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Shariah Compliant Real Estate Transaction Structures

Shariah Compliant Real Estate Transaction Structures. Hamid Yunis. London (November 2006). Fundamentals Islamic (Shariah) Finance: Quranic (Shariah Law) principles; Riba (“interest/unjustified rewards/unlawful gain”); Gharrar (“uncertainty, risk, speculation”);

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Shariah Compliant Real Estate Transaction Structures

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

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

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

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

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

  6. Conventional Lender Concerns • 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 • Risk of structural maintenance to stay with owner/landlord/lessor • No rent after termination 5

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

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

  9. Islamic Investors Declaration of Trust Vendor CharitableEntity 100% share ownership Property Transfer 100% share ownership 100% share ownership SUKUK(Discounted BondInstrument) Bank Senior Debt Partner Co Project co Fund Co Joint Venture (MUSHARAKA)Agreement Joint Venture Agreement Security Occupational End User Leave Occupational Tenant MusharakaStructure 8

  10. Property Development/Investment Ijara Sukuk Investment Company Financial Product Developer Ijara Muntahia Bitamlik contract (plus sale contract) [PROCEEDS] Wakeel Wakala Agreement Purchase Contract for Assets Special Purpose Company Service Agency Service Supplier Admin and Registrar Sukuk Investor Sukuk Investor 9

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

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

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

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

  15. Additional Matters • 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

  16. HAMID YUNIS • Taylor Wessing • Carmelite • 50 Victoria Embankment • Blackfriars • London • EC4Y 0DX • Tel: 0207 300 7000 • Fax: 0207 300 7100 • Direct Dial: 0207 300 4088 • E-mail: h.yunis@taylorwessing.com • Web: www.taylorwessing.com

  17. Taylor Wessing Offices Berlin Brussels Cambridge Düsseldorf Frankfurt Hamburg London Munich Paris Representative offices: Alicante Shanghai Associated office: Dubai www.taylorwessing.com London Carmelite 50 Victoria Embankment Blackfriars London EC4Y 0DX United Kingdom Tel +44 (0)20 7300 7000 Fax +44 (0)20 7300 7100 london@taylorwessing.com Munich Isartorplatz 8 D-80331 Munich Germany Tel +49 (0)89 2 10 38 0 Fax +49 (0)89 2 10 38 300 muenchen@taylorwessing.com Paris 42 avenue Montaigne 75008 Paris Tel +33 (0)1 72 74 03 33 Fax +33 (0)1 72 74 03 34 Düsseldorf / Neuss Königsallee 92a D-40212 Düsseldorf Germany Tel +49 (0)211 83 87 0 Fax +49 (0)211 83 87 100 duesseldorf@taylorwessing.com Am Krausenbaum 42 D-41464 Neuss Germany Tel +49 (0)2131 7 40 30 0 Fax +49 (0)2131 7 40 30 50 neuss@taylorwessing.com Frankfurt a. M. Senckenberganlage 20-22 D-60325 Frankfurt a. M. Germany Tel +49 (0)69 971 30 0 Fax +49 (0)69 971 30 100 frankfurt@taylorwessing.com Hamburg Neuer Wall 44 D-20354 Hamburg Germany Tel +49 (0)40 3 68 03 0 Fax +49 (0)40 3 68 03 280 hamburg@taylorwessing.com Representative offices: Alicante Paseo Explanada de España No. 1, 4-Izda E-03002 Alicante, Spain Tel +34 (0)96 51 42 805 Fax +34 (0)96 52 00 248 alicante@taylorwessing.com Shanghai 15th Floor United Plaza Unit 1509 No. 1468 Nanjing West Road 200040 Shanghai China Tel +86 (21) 6247 7247 Fax +86 (21) 6247 7248 shanghai@taylorwessing.com Associated office: Dubai Berlin Jägerstrasse 51 D-10117 Berlin Germany Tel +49 (0)30 88 56 36 0 Fax +49 (0)30 88 56 36 46 berlin@taylorwessing.com Brussels Trône House 4 Rue du Trône B-1000 Brussels Tel +32 (0)2 289 60 60 Fax +32 (0)2 289 60 70 brussels@taylorwessing.com Cambridge 24 Hills Road Cambridge CB2 1JW United Kingdom Tel +44 (0)1223 446400 Fax +44 (0)1223 446401 cambridge@taylorwessing.com 15

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