, and a new Ritz-Carlton. Developers in coastal areas are starting to run off inventory and are encountering problems such as the lack of infrastructure growth to keep pace with demand.

There has been a change in the demographics of real estate investors in Costa Rica. Retirees used to form the bulk of investors, but this has changed to younger families; particularly those in the technology sector who are able to either sell their business and move to Costa Rica, or work remotely from anywhere in the world. Also, hospitality investment in the country, particularly in the Guanacaste province, has grown as a trend in the last 12–24 months.

Notable Deals in the Last 12 Months

Gencom and Mogary Hospitality, through Lotus Capital Partners – a Blackstone affiliate – have secured a USD191 million financing on the Four Seasons and Andaz resorts in the Papagayo Peninsula; also, the establishment of Nekajui, a Ritz-Carlton members-only resort through a USD130 million financing from Banco BCT and Monroe Capital. New project Discover Land has invested in the area of Potrero, raising the bar for development of the area. The refurbished marina in Flamingo has now opened and is driving development in Flamingo, Las Catalinas, Conchal and Pinilla.

Alongside a USD200 million investment by Bayer in a new pharmaceutical plant in Costa Rica, and Hilton’s investment alongside Cacique Investors LLC and Garnier & Garnier to bring the Waldorf-Astoria flag to the Guanacaste Province, Costa Rica has seen a strong increase in hospitality and real estate investments in the last 12 months.

Effects of the COVID-19 Pandemic on the Real Estate Market

The hospitality industry was negatively impacted during the first and second years of the COVID-19 pandemic; however, it does not currently play a negative role in the local real estate market. With Costa Rica’s relatively loose COVID restrictions, the pandemic accelerated the inflow of investors to the market. Regarding commercial real estate, commercial office spaces have opened back up. However, a new partial remote work from home culture has permeated society, which prompted developers and owners to seek more than one use for their offices and other commercial spaces.

Rising Interest Rates and the Effect on the Local Real Estate Market

Regarding rising interest rates, these are not necessarily affecting the flow of international real estate investors since they are not eligible for credit within the national financial sector. The types of investors currently doing business in Costa Rica usually have means to purchase lot/houses, and developers are booking their loans abroad to have access to more cash. Inflation as a phenomenon has not affected the market in any significant way, since foreign investors in the sector transact in US dollars, and prices for land and homes have not seen any noticeable increase.

Disruptive technologies have not taken a hold of any significant part of the real estate investment sector. Some sellers may accept cryptocurrencies as a form of payment; however, this is not a common practice by any means.  Costa Rica has very strong financial reporting and compliance regulations, therefore, using alternative payment methods may raise flags to the authorities. As a result, the parties try to keep it simple in most transactions.

There are no proposals for reform at state level which would impact the real estate market in any noticeable way at the moment. However, local developers are seeking the easing of environmental permits and looking for options to finance residential development affected by the slowdown of the local market economy and rising interest rates, which affect lending to Costa Ricans.

Property rights in Costa Rica are divided into simple title, which includes condominium regimes, and another that shares certain elements of complete or partial ownership, and includes government land lease properties (concessions) regimes, such as those in the Terrestrial-Maritime Zone, or those within the “Polo Turístico Papagayo”. In this latter category, the state issues a 50- or 20-year lease on the property, which may be renewed for additional periods.

All fee simple title transfer must comply with the same formalities. Transfer of title must be executed by a notary public and registered in the National Registry. The transfer of titles is regulated by the Civil Code as it relates to the minimum contractual requirements for it to be legally valid and binding. Corporate requirements, such as a legal entity’s capacity to enter into a transfer agreement and holding of shareholders’ meetings authorising the sale or purchase of assets, are regulated by the Commercial Code. That said, at a regulatory level, there is no distinction between the transfer of different types of assets, whether they are commercial or residential in nature. Consideration should be taken by the investor regarding contractual obligations which may affect the asset, such as active leases with tenants, or liens or encumbrances.

A lawful transfer of title of a property is effected through a public deed in which the parties appear before a notary public. Transfers of title are recorded in the National Registry, which can be accessed by searching for the property’s individual registration number. Even throughout the COVID-19 pandemic, notarisation remained an in-person affair; however, virtual submission of executed transfer deeds was made available by the National Registry.

Buyers retain lawyers and consultants to conduct due diligence. Most due diligence processes are divided in two: (i) confirming legal status of title and that no clouds may affect ownership, and (ii) technical due diligence, which consists in confirming that the property is not subject to environmental restrictions and has the infrastructure required for its development.

Relevant aspects that are reviewed during due diligence include the following:

  • access localisation to determine whether it is through a public road or an easement – note new regulations have restricted the ability to develop parcels of land that have access through certain types of easements;
  • execution of environmental reports to determine whether the property is located in a protected area, such as a national park or a wildlife reserve;
  • review of property measurements/boundaries to determine if any potential overlapping with neighbouring properties exists;
  • soil tests;
  • a construction assessment;
  • research on possible clouds on title, such as easements, and possible outcomes; and
  • confirmation of good fiscal standing.

