Not every real property is titled in Panama.  A buyer needs to know if he is purchasing “Titled” (actual ownership with a deed) property or “Rights of Possession” (ROP)


Credit to  Panama Offshore Services

Real Estate Development and purchase


TITLED REAL ESTATE

The safest way is to own the real estate proven by having a deed recorded with the Panama government’s Public Registry in your name or in the name of an entity owned by you such as a Panama corporation or a Panama Private Interest Foundation.  A recorded deed allows lenders to feel secure with loaning money to purchase titled property with a mortgage secured by recording a lien on the property.

The process for purchasing titled real estate in Panama is the following:


a) Negotiate: Real estate agents are available to negotiate the price and terms on behalf of foreigners in Panama.  If you negotiate directly with a property owner be sure to agree upon all important terms.  Then hire a competent Panama lawyer to prepare a written purchase contract using those terms.


b) Promise to Purchase Contract: The buyer promises to purchase the property in a formal written contract.  A small down payment is generally required when this contract is signed by the parties.  Now the property is held open to give the buyer time to research the property’s condition and verify the seller is really the owner.  Register this contract with the government Public Registry to give notice to other potential buyers that the property is unavailable.


c) Search the Title: A reliable attorney can be hired to go through Public Registry records confirming the seller is the true owner along with any liens on the property.  The lawyer can also research encumbrances or other problems related with the property.  Hire a licensed surveyor to confirm boundaries on raw land.  The attorney can also research the government utility agencies to make sure all bills are paid for water and sewer services.


d) Buy-Sell Agreement: This is a second contract after the title and utilities are researched and the buyer is ready to close on the purchase.   This contract usually is the deed.  An escrow agency can be hired to hold the funds and make final payment and file the title transfer deed at the Public Registry.


e) Transfer of Title: In the U.S. this is known as the “Closing” when title transfers to the buyer where the Buy-Sell Contract is recorded with the Public Registry.

RIGHTS OF POSSESSION (ROP)

Panama’s government owns a lot of land allowing persons to “possess” the land to make improvements.  Known as “Rights of Possession” (ROP), this right passes onto to the next generation and this right can be sold to third parties (which includes foreigners).

A ROP is a simple document which certifies possession rights to particular government property.  ROP certifications can be issued by municipal mayors, sheriffs, or governmental agencies.  Property taxes are exempt for ROP because they are owned by the government.  However, erecting structures can be subject to property taxes once the improvements are registered.  ROP properties can’t be mortgaged because they are owned by the government.

The Public Registry does not record ROP’s, only property title deeds.  There is no central data base for Rights of possession properties.  This creates confusion and conflicts between different people claiming to have ROP on the same property.

Two Types of Rights of Possession


1.  Most islands, beaches, and marine floors are owned by the national government maintaining its rights up to 200 meters from the high tide mark.  These properties are administered by the Ministry of Economy and Finance.


2.  Land used for agriculture is administered by the Ministry of Agriculture which can grant title for agricultural uses.

Researching Rights of  Possession Since there is no central place for recording ROP’s, one must research local municipalities, the government property registration offices (Catastro) in each region, sheriffs or justices of the peace (Corregidors), and the government’s Agrarian Reform Department to locate ROP documents.


ROP’s are available to Foreigners A foreigner can purchase ROP’s from Panamanians or other foreigners.

ROP’s can be Titled There is a process for petitioning the government to convert a ROP into titled property.   Basically, the government sells the land to the possessor who obtains a deed and records it at the Public Registry.

Here is the process for purchasing Rights of Possession:


1.  Promise to Purchase Agreement: The Promise to Buy Rights of Possession Property Agreement usually requires a small deposit when signed by the parties.  Make sure there is sufficient time to do due diligence and obtain the funds to close the purchase.  This contract can’t be filed with the Public Registry.  Use a Notary Public to authenticate all signatures.


2.  Due Diligence: Since the Public Registry does not file ROP’s; the due diligence is more complicated than for properties with title.   The following are the necessary steps for ROP due diligence:


a)  Certification of ROP Verification: Find the government or municipal agency which issued the ROP to confirm that the possessor has the right along with verifying the property description, size, area, location, and boundaries.


b)  Survey Verification: Find the original survey and verify that it is signed and stamped by a licensed surveyor.  The survey should have the name of the possessor, property location, and other information found in the Certificate of Possession Rights.


c)  Inspect: Do a physical inspection confirming the actual occupation and there are no opposing third parties.   Talk to any neighbors to ensure there are no border disputes.  See if the land is fenced and borders marked.

d) Permit Verification: If the buyer wants to develop the land make sure there are no municipal or national rules prohibiting the type of development.


