Analysis: Cuba’s property rights — what’s in it for foreign investors?

By José Manuel Pallí, Esq.

In a recent interview, the director for technical development at Cuba’s National Housing Institute explained the reasons that led the Cuban government to modify the Housing Law last November through Decreto Ley 288/11. He emphasized the need to bring order and safety to the often-haphazard internal building activity (additions and expansions) that takes place in many Cuban homes, constructions driven by the severe housing shortage that afflicts the island.

Here in Miami, we tend to discard anything we hear from Cuban officials as misleading propaganda, when in most cases we end up confirming later that what they said is exactly what they meant to say or do.

Still, I believe there may be more than one constituency in the minds of Cuban legislators engaged in the series of reforms (or adjustments, as they prefer to call them) recently made to real property or housing rights, as well as in the Cuban land title recording system. The strengthening of individual, well-publicized housing rights — from a legal as well as from a practical (meaning structural safety and overall value) perspective — is clearly directed to a national constituency.

At first glance, neither the changes made by way of DL 288/11, nor the reform of Cuba’s land title recording system we have been discussing seem to have a significant impact on foreign real estate investment in Cuba.

However, the reform of the Registro de la Propiedad has, from its very beginning, been tied to foreign investors’ need to ascertain the strength of the rights they may be acquiring  — including against the pre-revolutionary owners’ interests — and investors’ potential need to use those assets as security for borrowing back home.

And the strengthening of the property rights of the regular Cuban citizen (the proverbial cubano de a pie) is also an incentive for foreign investment, to the extent that it brings a sense of stability to an area that is mired in a haze of confusion due to, among other factors, American laws that purport to play a role in matters such as who owns what in Cuba. Property rights are only as strong as the support they find within the society were they are to be exercised. The late Senator Jesse Helms and his acolytes owned a franchise in this business of  “protecting” —and, presumably, eventually assigning — property rights in foreign lands, with rather questionable effects in Nicaragua, for instance.

Of course, the other side of the coin also deserves a hearing: Absent a full restoration of the Rule of Law — that is seen as protecting the rights of those pre-revolutionary owners — and all its accouterments, no foreign investor in his right mind will ever invest a penny in Cuban real estate, claim many of my good friends and neighbors. But let us look into this argument from a different perspective.

From the perspective of the foreign investors focused on obtaining a good return, if those investors share the short-term mentality of our sub-prime mortgage originators and our so-called rating companies — not to mention the real estate “flippers” that have turned Miami into a giant aquarium — they may feel attracted to Cuban real property regardless of whether Cuba meets the Rule of Law standard. It is the return on their investment that really counts.

For the past 40 years, Mexico has attracted wave after wave of American direct investments in real estate despite an evolving legal environment that, pursuant to what most American media outlets quizzically report, failed to meet the expectations a foreign investor is presumed to have.

A similar situation has been playing out in China more recently, and few foreigners seem to question the attractiveness of real estate investment there (the Kuomintang partisans whose lands were expropriated by Mao notwithstanding), to the point the Chinese government is actively pursuing policies to slow down the inflow of foreign real estate investment.

In July 2010, Cuba modified, through Decreto Ley 273/10, those articles in its Civil Code that deal with the derecho de superficie, a real property right (or derecho real, in Civil Law parlance) that is held by someone other than the owner of the land, and that allows the superficiario to build on the land and to use and enjoy those improvements for the length of his/her rights. This type of real property right —anchored in time and space, as so many Common Law purists love to say when describing their “estates in land” — has been shunned in many Civil Law jurisdictions where they see little value in conserving medieval legal institutions that fragment property rights into a mosaic. But the derecho de superficie has been making a comeback lately — in Spain, in Argentina, even in China — so Cuba seems to be riding the crest of the new wave. Cuba has even allowed for the concession or grant of such rights in perpetuity, for the construction of houses and apartments for tourists (Artículo 222, inciso 3, of the Cuban Civil Code).

The Cuban Foreign Investment Law (CFIL), Decreto Ley 77/1995  — which is very similar to those in force in other developing countries, with one caveat discussed below — has few articles specifically addressing foreign real estate investments.

Artículo 5 guarantees the protection of the Cuban State to foreign investments when they are attacked by third parties alleging a legally sound claim against them, pursuant to Cuban laws and before a Cuban court.

Artículo 16, inciso 1, authorizes foreign investment in real estate, through ownership or through the exercise of other real property rights (derechos reales). Inciso 2 then lists the four varieties (or purposes) of foreign real estate investment allowed under the laws. The interplay between inciso 2(a) and inciso 2(b) of Article 16 of the CFIL (both of which refer to housing or viviendas) does not make absolutely clear, in my opinion, whether foreign investment is allowed to contribute to the reduction of the housing shortage in Cuba, an issue that seems to be behind many of these recent reforms or adjustments to Cuban laws.

Under Artículo 21, inciso 2(f), you must have an authorization issued by the Executive Committee of the Council of Ministers (Comité Ejecutivo del Consejo de Ministros) in order to make a foreign investment involving the conveyance of state-owned assets or any kind of real property rights held by the Cuban state. One of the forces driving the recent “flexibilization” of Cubans’ housing rights was my Cuban colleagues’ complaint about the excessive “administrativization” (or bureaucratization) of Cuban law, and some voices are beginning to be heard raising the same issue with regard to foreign investments.

Chapter 11 of the CFIL, which covers the labor relations foreign investors in Cuba can engage in, is one section of this law that strikingly “distinguishes” Cuba’s version from other foreign investment laws in developing countries. The use of an employing entity as a buffer or intermediary between the foreign investment venture and Cuban labor (Artìculo 33 et seq.) downgrades what would otherwise be a strongly pro-investor piece of legislation. But among the “adjustments” Cuba has recently made to its laws, it is now permissible for a Cuban individual entrepreneur to hire employees (beyond his family circle), and this change (whether we may want to believe in it or not) may be foretelling the end of this unseemly corset imposed on Cuban labor.

In a coming piece, I will discuss the potential tension foreign investors in real estate may face when they invest in the lands of pre-revolutionary owners, under the light of Artículo 5 of the CFIL, and the position the Cuban government has taken in this regard.

José Manuel Pallí is a Cuban-born member of the Florida Bar, originally trained as a lawyer in Argentina. He is president of Miami-based World Wide Title, and can be reached at jpalli@wwti.net

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