Standard transaction representations and warranties are usually made during the due diligence period and re-stated at closing. Typical representations are that the property is in good standing, free of any clouds on title and annotations, and that it is not affected by environmental regulations. Remedies for enforcing misrepresentation are usually through the process of arbitration. There is no standard practice of keeping funds in escrow or certain security for a certain period of time to avoid misrepresentations. Representations are subject to the regular statute of limitations: ten years for contract obligations, five years for construction defects and one year for equipment warranties. Compensation for misrepresentation is not capped; however, in practice only direct damages are awarded.

An investor should consider environmental restrictions and the ability to develop land by checking with the applicable regulatory compliance guidelines and municipal permits. A safe corporate structure is also desirable to protect the assets, which would lead to the investor requiring an effective legal team specialised in corporate compliance.

Local environmental legislation places personal responsibility, whether civil or criminal, upon the person or legal entity’s principal that directly causes soil pollution or environmental damage. If a property is purchased by an investor, and the damage was caused by a third party or previous owner within their property, criminal and civil liability will not apply to the owner, unless it is proven that the property’s owner had knowledge of the activity and did nothing to prevent it.

Each of the 82 municipalities is able to establish permitted land uses through “land use permits”. Land use certificates are available to any interested party. Also, it is important to review environmental regulations that may affect the area where the property is located. The construction law provides guidelines concerning what can be developed in any property, according to its size and location.

The urban planning law allows for certain types of PPP in which a development will develop and transfer public infrastructure in order to obtain its permits. The developer may recover the investment made to build public infrastructure within a period of five years, by charging other developers or neighbours a fee for accessing such infrastructure. This provision is starting to be used more frequently, especially to secure water infrastructure for development.

Expropriation is possible in Costa Rica if the government declares the property to be of public interest. Once the government declares public interest in a site, it must serve notice on the owner and request an official appraisal to determine the value of the property. The government may pay the value, take possession and, if the appraisal determines the value is higher, then it will have to pay the difference. 

This process is regulated by the Costa Rican Constitution, and Law 9286 on Acquisitions, Expropriations and Easements. The Constitution guarantees the inviolability of private property, and it may only be taken once a legally proven public interest has been established. Furthermore, in all cases, the expropriation must go through a judicial process and compensation to the owner must first be made in full, and at a fair market value.

Transfer taxes are roughly 2.5% of the final sale price of a real estate asset. Among these are the transfer tax of 1.5%, agrarian tax of 0.15%, National Registry stamp of 0.50%, fiscal stamp of approximately USD1.00, National Archive Tax of approximately USD0.04, and the Bar stamp of approximately USD40.00. Notarial fees are usually 1% to 1.5% of the sale price.

Foreign investors are treated equally under the law in general terms. The only restriction is for holding land within concession zones, such as Terrestrial Maritime-Zone.

If the share capital is Costa Rican-owned, there are no restrictions regarding financing. Foreign investors, such as final beneficiaries of legal entities that are foreign, may not be subject to financing by local banking institutions; however, they may secure foreign financing and contribute the capital to locally constituted entities as working capital.

Investors often opt for establishing a guaranteed trust with the lending institution in order to secure funds for acquisition or development purposes.

Trusts are used as a vehicle to comply with applicable banking regulations for foreign investors. Regarding repayment, there are no restrictions on funds being transferred outside Costa Rica, so long as KYC requirements are met when constituting the original banking relationship.

There are registration taxes for mortgages and security trusts. Mortgages pay 0.8% of the value of the financing plus 0.5% of notary fees. Movable pledges as security attract only a standard fee of USD10. Security trusts require a transfer to a trustee, so transfer taxes and notary fees to the amount of 3.5% of the transaction value are required.

There are no legal requirements for a company to grant security over its assets. However, recently, a law enacted a protection to minority shareholders that requires approval of the board of directors or equivalent body, as a prerequisite for the execution of those transactions involving the acquisition, sale, mortgage or pledge of assets of the issuing company that represent a percentage equal to or greater than 10% of its total assets.

If a borrower defaults on its debt, a lender may resolve the contract and request payment in full. That said, applicable regulation allows the lender to sue for the outstanding debt and execute its security. The execution would take place through auctioning of the secured asset or assets, and, depending on the time when the debt was secured, the lender that secured its loan first would have priority over other lenders. On this matter, it may take anywhere between one and two years to enforce and realise on a real property security. However, this depends on several factors, such as the number of lenders who hold security over the same asset or assets and the court circuit hearing the case.

Existing secured debts may be subordinated to newly created debt through an agreement between the lenders. On the other hand, existing secured debt may become subordinated if, during insolvency proceedings, the person or entity that holds the existing secure debts does not verify its loan before the competent court in the timeframe afforded by the court to do so.

There is no lenders’ liability under environmental laws. Environmental liability is prosecuted at a personal level under criminal law; therefore, the specific natural person who is in violation of environmental law would be the only one to bear all criminal and civil liabilities.

Security interests are not made void by a borrower becoming insolvent alone. The extinction of security interests would be a consequence of a judicial decision derived from insolvency proceedings in which insolvency is officially declared.

If a borrower becomes insolvent, the borrower itself, those who manage the borrower’s assets, its lenders or the state may initiate insolvency proceedings. Once the oral hearing is held, the court will decide whether the case has enough merit to move on to the formal opening of the insolvency proceedings.

The opening of insolvency proceedings will see the appointment of an intervenor or an insolvency trustee, the summoning of lenders and interested parties, and a notice of the opening of the insolvency proceedings to the respective public registries, public and financial entities with which the insolvent party is involved.