3.  Buy-Sell Agreement: When verifications are complete a Buy-Sell Contract is prepared.  An escrow agent can be used to make the final payment upon the Possession Rights Certification being transferred to the buyer’s name.  Since the contract can’t be recorded at the Public registry make sure a Notary Public authenticates all signatures.


4.  Conveying the Possession Rights Certification: When the buy-Sell Contract is signed by all parties the ROP ownership transfers to the buyer in the Certification of Possession Rights.  If the ROP is in a corporation’s name and the seller wishes to sell the shares of the corporation, hen only the corporate shares are being sold as the ROP remains in the corporation’s name.  This is a faster and easier option than re-issuing the ROP certifications to the new buyer’s name.

PANAMA CONCESSION PROPERTIES


National protected properties such as parks, islands, and coastal areas are usually not titled.  However, the government can grant Panama “Concessions” so the land can be used for commercial purposes.  Usually, Panama Concessions are granted for hotels and marinas or other specific uses.

A typical Panama Concession is for 20 years and is renewable.  Sometimes, a concession can be granted for 40 years and is renewable for specially designated tourist areas.

Buying A Panama Condo


Work with a real estate agent who speaks English and can show you a wide range of condominium buildings.   Beware of real estate agents committed to only a few property developers or simply looking to make the biggest commissions.   Then find a reliable English speaking real estate lawyer who can give you practical advice, do the title search, and draw up the necessary purchase contracts.   The sales office at a specific condominium building will have the architect drawings, a model of the building along with typical floor plans.   If the sales staff hands you a written contract you will find that it will usually be in Spanish.   Do not sign anything until you have a licensed Panama real estate attorney review it and explain it to you.


There are two types of Panama condos for sale: Pre-construction and Existing buildings.

Panama Pre-Construction

Panama developers have a “Pre-Construction Contract” ready to be filled out by their sales staff or a real estate agent.  Let us explain things a buyer should be looking out for in these types of contracts.

Many of them include clauses restricting purchaser’s rights such as the right to re-sell the condo unit before construction is completed without the developer’s consent.   Such a clause requires the buyer to complete the purchase before selling to another party.   The reason for such a clause is to prevent the original buyer from selling a unit for less than what the developer is trying to sell the other units for.

Panama developers also include what are known as “subjective” clauses like “possibility of a sales price increase up to 5% due to rising construction costs or materials”.   Expect this clause to be enforced every time.

Panama developer’s contracts often limit their liability for construction damages to one year from the occupation permit being issued.   Purchasers should be aware that Panama’s Civil Code Article 1343 holds construction companies liable for “structural” damages for the first 10 years.   Thus, the one year limit can only apply to “non-structural” damages.

Panama courts have held some pre-construction contracts null and void for violating Panama’s Consumer Protection laws by having “abusive” clauses which restrict buyer’s consumer rights.

Another problematic clause requires full payment of the balance when the government issues the occupation permit which may occur when the foreign buyer is out of the country.   To prevent such poor timing the buyer can acquire a bank’s “Promise to Pay” letter which guarantees payment upon issuance of the occupancy permit without requiring the purchaser to be present.

If the buyer wants the penthouse the pre-construction contract should be specific about the top floor instead of naming the 20th floor because the developer may add more floors leaving the 20th floor below the penthouse.

Another clause in which a competent real estate lawyer should include in any pre-construction contract is a “purchaser’s protection clause” in case the mortgage application is not approved by the bank.   Without this clause the buyer will lose the 30% down payment.


Condominium Documents created by the Panama developer include:

  • Plans;

  •  Drawings;

  •  Articles of Incorporation;

  •  Bylaws.

These documents are filed with the Ministry of Housing and copies can be purchased there.  These documents will all be in Spanish.

Existing Panama Condominiums

The above-mentioned documents for existing condo buildings will also be on file with the Panama Ministry of Housing.

