Issue #
May - June 2022

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Economic Indicators

On July 5, 2022, updated financial indicators reflected:
Peso/Dollar Exchange Rate: $20.5598 pesos per Dollar.
Mexican Stock Exchange: The Mexican Stock Exchange (BMV) closed 47,503.22 points.
Interest Rates: The Average Interbank Rate (TIIE) for a 28-day period was at 8.0303%.

Claim Filed for Labor Rights Violations under the USMCA

June 14, 2022

On April 18, 2022, the United States filed a request for review of alleged denials of free association and collective bargaining rights in a manufacturing plant operated by Panasonic Automotive Systems de México located in Reynosa, Tamaulipas (“Panasonic Automotive”). Such would be the third review filed under the USMCA’s (“USMCA”) Facility-Specific Rapid Response Labor Mechanism, following similar review procedures initiated last year with respect to the General Motors plant in Silao, Guanajuato, and Cardone Industries’ plant in Matamoros, Tamaulipas.

The request for review was filed by the National Independent Union for Industrial and Services Workers “Movimiento 20/32” (“SNITIS” per its acronym in Spanish), collectively with Rethink Trade, a non-profit organization based in Washington, D.C. For background, in October 2021 a survey of the employees of Panasonic Automotive was conducted for the purpose of legitimizing the collective bargaining agreement effective as of such date. However, most of the employees voted against it, and  the collective bargaining agreement was thereby terminated. This opened the possibility of other unions to seek representation of the employees.

In March 2022, two unions – the SNITIS and a union affiliated with the Mexico Worker’s Confederation (“CTM” per its acronym in Spanish) – filed with the Federal Center for Conciliation and Labor Registration (the “Federal Center”) requests to obtain Representation Certifications, with the intent to represent the workers of Panasonic Automotive in the negotiation and execution of a collective bargaining agreement. The Federal Center set dates to survey the employees on April 21 and 22 of 2022, for purposes of electing the union that would represent them.

In the request for review initiated by SNITIS and Rethink Trade, multiple irregularities were reported, including alleged denials of rights, obstructing the workers’ ability to choose their union freely. Among other alleged violations, it was reported that representatives of the CTM were allowed to access the facilities of Panasonic Automotive to influence union representatives, to buy votes, and to request employees’ signatures in support of a collective bargaining agreement executed between the company and CTM that had allegedly been filed with the Local Labor Board of Tamaulipas.

The SNITIS won the election that was carried out on April 21 and 22, 2022, and was therefore awarded the Representation Certification allowing the union to negotiate the collective bargaining agreement in representation of the employees. Notwithstanding such result, on May 18, 2022, Katherine Tai, United States Trade Representative (“USTR”), announced that sufficient evidence existed to initiate the review process. She then requested Mexican authorities to carry out a review to determine if any denial to free association and collective bargaining rights occurred.

Based on the Facility-Specific Rapid Response Labor Mechanism, Mexico has a 45-day term to conclude the review procedure and may impose any of the remedies available under the USMCA. It is worth noting that the USTR instructed the Department of Treasury to suspend the customs liquidation process on all unliquidated importations of goods from the Panasonic Automotive facility during the review process.

The three review requests filed in the U.S. thus far have been filed against companies in the automotive industry based in Mexico, which is one of the primary industries subject to the Facility-Specific Rapid Response Labor Mechanism. We encourage clients and interested parties to continue monitoring the labor environment generally and union activity specifically in Mexico and the U.S., but mostly with regard to the applicable provisions of the USMCA and Mexico’s Federal Labor Law regarding collective bargaining matters.

Labor and Employment

Use of Waterfall Distributions in U.S. Private Equity Real Estate Investments

June 8, 2022

There are a variety of ways in which industrial and multitenant commercial development projects are financed in the United States. One common form of financing is private equity real estate investment, which typically involve as key players a senior institutional lender, possibly a subordinated mezzanine debt lender, as well as a general partner and several limited partner private equity investors. The role of the general partner is to devote the necessary time, effort, and expertise to assure the success of the project, while the role of the limited partner investors is to provide the necessary investment of capital. Given the respective roles of the general partner and the limited partner investors, performance based so-called waterfall distribution structures should be considered in allocating payments for the return of the capital invested and the distribution of profits among the partners. This model can be used in situations involving domestic or foreign equity investors.

