islamic real estate funds in north america opportunities and pitfalls

Copyright 2004 - Majid & Associates, P.C - All Rights Reserved

ISLAMIC REAL ESTATE FUNDS IN NORTH AMERICA

OPPORTUNITIES AND PITFALLS

Islamic Real Estate Finance Conference

June 29, 2004London, England

Arshad Majid, JD MBAArshad Majid, JD MBAMajid & Associates, P.C.Majid & Associates, P.C.

(631) 582-5558(631) [email protected]@yahoo.com


RESIDENTIAL PROPERTIES- USUALLY RESIDENTIAL PROPERTIES- USUALLY MULTI-FAMILY APARTMENT BUILDINGSMULTI-FAMILY APARTMENT BUILDINGS

COMMERCIAL PROPERTIES– COMMERCIAL PROPERTIES– RETAIL (MALLS), OFFICE SPACE, RETAIL (MALLS), OFFICE SPACE, WAREHOUSES, DISTRIBUTION WAREHOUSES, DISTRIBUTION FACILITIES AND RETIREMENT HOMESFACILITIES AND RETIREMENT HOMES

OVERVIEWOVERVIEW


MECHANICS IN THE U.S.MECHANICS IN THE U.S.

REAL ESTATE LAWREAL ESTATE LAW HOW PROPERTY IS TRANSFERREDHOW PROPERTY IS TRANSFERRED HOW PROPERTY IS RECORDED, ETC. HOW PROPERTY IS RECORDED, ETC.

VARIES FROM STATE TO STATE AND VARIES FROM STATE TO STATE AND THAT IMPACTS HOW THE DEAL IS THAT IMPACTS HOW THE DEAL IS DONE (OR IF IT’S EVEN POSSIBLE). DONE (OR IF IT’S EVEN POSSIBLE).


Common Structures: Common Structures: LeveragingLeveraging

The Shuffle Game?The Shuffle Game?

SPV BANK

Interest-bearing loan

Loan PaymentsLease-

back(Ijara)

Lease payments

Sale

ISLAMIC ENTITY

Property/Assets


WHY INVEST IN REAL WHY INVEST IN REAL ESTATE?ESTATE?

ISLAMIC PERSPECTIVEISLAMIC PERSPECTIVE

PRACTICAL PERSPECTIVEPRACTICAL PERSPECTIVE

ECONOMIC PERSPECTIVE ECONOMIC PERSPECTIVE

Copyright 2004 - Majid & Associates, P.C - All Rights ReservedCopyright 2004 - Majid & Associates, P.C - All Rights ReservedCopyright 2004 - Majid & Associates, P.C - All Rights Reserved

WHY INVEST IN A WHY INVEST IN A REAL ESTATE FUND?REAL ESTATE FUND?

LEVERAGELEVERAGE

DIVERSIFICATIONDIVERSIFICATION

LARGE MARKET AND INVENTORYLARGE MARKET AND INVENTORY

SAFE HAVEN SAFE HAVEN


SOME CURRENT SOME CURRENT PLAYERS IN THE U.S.PLAYERS IN THE U.S.

FIRST ISLAMIC (WITH ARCHSTONE AND WITH PRO FIRST ISLAMIC (WITH ARCHSTONE AND WITH PRO LOGIS)LOGIS)

ABU DHABI ISLAMIC BANK (WITH SENTINEL REAL ABU DHABI ISLAMIC BANK (WITH SENTINEL REAL ESTATE CORP.)ESTATE CORP.)

CONSTRUCTION FINANCE FUNDS (BY HSBC WITH CONSTRUCTION FINANCE FUNDS (BY HSBC WITH INDIANA BASED MANSUR) INDIANA BASED MANSUR)


IS IT REALLY IS IT REALLY SHARIAH SHARIAH

COMPLIANT?COMPLIANT?


SPECIFIC SHARIAH ISSUESSPECIFIC SHARIAH ISSUES WHERE IS THE MONEY COMING FROM?WHERE IS THE MONEY COMING FROM? IN WHAT FORM? (EQUITY OR DEBT?)IN WHAT FORM? (EQUITY OR DEBT?) WHAT IS BEING INVESTED IN?WHAT IS BEING INVESTED IN? WHAT ACTIVITIES ARE BEING ENGAGED IN AT THE WHAT ACTIVITIES ARE BEING ENGAGED IN AT THE

PROPERTY? PROPERTY? WHAT IS BEING SOLD THERE?WHAT IS BEING SOLD THERE? LEASE RELATED ISSUES - STRUCTURAL LEASE RELATED ISSUES - STRUCTURAL

MAINTENANCE AND PROPERTY INSURANCE ARE MAINTENANCE AND PROPERTY INSURANCE ARE THE DUTY OF THE OWNER (NOT LESSEE) UNDER THE DUTY OF THE OWNER (NOT LESSEE) UNDER SHARIAH COMMITTEE RULING. SHARIAH COMMITTEE RULING.

IF PROPERTY IS DESTROYED THEN NO MORE IF PROPERTY IS DESTROYED THEN NO MORE RENT CAN BE DUE BUT LOAN USUALLY GETS RENT CAN BE DUE BUT LOAN USUALLY GETS ACCELERATED.ACCELERATED.