Effects of Insolvency Proceedings

Upon the borrower

The borrower must have authorisation from the insolvency practitioner designated by the court to:

  • dispose of its assets subject to the proceedings; and
  • resolve any contracts to which the borrower is a party.

An insolvency administrator may be assigned to manage the borrower’s assets in the following circumstances:

  • when the borrower subject to the insolvency proceedings fails to appear in court, fails to aid in court-ordered discovery, commits procedural abuse, or acts in bad faith or against the procedural goals; and
  • if the proposal submitted to make the borrower’s lenders whole is equal to or greater than the total amount of the borrower’s assets.

Secured debt priority

All secured debt must be paid with the borrower’s assets which have no special liens upon them that make it legally impossible to do so. Separate types of credit take priority in payment over others in insolvency proceedings, in the following order:

  • specially privileged loans – mortgages, pledges, movable securities, guarantee trusts, rights of retention, and marital assets;
  • generally privileged loans – child support or alimony, labour debts, compensations related to health or life damages not covered by insurance;
  • common loans – all other loans not deemed specially or generally privileged or subordinated loans;
  • subordinated loans – those to whom the creditor voluntarily assigns that condition;
  • loans of those persons specially related to the debtor, except for those credits that have a general privilege in the insolvency proceedings; and
  • others to whom the law grants that qualification.

The country’s main banks have transitioned away from the LIBOR index and have moved to using mainly the Term SOFR index and the Prime Rate. Regarding active loan agreements, local banks are in the process of reaching out to current debtors to amend active loan agreements to one of these indexes. Banks will usually have a clause within credit agreements which allows them to switch between indexes if necessary.

Local regulations that apply to planning and zoning are contained within the Law on Urban Planning, municipal planning regulations, the National Urbanism and Dwelling Institute Law, and the Terrestrial-Maritime Zone law. These regulations impose limitations on the areas where developments and general construction may take place. Furthermore, there are environmental limitations on construction in certain areas too. Controls are focused on density and environmental regulations.

The Law on Constructions and its regulation, the National Urbanism and Dwelling Institute Law, the Law on Condominium Property, as well as the Federated Association of Engineers and Architects regulation apply to the method of construction and structural design. However, aesthetic design and appearance is not regulated and is completely up to the owners. The only limitations are usually those imposed by homeowners’ associations or condominiums.

The National Urbanism and Dwellings Institute (INVU) through its own INVU Law, the Ministry for the Environment and Energy (MINAE), the Federated Association of Engineers and Architects through its regulation, and each individual municipality are the authorities responsible for regulating the use each parcel of real estate may have.

Developers must obtain a land use permit to ensure municipal compliance, and submit construction plans to the National Urbanism and Dwellings Institute (INVU), the Ministry for the Environment and Energy (MINAE), the Federated Association of Engineers and Architects (CFIA), as well as to the pertinent municipality for approval. Once approval of the plans is obtained, the developer must obtain the Ministry of Health’s authorisation, which would in turn enable the developer to obtain a construction permit from the municipality. Third parties may object to construction through an injunction to stop construction if they consider their rights to be jeopardised by the construction process. The injunction must be filed within two months of the violation becoming known to the interested party.

Regarding municipalities, a developer may appeal its municipal council’s decisions through the established process in each municipality’s applicable construction and development regulations. This recourse is also available for other authorities such as CFIA, MINAE, and INVU, in accordance with each of their regulations.

Public-private partnerships are often carried out to facilitate the development of a project. That said, this is usually the initiative of the local or central government and interested private parties may participate in public tenders in accordance with the Law on Public Contracting. On the other hand, other public land may be developed by private parties such as that located in the Maritime-Terrestrial Zone, or in the Papagayo area. These are developed through a public 50-year lease.

Each authority has enforcement arms which supervise compliance with applicable regulation. In the case of municipalities, this is performed by municipal inspectors. If a construction violates restrictions, inspectors have the authority to stop all work, and, where it is an operating business, to shut it down.

There are two main entities used in Costa Rica used for real estate asset holding: The Sociedad Anónima (S.A.), and the Sociedad de Responsabilidad Limitada (S.R.L.), which are roughly equivalent to the corporation and the limited liability company, respectively.

The S.A. is a legal entity that is separate and distinct from its owners, also known as shareholders. It is a common form of business organisation that provides protection to the shareholders’ assets, which are owned in a proportion equal to the amount of shares that each shareholder owns. To register a S.A., it is indispensable to have a president, a secretary, a treasurer (the board of directors) and a comptroller, who may not be related to the other three.

The S.R.L. is like the S.A., in that the legal entity is separate and distinct from its owners; however, it offers certain flexibility in relation to it. The most important elements of this business organisation are as follows:

  • the shareholders have a first right of refusal over the other shareholders’ shares, which means that a shareholder may not sell or assign shares without first obtaining their unanimous authorisation to do so, and, if denied, offering them to the others;
  • the shareholders will only be liable for the company’s debts or liabilities in the same proportion that they own shares; and
  • this company requires, as a minimum, only one general manager and two shareholders to be registered.

They both offer protection to their owners, which means that their personal assets are typically protected from business liabilities. However, S.A.s have more formalities and governance requirements, while S.R.L.s offer more flexibility in terms of management and ownership.

