Shariah Compliant Real Estate Transaction Structures Hamid Yunis

Shariah Compliant Real Estate Transaction Structures Hamid Yunis London (November 2006)

n Fundamentals Islamic (Shariah) Finance: n n n Quranic (Shariah Law) principles; Riba (“interest/unjustified rewards/unlawful gain”); Gharrar (“uncertainty, risk, speculation”); Halal (“religiously permissible”); Haraam (“not religiously permissible”); 1

n Basic Assumptions n Underlying asset must be acceptable n Different interpretations on what proportion of asset must not be “haraam” Proposed structure of transaction has to be acceptable n No prohibited activities (proportionate approach) n Need to account for regulatory requirements and comply with two sets of law (Shariah and law of country) n 2

n Products / Structures have to be: n understandable n tax effective n useable and easy to administer n competitively priced n not “alien” to existing regulatory requirements 3

Use of Islamic Finance in Real Estate Fast Growing Activity – both commercial & residential n Transactions in UK, USA, France, Germany, Scandinavia, Eastern Europe as well as in the Islamic world n Most commonly used structures: n n n n Cash Purchase Ijara Lease Structure Murabaha Mudaraba Musharaka Diminishing Musharaka Others – see variations later 4

Conventional Lender Concerns n n n No direct contractual connection (privity) between Islamic equity providers and contractual financing vehicle Access to real and enforceable security Potential and Actual events of Default in Loan Agreement should have similar effect in Shariah compliant documents Effective Cross Default Provisions Mechanisms to deal with Shariah requirements of: Risk of insurance to stay with owner/landlord/lessor n Risk of structural maintenance to stay with owner/landlord/lessor n No rent after termination 5 n

Assumptions Acknowledge Shariah and Non-Shariah compliant sides n Issues: n Documentation n Put and call options n Managing contractor provisions n Tax matters n n n n Stamp Duty/SDLT Income Tax Capital/Chargeable Gains Capital Allowances Other Direct and Indirect Taxes Country specific structural risks 6

Ijara Structure Vendor Purchase price comprising bank facility and premium paid by Project Company for grant of Ijara Lease Bank $600 k Islamic Fund Charitable Trust Sale of Property from Vendor to Funding Company 100% share ownership $1 m Funding Company Rent payable under Ijara Lease (being equivalent to interest & amortisation payable under bank facility). $50 k pa Balance of all monies remaining after payment of rent under Ijara Lease representing return on “equity” investment. $20 k pa Ijara Lease Interest $50 k pa Ijara Lease granted by Funding Company to Project Company for $400 k premium paid by Project Company to Funding Company representing “equity” in transaction Project Company End user lease Occupational tenant rent. $70 k pa Occupational tenant 7

Musharaka Structure Islamic Investors Declaration of Trust Vendor Charitable Entity 100% share ownership Property Transfer 100% share ownership Bank Senior Debt Partner Co Fund Co Security Joint Venture Agreement Joint Venture (MUSHARAKA) Agreement Project co SUKUK (Discounted Bond Instrument) Occupational End User Leave Occupational Tenant 8

Property Development/Investment Ijara Sukuk Investment Company Financial Product Developer Ijara Muntahia Bitamlik contract (plus sale contract) [PROCEEDS] t la Waka Purchase Contract for Assets Special Purpose Company men Agree Service Agency Wakeel Service Supplier Admin and Registrar Sukuk Investor 9

n Variations Commodity Murabaha (Tawarruq) n Cash acquisitions and subsequent financings (UK) n Dual lease structure (SWITZERLAND) n “credit bail immobiliser” (FRANCE) n 10

Cash Acquisition and Subsequent Financing (# 1) Purchase Price Project Funding Lease (Ijara) Company Purchase Price Title Sale Agreement Seller 11

Cash Acquisition and Subsequent Financing (# 2) Bank Financing Amount Project Funding Lease (Ijara) Company 12

Considerations for Developing Market n n n Awareness of Acceptable Structures Familiarity with developing and accepted documentation Awareness of Shariah Scholar Dialogue (FATWAS) Credit Process Issues for Lenders Generally 13

n Additional Matters n n n Zakat (specified amounts to be allocated from disposable income); Shariah Boards – competition, pragmatic approaches; Urf (custom); Darura (overriding necessity); Maslaha (general interest to justify); Hiyal (ruse) 14

HAMID YUNIS Taylor Wessing Carmelite 50 Victoria Embankment Blackfriars London EC 4 Y 0 DX Tel: 0207 300 7000 Fax: 0207 300 7100 Direct Dial: 0207 300 4088 E-mail: h. yunis@taylorwessing. com Web: www. taylorwessing. com

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