OTHER ISSUESOTHER ISSUES THE LEASE AGREEMENT – GENERALLY CONSISTS OF FIVE THE LEASE AGREEMENT – GENERALLY CONSISTS OF FIVE

DOCUMENTS: DOCUMENTS:

THE LEASE ITSELF (USUALLY THE FATWA'S PURVIEW IS THE LEASE ITSELF (USUALLY THE FATWA'S PURVIEW IS LIMITED TO THIS DOCUMENT AND THE PUT AND CALL OPTION LIMITED TO THIS DOCUMENT AND THE PUT AND CALL OPTION LETTERS)LETTERS)

THE PUT LETTER & THE CALL LETTER (DOCS MEANT TO MIMIC THE PUT LETTER & THE CALL LETTER (DOCS MEANT TO MIMIC ACCELERATION, DESTRUCTION, AND CONDEMNATION ACCELERATION, DESTRUCTION, AND CONDEMNATION MECHANICS IN A CONVENTIONAL CREDIT ARRANGEMENT).MECHANICS IN A CONVENTIONAL CREDIT ARRANGEMENT).

THE TAX AGREEMENT – SIMPLY STATES THAT THE PARTIES THE TAX AGREEMENT – SIMPLY STATES THAT THE PARTIES AGREE FOR US TAX AND ACCOUNTING PURPOSES THAT THIS AGREE FOR US TAX AND ACCOUNTING PURPOSES THAT THIS DEAL IS A INTEREST BEARING FINANCING DIFFERENT IN FORM DEAL IS A INTEREST BEARING FINANCING DIFFERENT IN FORM BUT SIMILAR IN SUBSTANCE TO A CONVENTIANAL LOAN FOR BUT SIMILAR IN SUBSTANCE TO A CONVENTIANAL LOAN FOR TAX PURPOSES ONLY.TAX PURPOSES ONLY.

SUPPLEMENTAL AGREEMENT - DOES NOT USUALLY INVOLVE SUPPLEMENTAL AGREEMENT - DOES NOT USUALLY INVOLVE SHARIAH - POTENTIAL FOR UNISLAMIC ASPECTS OF A LEASE, SHARIAH - POTENTIAL FOR UNISLAMIC ASPECTS OF A LEASE, SUCH AS REQUIRING THE LESSEE TO BEAR RESPONSIBILITY SUCH AS REQUIRING THE LESSEE TO BEAR RESPONSIBILITY FOR STRUCTURAL MAINTENANCE.FOR STRUCTURAL MAINTENANCE.


CHALLENGESCHALLENGES

REALLY UNDERSTANDING THE STRUCTURE REALLY UNDERSTANDING THE STRUCTURE AND EXPLAINING IT TO THE INVESTOR AND EXPLAINING IT TO THE INVESTOR PROPERLYPROPERLY

ISSUES OF DISCLOSURE AND TRANSPARECNYISSUES OF DISCLOSURE AND TRANSPARECNY

PEOPLE WANT PROFIT, BUT PEOPLE ALSO PEOPLE WANT PROFIT, BUT PEOPLE ALSO WANT COMFORTWANT COMFORT

STRUCTURE COMPLEXITY AND INEFFICIENCIES STRUCTURE COMPLEXITY AND INEFFICIENCIES HEIGHTEN COSTS AND CUT INTO PROFITSHEIGHTEN COSTS AND CUT INTO PROFITS


CURRENT SUCCESSCURRENT SUCCESS

► APPROXIMATLEY $50 TO $200 MILLION PER APPROXIMATLEY $50 TO $200 MILLION PER FUND (MINORITY AS EQUITY – MAJORITY AS FUND (MINORITY AS EQUITY – MAJORITY AS INTEREST BEARING LOAN VIA SPV)INTEREST BEARING LOAN VIA SPV)

► RATE OF RETURN – APPROX. 7%-12%RATE OF RETURN – APPROX. 7%-12%

► NUMBER OF FUNDS IS VERY LIMITEDNUMBER OF FUNDS IS VERY LIMITED

► FUNDS NOT MARKETED WELL FUNDS NOT MARKETED WELL


WHOLESALE v. RETAILWHOLESALE v. RETAIL

• WHOLESALE – CURRENTLY MOST COMMON (BUT PROFITS VULNERABLE TO HIGHER INTEREST RATES)

• RETAIL – RELATIVELY UNTAPPED MARKET IN THE U.S. (WITH EXTREME UPSIDE POTENTIAL EVEN IN HIGHER INTEREST RATE ENVIRONMENT)


ISSUES LIMITING SUCCESS OF ISLAMIC BANKING IN

THE U.S. • 9/11 AND MEDIA ISSUES• PATRIOT ACT• LACK OF REAL UNDERSTANDING

(BANKING & R.E. MARKET)• LACK OF MARKETING• LACK OF COMPETITION


THERE IS TREMENDOUS THERE IS TREMENDOUS POTENTIALPOTENTIAL

BUTBUT


OPPORTUNITIES IN U.S. RETAIL MARKET

• NOVEL IDEA FOR MOST MUSLIMS

• GOOD POTENTIAL FOR GRASS ROOTS MOVEMENT

• POOL OF 8M+ POTENTIAL CLIENTS

• GROWING AWARENESS OF ISLAM IN N.A.

• TIMING MAY BE JUST RIGHT DUE TO I.R. INCREASE

• CURRENT EVENTS

• BOOMING R.E. MARKET IN N.A.

• USE FOR MOSQUE FINANCING?


SOLUTIONS

1. CREATE GREATER UNDERSTANDING

2. NEED SUBSTANTIAL GRASS ROOTS, MEDIA AND PROMOTIONAL EFFORT

3. NEED SIGNIFICANT CORPORATE SPONSORSHIP

4. NEED GREATER COMMUNITY SPONSORSHIP AND LEADERSHIP


MAJID & ASSOCIATES, P.C.MAJID & ASSOCIATES, P.C. Arshad Majid, JD MBAArshad Majid, JD MBA

Phone: (631) 582-5558Phone: (631) 582-5558Fax: (631) 582-5558Fax: (631) 582-5558

[email protected]@yahoo.com

THANKS FOR NOT FALLING ASLEEP!

islamic real estate funds in north america opportunities and pitfalls

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