Any entity requires a minimum of USD2.00 as capital in order to be able to be registered before the National Registry.

Both S.A. and S.R.L. have the following governance requirements:

  • an annual general shareholders’ meeting in which financial statements are approved, and dividends are distributed to shareholders;
  • an annual ultimate beneficiary owner declaration, which must be submitted to the Central Bank; and
  • an accurate accounting record.

S.A.s require a board of directors with three members: a president, a secretary, and a treasurer.

S.R.L.s require a minimum of one manager appointed by the company’s shareholders.

All entities, whether S.A.s or S.R.L.s, and whether they are in the real estate industry or not, must comply with certain corporate compliance requirements on a yearly basis. Among these is the Ultimate Beneficiary Ownership declaration (UBO), which must be submitted on a yearly basis, at latest by April 30th, and every time over 15% of the entity’s shares are assigned or sold to new shareholders. Entities must also hold a yearly ordinary meeting to approve financial statements. Full-service law firms usually perform these services on a yearly basis, as well as the submission of tax declarations, at a cost of between UDS1,000 and USD4,000.

A person may occupy and use real estate without buying it outright under a lease, a “comodato” (free loan) or a tolerance agreement.

Commercial and residential leases are both regulated by the Law on Urban and Suburban Leasing.

Applicable regulation places a minimum term of three years for commercial and residential real estate, and recognises a de facto extension of the contract, if the landlord does not notify the tenant of its decision to terminate the agreement with at least three months’ prior notice, for the same term as the original agreement. That said, the parties may amend the term of the agreement notwithstanding the extension. Certain provisions of the lease law are mandatory and under the exclusive jurisdiction of the Costa Rican courts, and parties cannot avoid them by contract.

The typical terms of a lease agreement are as follows.

  • Term – the parties will negotiate a term, which, according to the Law on Urban and Suburban Leases, may not be less than three years.
  • Payment – monthly rent payment is the typical structure of a lease payment, along with a security deposit equal to one month’s rent.
  • Maintenance and repairs – the tenant is usually responsible for the property’s maintenance, particularly those regarding non-structural components of the property, such as interior and exterior paint, and lighting.
  • Improvements – any improvements to the property must usually be accepted by the landlord in advance, and, if they are of a structural or immovable nature, the landlord is not under an obligation to pay for them.
  • Termination – most contracts will detail the means by which the contract can be terminated for reasons other than a term expiration. Usually, both parties will have the right to terminate the lease unilaterally, provided they notify the other party within a certain amount of time.
  • Assignment and delegation – under the assignment clause, the landlord will tend to be able to assign the rights conferred within the agreement, while the tenant will not usually be permitted to assign the agreement or sublease, unless expressly approved by the landlord.
  • Insurance – usually borne by the landlord.
  • Inspections – the landlord has the right to inspect its property once a month.
  • Failure to uphold commitments:
    1. by the tenant – failure to adhere to the terms of the agreement will usually lead to the landlord exercising its right to terminate the agreement, as well as the removal of the tenant from the premises through the legally sanctioned process of eviction; and
    2. by the landlord – similarly, if the landlord fails to meets its commitments under the contract, the tenant is entitled to terminate the lease and receive its guaranteed deposit back.

Residential rent may be increased on an annual basis. If inflation for the 12 months prior to the first year after the effective date of the lease agreement is less than or equal to 10%, rent may be increased in a lesser or equal proportion. If inflation is over 10% for the same period, the Ministry for Housing and Human Settlements (MIVAH) will determine the additional percentage over 10% that rent may be increased.

Applicable regulation entitles the landlord to increase rent unilaterally on a yearly basis, subject to the limitations on rent variation.

Rent pays 13% VAT if it is over 1.5 base salaries or roughly USD1,000 a month.

The law allows for landlords to require an upfront payment of no more than one month’s rent, and a security deposit that is equal to, or less than, one month’s rent at the start of a lease.

Large buildings or gated communities in the condominium regime usually hire an administrator company, and it is the responsibility of the owners of each unit to cover the maintenance fees of common areas, such as lounges, pools, garden, and parking lots. Parking spaces are usually considered part of each unit and are registered as private property. If one entity or person owns a property with several units and tenants, the landlord will account for these expenses when calculating the rent for each property.

Responsibility for the payment of utilities and telecommunications may be negotiated, but normally they are covered by each tenant.

Insurance cover is paid by the tenant for their operation, and the owner/developer obtains insurance cover for the structure of the facilities.

Landlords may impose reasonable restrictions on the use of their rental property, particularly when it comes to the land use authorisation issued by the local municipality, regarding residential use versus commercial use.

Landlords and tenants can negotiate the improvement or alteration of the property in the lease agreement. However, it is common practice in lease agreements to allow the tenant to improve or alter the property at its own expense. Where the improvements made are movable, there is usually no restriction. However, if they are immovable, contracts will contain a clause which determines that all modifications of this nature are considered part of the property, and the landlord is not required to compensate the tenant in any way.

Residential, Industrial and Commercial Leases

The Law on Urban and Suburban Leases regulates all leases in Costa Rica, except those under the Regulation on Touristic Lodging Businesses. Residential, industrial and commercial lease are all regulated similarly, with the exception of commercial or industrial real estate leases, in which case the tenant may, in case of merger or acquisition, assign the lease agreement.