The waterfall distribution model envisions a series of receptacles into which the funds for the return of the initial investment and distribution of profits flow downwardly once a designated rate of return is exceeded at the top tier and at each lower tier, respectively. As each lower tier is reached, the split of funds between the general partner and the limited partners changes.

A waterfall distribution model can vary substantially in structure and complexity from project to project depending on the needs and expectations of the private equity investors. Detailed provisions must be included in the limited partnership’s governing documents to address the distribution rules taking into account aspects such as the order in which the general partner and the limited partners are repaid their initial investment and their corresponding share of profits (“preferred return”), the rate of return (“hurdle”) that must be exceeded at each tier before funds can flow to the next tier hurdle, and how the rate of return for the hurdles will be measured (i.e. based on the percentage of interest earned on the investment over the entire holding period, the internal rate of return (“IRR”), or an equity multiple ratio calculated by dividing the sum of the equity investment, plus all profits, by the total amount of equity invested). Either the IRR method or the equity multiple ratio method of measurement of the rate of return hurdle is typically used in commercial real estate investments that are held over long periods of time.

As relates specifically to the order in which the general partner and the limited partners are paid, waterfall distribution models can be structured as simple splits between the limited partners and the general partner, which are made subject to two typical provisions which should be considered, catch-up provisions and look-back provisions.

A catch-up provision provides that the limited partners must receive one hundred percent of the project’s preferred return until the designated rate of return has been achieved, at which time funds would flow to the general partner until such time as the general partner has received the rate of return specified in the partnership agreement.

A look-back provision provides that if the designated IRR is exceeded in a given year, the split would be modified such that the general partner’s percentage share increases, with the limited partners still getting a better return than initially contemplated. On the other hand, for example, if looking back over the entire holding period the limited partners did not get the designated rate of return, the general partner would have to return such portion of the profits to the limited partners as would allow them to achieve their designated rate of return.  

By way of example, a waterfall distribution model for a real estate development project might include four tiers: Tier 1 with one hundred percent of the available distributions going to the limited partners; Tier 2 with a preferred hurdle rate of return with the available distributions going to the limited partners until the preferred rate of return is achieved; Tier 3 with the  available distributions going to the general partner until the general partner receives its designated percentage of profits pursuant to a catch up provision; and Tier 4 whereby the general partner receives a disproportionate share of the profits if the investment performs better than expected pursuant to a look back provision.

Mandatory Inspections at the Mexico-Texas Border Suspended

June 3, 2022

After U.S. President Joe Biden’s April 6, 2022 decision to eliminate the Centers for Disease Control order known as Title 42, which was implemented to stem illegal immigrant and drug traffic between the United States and Mexico, Texas Governor Greg Abbott imposed strong inspection measures on all importations from Mexico entering Texas through land ports of entry. Such measures included the detention and inspection of all trailers and busses coming from Mexico to the U.S.

The new inspection procedures caused long delays of up to 24 hours, the loss of agricultural products transported, and the loss of many scheduled deliveries. The inspections also caused millions of losses in cross border trade. According to amounts published by CANACAR (National Chamber of Freight Motor Transportation), the impact in Reynosa, Tamaulipas was calculated at approximately $117 million dollars, reflecting a failure to deliver goods and leading to accrued fines.  At this rate, the loss was approximately $7 to 8 million dollars per hour. Likewise, it was estimated that similar losses were caused in Nuevo Laredo and in Nuevo León, where 13,000 trucks cross the border daily.

Based on these developments, on April 12th the Mexican Senate’s Special Commission for USMCA Implementation (CESITMEC per its acronym in Spanish) raised concerns as to the measures being implemented and requested the Texas to reconsider the new inspection guidelines.

