Global political arid economic instabilities have wreaked havoc upon world financial markets. United States real estate investors, seeking comparatively conservative investments, once confined themselves to "think locally," investing exclusively in domestic opportunities. Following the high technology crash, many investors diversified their portfolios, seeking cautious investments in other nations with established markets offering predictable, "safe" returns. The result: a growing interest in existing investment opportunities via the North American Free Trade Agreement ("NAFTA"). NAFTA provides U.S. investors with broad assurances of predictable, stable real estate investments in the other NAFTA trading partners. Mexico and Canada. The U.S. investor cannot proceed blindly without understanding that, despite the broad, liberal trading regime instituted under NAFTA, these countries have statutory requirements which may trap the unwary, causing project delays, necessitating timely and costly governmental approva ls, or pose unexpected tax consequences. This article reviews several general issues an investor must consider when investing in cross-border real estate, particularly noting how NAFTA may affect such investments.
NAFTA AND INVESTMENT OPPORTUNITIES
NAFTA (or the "Agreement") is the most important factor to consider in analyzing any cross border real estate transactions. The Agreement was executed by the United States, Mexico, and Canada on December 17, 1992, and became effective on January 1, 1994. The Agreement is a comprehensive, multi-layered document which institutes numerous structures, guidelines, and rules relative to trade between all three countries. The objectives of NAFTA include the elimination of trade barriers, heightened investment opportunities, and the promotion of fair competition. Investors under NAFTA (e.g., "persons" who are nationals of a NAFTA country) have broad assurances against governmental interference and profit expropriation.
NAFTA has provided broad statistical fodder for its opponents and proponents. The creation of NAFTA established North America as the world's largest free trade block, which now contains approximately 400 million people, second only to the European Union. As of 2003, the NAFTA trade alliance produces more than $11 trillion worth of goods and services.' Since 1994, the total value of trade between the three NAFTA parties expanded from $109 billion to $622 billion in 2000, an increase of 109 percent. (2) Mexico, in particular, has reaped major benefits from NAFTA: Mexico exported $139 billion to its NAFTA partners in 2001, 225% more than in 1993, the year prior to the start of NAFTA implementation. (3) Additionally, from 1994-2001, export growth to the U.S. contributed to more than half of real gross domestic product in Mexico. (4)
The effect of NAFTA on U.S. exports and imports also has drawn much criticism. According to the United States International Trade Commission Report of 1997, the Commission could not quantify a noticeable effect by NAFTA on the United States gross domestic product. Alternate data notes, however, that the total trade of United States with Canada and Mexico has increased since January 1, 1994, from an annual average of $269 billion in 1991 through 1993, to an annual average of $384 billion in the period from 1994 to 1996. (5) Additional statistics note an increased U.S. trade deficit with Canada: Canada's trade surplus with the United States as of January, 2003 was $8.0 billion. (6)
CANADIAN REAL ESTATE OPPORTUNITIES
The Investment Canada Act of 1985-In addition to the requirements under NAFTA, foreign real estate investors in Canada must contend with the Investment Canada Act of 1985 (the "Act") with respect to creating holding entities controlling real property investments. For example, the Act provides for certain regulations concerning an "Investor," which, under Section 24(4), is defined as: (a) an "individual, other than a Canadian, who is a national" (as further defined under NAFTA), (b) a government of a NAFTA country (including a federal state or local government, or an agency thereof), (c) an entity that is not a Canadian controlled entity [which must comply with certain qualifications] and (d) a corporation, limited partnership, or trust which complies with certain control guidelines under the Act (e. …