Touristic Lodging Businesses

Governed by Regulation 11217-MEIC, on Touristic Lodging Businesses, hotels, hostels, bed and breakfasts, villas and rural tourism shelters, among others, are subject to regulation by the Costa Rican Tourism Institute. This covers the process of making reservations, availability, payment, proper use of the installations, etc.

Where a tenant becomes insolvent, as declared by the competent judicial authority, obligations under lease agreements must be fulfilled by their estate. That said, the landlord is considered to be a privileged creditor, which implies that during bankruptcy proceedings they have priority in being paid over other creditors.

There are two ways in which the landlord may protect against the tenant’s failure to meets its obligations, whether by failure to pay rent, or failure to vacate the property once the lease expires:

  • execution of the security guarantee made at the start of the lease; and/or
  • initiating a summary eviction process. This process may take up to three or four months but requires judicial intervention. In addition to the expenses incurred during the eviction process, the landlord is entitled to receive damages and unpaid rent, as well as interest.

The tenant does not have the right to occupy a property after its lease expires or is terminated. If a tenant does not vacate the premises after termination or expiry of a lease, the landlord has the right to initiate an eviction process. In order to reduce the risk of having a tenant occupy a property after termination or expiry of a lease, the agreement should include a clause which specifically declares the termination of the agreement on a set date, as well as the terms for automatic renewal of the lease’s term if no termination notice is given before the expiration date.

Assignment or subleasing is explicitly prohibited under Costa Rican law for residential leases, unless otherwise agreed by the parties. Violation of this condition is grounds for eviction under the established process in law. That said, if sublease or assignment are accepted within the lease agreement, the same rules apply as for a standard lease agreement.

The following events give the landlord and the tenant a right to terminate the lease.

  • Landlord:
    1. failure of the tenant to pay rent within seven calendar days after the due date;
    2. failure of the tenant to keep the property in a habitable state, or causing damage to the property due to negligence;
    3. violation of the terms of the homeowners’ association or established rules within condominiums, if applicable;
    4. the tenant uses the property in violation of the agreed upon conditions of the lease;
    5. the tenant does not allow the landlord to inspect the property once a month;
    6. lease expiration; and
    7. expropriation.
  • Tenant:
    1. the property is not in a good state, is unsafe, or is uninhabitable;
    2. failure of the landlord to pay for repairs necessary to ensure the proper use and enjoyment of the property;
    3. execution of remodelling or construction on the property by the landlord without the tenant’s authorisation;
    4. disturbances caused by the landlord; and
    5. failure of the landlord to pay for public utilities when it has the responsibility to do so.

Even though leases may be registered in the land records, it is not only not mandatory, but it is a rare occurrence. If a lease were to be registered, recording fees would amount to roughly USD800, and taxes would depend on the estimated value of the lease, but would be paid by the owner of the property.

A tenant can be evicted before the term of the lease expires if any of the following scenarios occur:

  • failure of the tenant to pay rent within seven calendar days after the due date;
  • failure of the tenant to keep the property in a habitable state, or causing damage to the property due to negligence;
  • violation of the terms of the homeowners’ association or established rules within condominiums, if applicable;
  • the tenant uses the property in violation of the agreed upon conditions of the lease;
  • the tenant does not allow the landlord to inspect the property once a month;
  • lease expiration; and
  • expropriation.

The process of eviction will usually take anywhere between four and seven months, depending on the jurisdiction. Costa Rica does not have any COVID-19 pandemic-related eviction moratoriums or restrictions active at this time.

Leases may only be terminated according to the terms agreed upon by the contracting parties, or through a judicial order based on a suit filed by either of the parties in case of contractual breach.

Construction projects are usually priced by calculating the cost of the project plus a margin for the contractor.

Responsibilities for design and construction of a project are usually allocated through a construction agreement, and general responsibilities and liabilities are established in applicable regulations such as the Constructions Law, and by the Engineers and Architects Association (CFIA).

Management of construction risks is regulated in the majority by the Constructions Law, the Construction Projects Regulations, and the Seismic Code. These regulations introduce construction permits, which are issued by the municipality. The application process includes the submission of construction plans, which the municipality reviews to determine whether they are in compliance with applicable regulations, and, once granted, government inspectors inspect the site on a regular basis to determine compliance. 

Liability insurance is also a necessary requirement when opting for a construction permit, and must cover potential injuries, death or damages during the construction process.

Construction projects generally include a “Curve of projected progress and payment”, otherwise known as “the curve”. This consists of a timeline reflecting the projected progress expected as a percentage of the total work to be performed within a set timeline. In order to manage risk and potential delays, payments from the contracting party to the contractor are tied to the accomplishment of certain milestones.

Delays and Extensions

Delays attributable to the voluntary or involuntary breach of the agreement by the contractor in the completion of each stage of the process are punished in the form of liquidated damages, usually as a percentage of the total fees payable for each stage or for the entire project. In case of force majeure or unforeseeable circumstances, there tends not to be a punitive penalty. Additionally, the owner will usually reserve the right to withhold a percentage (usually 5–10%) of all fees payable to the contractor or construction manager as security to guarantee the performance of the contractor’s obligations, which is to be released to the contractor once the project is completed and delivered.

Owners will often seek additional forms of security to guarantee a contractor’s performance of a project, such as third-party sureties. Local insurance companies offer insurance policies which cover potential damages and performance milestones.