In mid-April, the Texas governor met with governors of the states of Chihuahua, Coahuila, Tamaulipas and Nuevo Leon to discuss and resolve the issue. As a result, certain Memoranda of Understanding were executed with the intention of improving border security, and specifically preventing illegal immigration from Mexico to Texas. Among the measures discussed, the parties agreed to work together to:

1. Reassure that vehicles crossing the border comply with all safety requirements in place.

2. Stop illegal immigration entries.

3. Restore the inspection process for cross border traffic with the intention of speeding up the inspection process.

Notwithstanding these efforts, Abbott warned the Mexican border governors that in case border security is not restored and there is not sufficient cooperation to stop illegal immigration, the aggressive measures provided in the new thorough inspections will be reinstated for all vehicles crossing to the U.S. In the end, the parties involved in the process stated they were willing to agree to necessary measures to avoid delays in cross border commercial traffic, particularly the governors of those states who are primarily affected.

Mexico Publishes New Official Standard Regulating Wastewater Discharges to Federal Waterways

May 12, 2022

On March 11, 2022, the Official Mexican Standard titled NOM-001-SEMARNAT-2021 was published (“NOM” per its acronym in Spanish) setting forth new limits allowed for wastewater discharges to federal waterways.  Such NOM updates and replaces Official Mexican Standard NOM-001-SEMARNAT-1996, and will enter into force in stages.

Regarding the NOM’s specifics, the following are worth noting:

1. The list of Official Mexican Standards issued to determine sampling and analysis parameters that shall be used for the application of the NOM is updated.

2. More detailed classification of federal waterways and focus on subsequent uses, for the purpose of improving management and protection of such collection bodies.

3. Update of the parameters used for measuring water quality of collection bodies, through the incorporation of parameters known as Chemical Oxygen Demand (“COD”), toxicity and color index, and Total Organic Carbon (“TOC”) in substitution of the COD, specifically as to the organic contamination index with a concentration higher than 1000 mg/L chlorides.

4. The allowable limit for contaminants of wastewater discharges is modified for each waterway where such wastewater is disposed of, divided into: i) rivers, streams, canals, drains; ii) reservoirs, lakes and lakes; iii) Mexican marine waters; and iv) ground, classified in green area watering, filtration and other types of watering, and karstic. Therefore, this NOM does not apply to waste water discharged exclusively from rain sewage, or directly from Municipal wastewater sewer systems.

5. A Spanish version of tables 1 and 2 of the Regulatory Schedule of the NOM may be reviewed here.

6. Evaluation procedures for NOM compliance per requests of interested parties is updated, for both private and official purposes.

The NOM will enter into force 365 calendar days as of the publication in the Official Journal of the Federation, meaning on March 11, 2023, except for:

a. Allowable parameters and limits set forth in tables 1 and 2 of the NOM, and the Regulation Schedule, which will enter into force on April 3, 2023; therefore, until such enter into force, wastewater discharges will remain regulated by sections 4.1, 4.2, 4.3, tables 2 and 3 of NOM-001-SEMARNAT-1996.

b. Allowable parameters and limits on true color and acute toxicity as provided in table 1 will enter into force on the fourth anniversary of publication of the NOM in the Official Journal of the Federation.

If your company has a wastewater permit to discharge into Federal waterways, it is very important to review the updated discharge parameters, evaluate the operative and economic implications, and also be prepared to comply with the NOM in a timely manner.

Skyrocketing Real Property Tax Appraised Values Throughout Texas

May 9, 2022

The real estate market in Texas experienced unprecedented growth in 2021 and real property values skyrocketed as buyers took advantage of low interest rates and competed in a market with high demand and limited inventory. Counties throughout Texas are in the process of sending property owners their annual Notices of Appraised Value and many real property owners are shocked to see the amount by which their local appraisal district intends to increase the value of their real property. Note that the appraised value is supposed to reflect the fair market value of the real property and is used to calculate real property taxes.  

Among other details, the Notice of Appraised Value contains a description of the real property, the preceding year's appraised value, the preceding year's taxable value, and the current year's appraised value. It also includes a protest form and information about how and when to file a protest if a real property owner disagrees with the current year’s appraised value. In most cases, real property owners have until May 15 to protest property tax appraised values in Texas.

Real property owners are advised to review their Notice of Appraised Value and file a timely protest if they disagree with the current year’s appraised value.