In addition, the Condo owners association will have their own rules and regulations which every owner is entitled to receive.   Ask about how much funds are held in reserve and plans for future maintenance or repairs where every owner will have to contribute.


Purchasing an existing condo unit requires hiring professionals to inspect the unit’s electricity, plumbing, air conditioning, and structure.


Here are the following steps necessary to purchase a Panama condominium:


1. Promise to Purchase Contract: This will include important terms and conditions which a competent Panama real estate attorney will need to review before signing.   The down payment will be paid when the parties sign this contract.


2. Title Search: The Promise to Purchase Contract should give the buyer sufficient time to verify the seller is the owner.   Hire a real estate attorney to do a title search at the government Public Registry.   Encumbrances, liens, existing mortgages, and other possible problems which may affect transferring ownership can be researched at the Public Registry.   The lawyer can also research that all the utilities are paid up.


3.  Buy-Sell Contract: After the title search is completed, a formal Buy-Sell Contract is prepared for all parties to sign.


4.  Transfer of Title: Title officially transfers from seller to buyer when the Public Deed of Transfer is signed and recorded at the Public Registry.   This is when final payment is made.   In order to avoid paying the seller who doesn’t file the deed at the Public Registry use a reliable escrow agent who will pay the seller and personally file the deed.


Panama has title insurance companies from the United States offering the same services they offer in the U.S.


Panama title insurance protects real estate buyers by insuring that the title has no flaws, there is nobody else claiming ownership, there are no encumbrances, no boundary disputes, no liens, and no encroachments on the property.  Any one of these problems could create havoc with the peace of mind a real property purchaser should be experiencing when obtaining title to real estate.

Here is a true life example of someone who didn’t purchase Panama title insurance.  Two foreigners bought Panama real property in 2006 when the seller provided a “Paz y Salvo” document from Panama’s Ministry of Finance (MEF) claiming he did not owe and property taxes.

The reality was that when the seller bought the property it was not properly registered with MEF’s Cadastro office which levies property taxes.  The seller was supposed to pay higher property taxes.  MEF eventually found out and filed an $11,000 property tax lien.  The buyers ended up paying the $11,000 even though it was the seller’s fault.  Panama title insurance coverage would have paid the entire $11,000 because it was a “hidden lien” not discoverable during the title search but still covered by the insurance policy.    



Defining Panama Title Insurance                      

The word “title” describes one’s legal right to own, use, possess, and transfer title to other people or entities.  A “title search” involves investigating Public Registry filings on the property to determine whether the property is free & clear of any encumbrances or title defects before the title transfers.  

“Encumbrances” are claims on the property’s usage made by outsiders like a power company with an easement to run power lines through the property.  A lien is another type of encumbrance.  A court judgment filed against the seller can be a lien on the property.  Property taxes which are unpaid automatically are liens on the property.

A “title defect” occurs when an important element is missing from the title.  For instance, the seller’s spouse did not sign the title transfer documents making him or the owner.  An undisclosed heir of a prior owner can file an ownership claim with the property. 


These are title defects.  

 

Mortgage lenders require that a property be free & clear of all encumbrances and title defects before title is transferred to the buyer.

“Title Search” is a research of the Public Registry records on the property including liens, court records, and deeds.  Included with these will be unsatisfied mortgages, unpaid property taxes, restrictions limiting usage of the property, and court judgments against the seller.

A title search is not foolproof.  There can be “hidden defects” which will not show up even with a most thorough title search.  Hidden defects can include forgeries, fraud, seller’s mental incompetency, defective deeds, undisclosed spouse, and clerical records errors.  The reason why they are called “hidden defects” is because they are usually not discovered until after title transfers.  These can result in ownership being voided.A deed cannot guarantee title because it merely shows a title transfer.  A defective title transfer or a hidden encumbrance or lien can result in the deed being challenged or unexpected payments. Panama title insurance covers all of these potential problems.  Panama title insurance only costs about 1% of the sales price which offers a lot of protection against the unknown.

Escrow services are available in Panama to handle real estate title transfers along with boats, airplanes, vehicles, and other valuable properties.


The Definition of an Escrow

 Just like in Canada and in the U.S., Panama escrow services offer a neutral third party to hold funds or assets under a contract whereby the other parties fulfill certain duties and obligations before the Panama escrow company completes the transaction.  Normally, the Panama Escrow Company holds a purchaser’s funds until the seller transfers the title into the buyer’s name and has the title deed recorded with Panama’s Public Registry.  Written “escrow instructions” spells out under what circumstances the funds are released to the seller. 