In the event of non-payment, applicable collections law will apply. If the owner of a project fails to perform their payment obligation with the contractor, the contractor may pursue a legal collections process through the competent judicial circuit. The start of legal action would, if so decided by the judge, place a lien on the property or other assets owned by the other party. Only a judgment in favour of the defendant or the payment of all owed fees would allow the owner to request the court to remove the lien on the property or other assets.

Before use or inhabitation, each construction site must be inspected by the pertinent municipality to determine its habitability in accordance with the Law on Constructions. Furthermore, the Ministry of Housing and Human Settlements, as well as the Ministry of Health, are in charge of conducting inspections on constructions, based on the precepts established by the General Sanitary Law, with the purpose of issuing a certificate of habitability.

VAT does not apply to real estate transactions. The only applicable taxes for real estate transactions are transfer taxes of roughly 2.5% of the final sale price of a real estate asset. Among these are the transfer tax of 1.5%, agrarian tax of 0.15%, National Registry stamp of 0.50%, fiscal stamp of approximately USD1.00, National Archive Tax of approximately USD0.04, and the Bar stamp of approximately USD40.00. However, natural or legal persons must declare either capital gains or losses.

The taxes payable upon acquiring large real estate portfolios are fixed and apply to all real estate transfers at an individual level. A large real estate portfolio may be accumulated within one legal entity, and the shares for that company can be sold for the value of the portfolio. That said, this transaction must be recorded based upon the real fiscal valuation for each property, so tax minimisation may be relatively small.

Municipal property taxes are levied on the ownership and use of real estate. The tax amount is calculated based on the property’s value.

Municipal taxes are also levied on businesses located in said properties, and each municipality has its own method for calculating the rate which a business must pay. In most cases, this tax varies between 0.1% and 0.15% of a business’s revenue per quarter. Certain preferential tax rates are available for micro, small, and medium-sized business.

Specific regulations and exceptions may apply in certain municipalities, and not in others. Therefore, it is recommended always to reach out to the local government in order to determine with which obligations each property or business may need to comply.

Income tax

All legal entities, residents, or non-residents who generate an income in Costa Rica, whether by commerce, financial instruments, securities, or real estate investments such as leases or selling properties are subject to income tax withholding, which, depending on the amount of revenue, may be 0%, 10%, 15%, 20% or 25%. Only yearly revenues totalling less than CRC3.84 million (around USD7,200) are exempt from income tax.

Value Added Tax (VAT) From Rental Properties

Leases over 1.5 base salaries (roughly USD1,000 a month), pay 13% VAT, which is a cost that the landlord transfers to the tenant by factoring it into the price of rent.

Capital Gains Tax

This tax applies to the gains realised for the sale of any real estate asset in the country. The rate for this tax is 15%, and it is calculated by subtracting the sale price from the price paid for the acquisition of the property. An exception to this rule would apply to property purchased before the passing of the Law to Strengthen Public Finances of 1 July 2019. Property acquired before this date may apply the aforementioned 15% of gains realised from the sale of a real estate asset, or, 2.25% of the total sale price.

Owning real estate can give foreign investors the opportunity to leverage tax benefits from depreciation deductions. A portion of a property’s cost may be deducted using a straight-line method for residential real estate, and an accelerated method for commercial real estate.

Dentons Muñoz

Centro Empresarial Forum I
Building B, 2nd floor
Santa Ana, San José, 10903
Costa Rica

+506 2503 9800

Eduardo.zuniga@dentons.com https://www.dentons.com/es/global-presence/latin-america-and-the-caribbean/costa-rica/san-jose
Author Business Card

Trends and Developments


Authors



Dentons Muñoz is a full-service law firm and business platform that provides services throughout seven offices in Costa Rica, Nicaragua, Panama, El Salvador, Honduras and Guatemala, with teams of highly specialised and experienced legal professionals. The scope of Dentons’ services covers real estate, corporate, M&A, finance, compliance, IP, dispute resolution and controversies, labour, administrative, cannabis and others, as well as escrow, accounting, and tax services. The firm’s commitment to providing exceptional legal services is evident in its successful management of complex, multi-jurisdictional transactions and in its growth as one of the region’s largest business platforms. Extensive experience in the real estate sector has established the firm’s teams as trusted advisers to flag hospitality operations, real estate developers, buyers, and sellers, cementing Dentons as a go-to for Costa Rica’s local and international investors.

The Future of Real Estate Investment in Costa Rica in a Post-COVID World

Costa Rica is a very popular market for real estate investors from all over the world, ranging from billion-dollar multinational corporations to the lone tech-savvy traveller with an internet connection, and everything in between. Since 2020, the country has seen a noticeable increase in the influx of investment in real estate driven by a paradigm shift in the order of priorities for what were considered traditional investors. Historically, the foreign real estate investor bracket was composed of people seeking to spend their retirement in the country. At least, until now. There has been a noticeable change in recent years, as young families and solo remote workers have looked to Costa Rica to make it their home, and multinational corporations see the growing trend of nearshoring as a way to adapt to the post-pandemic world and reduce overhead costs of operations in a place with a business-friendly climate, close cultural similarities to other western nations, and proximity to their borders. The following article will discuss the new trend of foreign real estate investors in Costa Rica being younger families, the rise in nearshoring, the role of the Costa Rican government institutions’ open business climate and track record of attracting and retaining over 300 multinational corporations within Costa Rica’s borders, as tasked with attracting foreign investment, and their link to the residential and commercial real estate market.

