[BUYING AND SELLING REAL ESTATE IN ECUADOR]
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A thorough due diligence report should include, at a minimum: i) an analysis of the property’s title; ii) a review of any encumbrances affecting the property (such as mortgages or transfer restrictions); iii) an assessment of the land’s compatibility with the intended activities; iv) an evaluation of the property’s construction characteristics, capacities, and limitations; v) a report on potential risks or threats related to the property (red flags); and vi) a list of requirements from the public authorities to address any issues that must be resolved before obtaining construction permits. REAL ESTATE INVESTMENT MECHANISMS: TRUSTS In Ecuador, the use of trusts is a well- established practice in transactions pertaining to the transfer of real estate. Under Ecuadorian legislation, particularly in the real estate sector, the mercantile trust functions as a contractual arrangement through the settlor or promoter transfers the real estate property to a trustee — accredited entities known as "Fiduciarias" (Fiduciaries) — for the purpose of developing and selling the project. Upon completion, the trustee delivers the proceeds or benefits to the designated beneficiaries or the settlor- beneficiary, if applicable. A key distinction in Ecuadorian law, compared to other jurisdictions, is that the mercantile trust is recognized as an autonomous legal entity with its own legal personality. The trust is managed and represented by an accredited third party (the trustee), who holds legal ownership of the property while fulfilling the trust’s mandate and distributing the benefits accordingly. Several variations of trusts are utilized in real estate transactions, the most common of which are analyzed below:
1. Real Estate Administration Trust: This trust mechanism addresses some of the most frequent challenges in construction projects, namely the mismanagement of funds and liquidity issues during development. As mentioned earlier, the fiduciary's role is critical in ensuring that, before construction begins, all technical, financial, and legal factors comply with local regulations. This process facilitates the smooth execution of the project and helps the development reach its break-even point on schedule, which is vital for the successful construction and commercialization of real estate units. It is important to highlight that Fiduciaries are subject to rigorous oversight, frequently reporting to various government entities and operating under a high level of regulation. This regulatory framework provides greater transparency for both the state and investors and ensures sufficient independence for the trustee to manage the project's cash flow, helping to secure its successful development even before construction begins. Among the benefits of using a trust to both the settlors and the beneficiaries, we can find: a) Asset Protection: By transferring the ownership of real estate to the trust, the assets are separated from the personal estate of the developer, protecting the project against personal creditors' claims. b) Professional Management. c) Flexibility in Benefit Distribution: The benefits can be distributed flexibly among the pre-agreed beneficiaries. These beneficiaries may be different from the contributing settlers.
ILN Real Estate Group – Buying and Selling Real Estate Series
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