Panama lawyers and law firms often provide escrow services. 

There are only a few actual Panama escrow companies.  Panama Title & Escrow (PT&E) located in Panama City is one of them (www.panamatitle.com).  PT&E offers these services:

 1. Provide the seller with the assurance that the buyer has the funds to pay for the transaction, since the escrow company can confirm that the funds are in the escrow account.

2. Assuring the buyer that a proper title search of the property was completed, the buy/sell contract was properly executed, and the buyer’s interests are protected under the legalities of the transaction.

3. Provide the buyer with the assurance that the various parties involved in the transaction are paid according to the buy/sell contract avoiding any post purchase claims.

Basically, a Panama escrow company holds a purchaser’s funds and disburses them at the Closing (when the title is transferred).  Besides giving funds to the seller, real estate commissions are paid, along with attorney’s fees, existing mortgages, unpaid utility bills, and other required fees and payments.  Having a neutral third party hold the buyer’s funds and paying off all outstanding bills at Closing protects both the buyer and the seller.  

Panama Escrow Agent’s Duties


Panama escrow companies are not regulated by the government.  No fiduciary duty requirements for Panama escrow agents exist.  This is why the written contract when hiring a Panama escrow agent is important to specify the duties and responsibilities the escrow agent must fulfill.  Since escrow services are fairly new in Panama many Panamanians are not familiar with how they function.  Do not let a seller insist on a direct payment for transferring the title because the seller might get paid before completing the title transfer and never transfer the title.

Here are the types of real estate transactions and the role of the Panama escrow company:

Purchasing Property 
There are two types of real estate purchases:  Titled and Rights of Possession (ROP).  Titled properties provide ownership of the property with a recorded deed.  Rights of Possession only provide the right to use government owned properties.  Transferring the rights of the seller will differ under these two types of properties.

Title Transfer 

When both parties sign the Buy-Sell Contract (also called a Public Deed of Title Transfer) and register it with the government’s Public Registry, ownership transfers to the buyer.

Potential Problem 

A potential problem occurs when the seller demands full payment prior to registering the Buy-Sell Contract.  How does one ensure the seller gets paid when the buyer receives full title?  SolutionUsing a Panama escrow company will protect both parties.  The seller is assured by the escrow company that full payment will be made because the Panama escrow agent is holding the buyer’s money.  An option exists when using a Panama bank mortgage by having the bank prepare a “Promise to Pay Letter” which guarantees full payment when the title transfer is registered with the Public Registry. 

Rights of Possession (ROP)  

ROP’s do not have a public deed of title.  The Certificate of Rights of Possession is not recorded with the Public Registry.  The Panama escrow agent pays the seller once the Certificate is signed along with the Buy-Sell Contract.  The Certificate must be protected by the purchaser as it is the only document proving transfer of possession rights to the buyer.


Title Insurance 

Panama escrow companies often act as agents for title insurance companies which can offer peace of mind by insuring the title against fraud, forgeries, encroachments, boundary disputes, and claims by outsiders that they own the property.  A Panama title insurance policy usually costs around 1% of the sales price.


Panama Escrow Fees 

Lawyer’s fees can vary when providing Panama escrow services.  Panama escrow companies generally charge a fee based on the sales price ranging from a half percent (0.5%) up to one percent (1%).


In Conclusion 
Using a law firm as an escrow agent or a Panama escrow company can protect your investment.  Sellers will be comfortable knowing they will be paid and buyers know they will receive transfer of title:

Panama Homeowner’s Insurance

Protect your Panama real estate investment.


Panama offers homeowner’s insurance, however, you must insure the contents and the building separately.  Fire insurance is available for the structure and Multi Risk policies for the contents.

Panama Fire Insurance policies are similar to those found in the USA, Canada, and Europe.  A typical Panama fire insurance policy covers fire, earthquakes, lightening, explosions, windstorms, falling objects, flood & water damages, and removal of debris afterwards.


Fire insurance policy rates differ depending on the types of construction and the home’s location.  Cement buildings pay the lowest rate.  A combination of cement and wood composites will pay a slightly higher premium.  Wood structures pay the highest premiums.  Structures located in or near major urban areas pay as better premium rate.  A building located on an island and rural areas (including Bocas del Toro) will pay higher premiums.