Younger families

Costa Rica’s allure to foreign real estate investors is understandable due to its predictable and stable climate, culture, democracy, and a relatively high standard of living when compared to other Central American nations. These factors make it an attractive destination for investors seeking a summer home, rental properties, or a place for people looking to retire in a country with a relaxed pace of life and a comparable, if not more affordable, cost of living. However, in recent years, there has been a shift in the demographic profile of these investors. Younger families, often with children, are now looking to Costa Rica as a place to invest in real estate.

The shift towards younger families investing in Costa Rica’s real estate market is a relatively recent phenomenon that has accelerated in the post-COVID world. The COVID-19 pandemic forced many families to rethink their priorities and seek new opportunities for remote work and a higher quality of life. Several demographic studies have highlighted the trend towards younger families investing in Costa Rica’s real estate market. A 2020 report by the Costa Rican National Institute of Statistics and Census found that the average age of foreigners living in Costa Rica has decreased over the past decade. In 2010, the average age of foreigners living in Costa Rica was 56 years old. By 2020, that number had dropped to 51 years old. Another study by the Costa Rican Chamber of Realtors found that the proportion of buyers under the age of 45 has increased in recent years. In 2018, 25% of buyers were under the age of 45, and, by 2020, it had increased to 35%. This trend towards younger buyers is also reflected in the types of properties that are being purchased.

Developers and brokers are now directing the attention of younger families towards larger homes and properties that offer more family-oriented amenities, that are located near private schools, and that are more generally suitable for permanent living, while taking into account middle incomes. Furthermore, this led to additional diversification in the market. Before this shift, the market was generally aimed towards high-end developments luxury properties, and more relatively affordable homes have been the target of new buyers in the USD250,000 to USD500,000 range. While legacy towns such as Tamarindo and Flamingo in Guanacaste and Escazú and Santa Ana in the Central Valley regions continue to be hotspots for real estate transaction activity, new popular locations for expat families, who often develop new towns entirely, have also been noted in the Southern Pacific region, namely Dominical, Ojochal, and the Osa Peninsula.

Looking to capitalise on this spike of younger investors, the Costa Rican government passed the “Law to Attract Remote Workers and International Service Providers”, more commonly known as the “Digital Nomads Law”, which came into effect in March 2021. The purpose of this law is to make the country attractive for remote workers whose job is not conditioned to their physical presence in an office, and to provide them with a straightforward path to working and residing in the country.

The law defines “digital nomads” as a “foreign individual who provides paid remote services, whether in a subordinated or non-subordinated manner, using a computer, telecommunications, or similar means, to a natural or legal person located abroad and who receives payment or remuneration from abroad as a result”, and makes them eligible to apply for a visa under a special category, which allows them the ability to stay in the country for up to one year, and to renew it for up to an additional two years. The process of obtaining this status is governed by the General Direction on Immigration, and consists of completing a virtual form for each applicant and their family, a payment of USD100 per person, a valid consular visa (depending on the applicant’s nationality), and bank statements which provide proof of a monthly income of at least USD3,000 for an individual, or USD4,000 if the applicant plans to move to the country with their family group. Additional requirements such as marriage certificates and birth certificates for children under 25 years old also apply. Once all of the applicable requirements are met, the competent authority will issue its decision within 15 calendar days.

The future of foreign real estate investment in Costa Rica: nearshoring

At a corporate level, nearshoring is an increasingly popular practice whereby companies transfer business operations to a country that is geographically closer to their home country. This approach has many benefits, including reduced transportation costs, shorter lead times, and more favourable time-zone differences. Costa Rica has emerged as a popular destination for nearshoring for the same reasons that younger families are looking to relocate to the country, such as an educated workforce, and its close proximity to the United States.

The country’s skilled workforce is one of its biggest advantages. With a literacy rate of nearly 98% and over 40% of the population holding college degrees, and skills in different trades, Costa Rica’s investment in producing a highly skilled workforce appears to be paying off. The country’s education system is geared towards meeting the needs of high-demand fields, such as engineering, computer science, and finance, making it easier for companies in these fields to find qualified labour. Moreover, the country has a well-developed infrastructure, including modern airports and seaports, which facilitate ease of doing business. The country’s culture of innovation has also led to the development of several technology parks that provide state-of-the-art facilities for research and development which, in turn, has attracted high-tech companies that require cutting-edge facilities to carry out their operations.

Notwithstanding some challenges, such as the need for more modern road infrastructure, and a relatively high labour cost and cost of living as compared to surrounding countries in the region, Costa Rica is expected to continue to grow in the coming years. The Costa Rican government has implemented policies to attract foreign investment and made significant investments in infrastructure, including the expansion of the Juan Santamaria International Airport, the construction of a new container Atlantic Ocean terminal in the port of Moín (in the province of Limón), which is currently managed by APM Terminals, and the monumental task of completing the ring road around San José to ease traffic and make ground travel more efficient. These investments have improved the country’s transportation and logistics capabilities, making it easier for companies to move goods in and out of the country.