A Panama Homeowner’s Multi Risk policy provides theft, fire, earthquake, explosives, windstorms & hurricane, smoke & water damage, and floods coverage.  Multi Risk covers the contents while Fire Insurance covers the structures. 

Theft coverage including electronic equipment are covered on a percentage of the basic sum insured.  General liability coverage can be up to $100,000 while an assault committed against the policy holder and family members can be up to $250.  Ambulance services are also included.  A policy can also include damages to neighbor’s properties by a fire originating on your property.


Normal coverage is limited to “depreciated value” of items insured.  This means older items depreciate in value over time.  This is why saving original purchase receipts for insured items is important in case a claim must be filed.

Multi Risk policy premiums for cement structures in major urban areas can cost around $70 plus 5% every year for each $10,000 policy.  Some insurance companies offer a 5% discount for paying the full year’s premium within one month.


Homeowner’s insurance premiums are reasonably priced in Panama making it a worthwhile investment providing peace of mind in case a catastrophe would ever occur.


Panama Real Estate Mortgages


Residential mortgages are available in Panama for foreigners.  However, there are a few differences.   For instance, North American mortgage lenders rely on the applicant’s ability to pay along with credit history.  Panama mortgage lenders rely on loan-to-value ratio and the ability to pay.

Panama mortgage lenders prefer 10 to 15 year terms rather than the standard 30 year terms found in the U.S.  Down payments are normally 30% of the sales price which is higher than what Panamanians pay.

More documents are required of foreigners than citizens.

Here are the usual documents required by Panama banks for a foreigner to obtain a residential mortgage in Panama:

• Bank mortgage application;

• Entire passport photocopy (certified copy if not present at the bank);

• An additional photo identification photocopied (like a driver’s license);

• Recent utility bill including applicant’s name and home address;

• Credit report (from companies like Equifax, Experian, or Transunion);

• CV (resume) showing education and work history;

• 2 original bank reference letters;

• 2 original commercial or professional reference letters;

• Bank statements for the last 12 to 24 months photocopied;

• Income tax returns from the previous 2 years (or financial statements audited);

• Letter explaining sources of income and reason for purchasing the property;

• Immigration status proof (if you over stayed the tourist visa period);

• Property appraisal from a bank-approved appraiser;

• Receipt of the purchase contract and down payment.

Authentication: Panama banks require all documents from other countries to be “authenticated” either through a Panamanian consulate or by “Apostille” which is a globally recognized type of a government certified authentication of public records.


Self-employed applicants are also required to provide these additional documents:

• Information about the company (name, physical address, phone numbers, website URL);

• A letter describing the history of the company and the type of business the company is engaged in;

• Last 2 years audited financial statements;

• 2 reference letters from companies applicant did business with; and

• 2 original bank reference letters for the company.

Life insurance is also required naming the Panama bank as the beneficiary for the full loan amount.  Since the policy is based on the applicant’s life expectancy, it is more expensive for older applicants.

Fire insurance policy on the structures for at least 80% of the loan amount is also required.

The process for releasing funds entails:


• Deed transferring ownership filed in the Public Registry;


• A copy of the filed deed delivered to the bank; and


• Proof that the loan was filed as a mortgage lien on the property in favor of the Panama bank.  (In essence, the bank does not disburse the funds to the seller until the bank’s security is in place.)

Things to watch out for in the loan documents include:


• Late payment penalties where there could be as much as a 2% interest rate increase for a late payment.  There are no “grace periods” for late payments.


• A clause requiring payments to a “specific branch” which may not allow auto-debiting from the applicant’s account or internet banking.

Fixed monthly mortgage payments will be required by every Panama bank.  There are no adjusted interest rates in Panama.  Each payment includes from 85% to 90% interest while the remainder reduces the principal.  The accrued interest will make the applicant pay four times the original loan amount over the 15 year life of the loan.

Tip: Paying bi-weekly instead of monthly will save you money and pay off the mortgage sooner.  Bi-weekly mortgage payments involve making a half month’s payment every two weeks.  That’s 26 payments a year amounting to 13 monthly payments instead of 12.  The extra month’s payment is applied directly to the principal and can shave four years off a 15 year loan resulting in slashing your interest payments by 27%.  However, some Panama banks have mortgage contracts preventing any pre-payments or reduction of principal for the first five years.  If it contains such clauses negotiate with the bank to allow for pre-payments.  If you become discouraged, hire a knowledgeable Panama real estate lawyer to negotiate with the bank.

Developing Panama Real Estate Yourself


If you want to build a Panama home yourself without hiring a Panama architect to draw the plans and have a Panama builder hire the contractors and buy the supplies and rent the equipment; here are things you should know.

Building a home in Panama is very different than in the U.S. or Canada.   One difference is that in order to get a building permit in Panama, a Panama architect must submit the application.  Once the Panamanian architect submits the plans, he owns them.  Making changes to the original plans requires permission from the Panamanian architect resulting in extra fees and the submission of a “remodel permit”.  Many Panama architects can be hired to build the structure.  The original general contractor signs the documents necessary for the occupancy permit.

Panama architects are accustomed to working with wealthy Panamanians whose home designs and lifestyle are very different from U.S. and Canadian citizens.

Panama lacks trained craftsmen requiring Panamanian architects to keep plans simple.


If you think you can purchase an American or Canadian architect’s plans on the internet and use it in Panama, think again.  One reason is that Panama homes are concrete block houses built for earthquakes.  Buying a California house plan for earthquakes will not work in Panama.  Panama has different steel reinforcement bar designs than a California earthquake home.  Look at a Panama home more as a high rise condominium than being a typical single family home in North America.  Every floor is poured concrete with welded red steel.

Do not expect to tell Panamanian builders and contractors how you do it back home.  If you want things done in a specific manner make sure it is in the contract. 

Here are some Tips on How to Build a Home in Panama:


1.  Find internet architecture plans designed for concrete block construction.  Purchase the plans using AutoCAD software on a disk so the plans can be easily modified and have the changes made by the original architect.  Make sure the plans will work for your land’s grade and fits on your lot as there are few flat lots here and foundations are expensive along with site work for the grade.  Try to get the plans drawn in the metric system rather than square feet to use in Panama.   


2.  Find a Panama architect who can redraw the plans in Spanish using the metric system for earthquake construction.


3.  Negotiate that you will own the plans and not the architect.  Get costs for any future changes in writing.  Architects are required to visit the construction sites so get the costs and number of required visits down in writing.


4.  Hire a competent and reliable Panama real estate lawyer to write the contracts in English and in Spanish.


5.  Find a local bank, finance company, or escrow company willing to open a construction account with pre-agreed disbursements to your general contractor.  Expect that a loan official or escrow company will inspect the site before each disbursement.  This will help reduce fraud by the contractor as the lender is looking out for its interests and the official will be familiar with contractor’s terms and customs.


6.  Bidding: Once you are satisfied with the architect’s detailed specifications you can put the plans up for bidding.


7.  If you choose to do it yourself to save money, contract with a local contractor to build the home’s shell known as “in the gray” and then you can complete the project yourself.  While you can hire painters, tile layers, electricians, plumbers, etc., the first contractor who built the shell is the one who submits the documentation to obtain the occupancy permit so you need to have a written contract covering these fees.


8.  Construction Manager: If you want to hire different subcontractors and act as a “construction manager” you will need to go to a local bank to set up a credit line.  Then go to local builder supply companies to set up your own “builder’s account”.  You can then order materials and pay for them.  Doing this will save you money because if you rely on a builder to order materials and supplies he will get a discount from 10% – 15% and still charge you up to 30% over retail as a mark up.  This is a typical mark up by general contractors worldwide.  This account will ensure that all subcontractors are paid and the materials bought are used.  There are no mechanics liens with releases type of laws in Panama to protect the subcontractors.


9.  Expect to be on the site every day to make sure the work is being done properly.


As an alternative, you might consider buying an existing home built for a foreigner and then remodeling it.  Another foreigner will have different specifications than a local which may be closer to your needs.  


You may also consider another option:  Hire a reputable builder with good references from foreigners and use his architect to create the plans.  It may be cheaper than buying architect plans on the internet and then having that architect modify the plans and charging U.S. or Canadian fees.


Once you get your occupancy permit you should have a home solidly built meeting all of your needs to enjoy living in paradise.




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