Lastly, Costa Rica’s commitment to sustainability and environmental protection is a major factor in attracting companies to the country. Its policies promoting the use of renewable energy sources, such as its use of renewable energy for around 300 days a year and its ambitious pledge to become carbon neutral by 2050, highlight this commitment and make it an example for nations across the globe. This aligns with the international business community’s pursuit of more eco-friendly business practices, which in turn further confirms Costa Rica’s unique position to materialise international interests into operating businesses in an environment which shares their values.

Government action

Aiming to attract further investments into the country, the government has tapped two entities with a proven track record that are dedicated to the attraction of foreign investment: the Costa Rican Investment Promotion Agency (CINDE) and the Costa Rican Foreign Trade Promotion Agency (PROCOMER).

CINDE has had an instrumental role in attracting foreign direct investment (FDI) to the country over the past 40 years by promoting Costa Rica’s advantages as a nearshoring destination and providing support to companies looking to set up operations in the country. Voted the world’s top investment promoter by the United Nations International Trade Center, CINDE has vast experience and a profound understanding of the needs of multinational companies in all sectors and works side-by-side with them to set up their operation in the country. CINDE’s involvement in the nearshoring industry is expected to continue to grow as more companies look to take advantage of the opportunities that Costa Rica has to offer. As a non-political and non-profit organisation that has advised more than 330 high-level companies to establish themselves in the country, some notable investments attracted by CINDE to Costa Rica were a USD600 million investment made by Intel, and a USD200 million investment by Bayer.

PROCOMER, on the other hand, is another organisation attached to the Ministry of Foreign Trade that plays a vital role in the nearshoring industry in Costa Rica. PROCOMER’s mission is to promote the country’s exports and attract foreign investment. One of the agency’s key functions is to identify potential export markets and work with businesses to develop export strategies. In the context of nearshoring, PROCOMER is actively involved in promoting Costa Rica as a destination for outsourcing services, working with companies to identify opportunities in the country.

Each of the aforementioned investments has a common denominator: they require an investment in real estate, and the growth of nearshoring in Costa Rica has had a significant impact on the real estate sector, as companies require office space and facilities to accommodate their operations. This has led to increased demand for commercial real estate, particularly in areas such as San José and Heredia in the Central Valley, as well as Orotina, Grecia, and Liberia, which are located well outside the central Greater Metropolitan Area, where many high-technology and services companies have established their operations. As a result, real estate developers and investors have been keen to capitalise on this trend, with many new commercial buildings and office spaces being developed to meet the growing demand.

Residential real estate has also been impacted by nearshoring, as the influx of foreign workers and expats has led to increased demand for housing. Many workers from North America and Europe prefer to rent apartments or houses in the cities where they work, leading to a surge in demand for rental properties. This has driven up rental prices and provided opportunities for real estate investors to generate income from their properties.

Conclusion

In conclusion, the real estate market in Costa Rica is experiencing a significant shift as younger families are becoming more interested in investing in the country’s real estate. This trend has been further accelerated by the COVID-19 pandemic, as remote work has enabled millennials to pursue a higher quality of life. Furthermore, the Costa Rican government’s recent passing of the “Digital Nomads Law” has made it even more attractive for digital nomads seeking to work and reside in the country. The rise in nearshoring has also contributed to the country’s attractiveness to foreign investors. These trends have led to a diversification of the market, with a greater focus on more affordable homes that cater to permanent living and family-oriented amenities. In light of these changes, it is clear that Costa Rica will continue to be an attractive destination for foreign real estate investment in the post-COVID world.

Dentons Muñoz

Centro Empresarial Forum I
Building B,
2nd floor
Santa Ana,
San José, 10903
Costa Rica

+506 2503 9800

Eduardo.zuniga@dentons.com https://www.dentons.com/es/global-presence/latin-america-and-the-caribbean/costa-rica/san-jose
Author Business Card

Law and Practice

Authors



Dentons Muñoz is a full-service law firm and business platform that provides services throughout seven offices in Costa Rica, Nicaragua, Panama, El Salvador, Honduras and Guatemala, with teams of highly specialised and experienced legal professionals. The scope of Dentons’ services covers real estate, corporate, M&A, finance, compliance, IP, dispute resolution and controversies, labour, administrative, cannabis and others, as well as escrow, accounting, and tax services. The firm’s commitment to providing exceptional legal services is evident in its successful management of complex, multi-jurisdictional transactions and in its growth as one of the region’s largest business platforms. Extensive experience in the real estate sector has established the firm’s teams as trusted advisers to flag hospitality operations, real estate developers, buyers, and sellers, cementing Dentons as a go-to for Costa Rica’s local and international investors.

Trends and Development

Authors



Dentons Muñoz is a full-service law firm and business platform that provides services throughout seven offices in Costa Rica, Nicaragua, Panama, El Salvador, Honduras and Guatemala, with teams of highly specialised and experienced legal professionals. The scope of Dentons’ services covers real estate, corporate, M&A, finance, compliance, IP, dispute resolution and controversies, labour, administrative, cannabis and others, as well as escrow, accounting, and tax services. The firm’s commitment to providing exceptional legal services is evident in its successful management of complex, multi-jurisdictional transactions and in its growth as one of the region’s largest business platforms. Extensive experience in the real estate sector has established the firm’s teams as trusted advisers to flag hospitality operations, real estate developers, buyers, and sellers, cementing Dentons as a go-to for Costa Rica’s local and international investors.

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