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ISLAMIC REAL ESTATE FUNDS IN NORTH AMERICA OPPORTUNITIES AND PITFALLS

ISLAMIC REAL ESTATE FUNDS IN NORTH AMERICA OPPORTUNITIES AND PITFALLS Islamic Real Estate Finance Conference June 29, 2004 London, England. Arshad Majid, JD MBA Majid & Associates, P.C. (631) 582-5558 Advocate1001@yahoo.com. OVERVIEW.

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ISLAMIC REAL ESTATE FUNDS IN NORTH AMERICA OPPORTUNITIES AND PITFALLS

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  1. ISLAMIC REAL ESTATE FUNDS IN NORTH AMERICA OPPORTUNITIES AND PITFALLS Islamic Real Estate Finance Conference June 29, 2004 London, England Arshad Majid, JD MBA Majid & Associates, P.C. (631) 582-5558 Advocate1001@yahoo.com

  2. OVERVIEW • RESIDENTIAL PROPERTIES- USUALLY MULTI-FAMILY APARTMENT BUILDINGS • COMMERCIAL PROPERTIES– RETAIL (MALLS), OFFICE SPACE, WAREHOUSES, DISTRIBUTION FACILITIES AND RETIREMENT HOMES

  3. MECHANICS IN THE U.S. • REAL ESTATE LAW • HOW PROPERTY IS TRANSFERRED • HOW PROPERTY IS RECORDED, ETC. VARIES FROM STATE TO STATE AND THAT IMPACTS HOW THE DEAL IS DONE (OR IF IT’S EVEN POSSIBLE).

  4. Common Structures: Leveraging The Shuffle Game? Sale Interest-bearing loan ISLAMIC ENTITY BANK SPV Loan Payments Lease-back(Ijara) Property/Assets Lease payments

  5. WHY INVEST IN REAL ESTATE? • ISLAMIC PERSPECTIVE • PRACTICAL PERSPECTIVE • ECONOMIC PERSPECTIVE

  6. WHY INVEST IN A REAL ESTATE FUND? • LEVERAGE • DIVERSIFICATION • LARGE MARKET AND INVENTORY • SAFE HAVEN

  7. SOME CURRENT PLAYERS IN THE U.S. • FIRST ISLAMIC (WITH ARCHSTONE AND WITH PRO LOGIS) • ABU DHABI ISLAMIC BANK (WITH SENTINEL REAL ESTATE CORP.) • CONSTRUCTION FINANCE FUNDS (BY HSBC WITH INDIANA BASED MANSUR)

  8. IS IT REALLY SHARIAH COMPLIANT?

  9. SPECIFIC SHARIAH ISSUES • WHERE IS THE MONEY COMING FROM? • IN WHAT FORM? (EQUITY OR DEBT?) • WHAT IS BEING INVESTED IN? • WHAT ACTIVITIES ARE BEING ENGAGED IN AT THE PROPERTY? • WHAT IS BEING SOLD THERE? • LEASE RELATED ISSUES - STRUCTURAL MAINTENANCE AND PROPERTY INSURANCE ARE THE DUTY OF THE OWNER (NOT LESSEE) UNDER SHARIAH COMMITTEE RULING. • IF PROPERTY IS DESTROYED THEN NO MORE RENT CAN BE DUE BUT LOAN USUALLY GETS ACCELERATED.

  10. OTHER ISSUES • THE LEASE AGREEMENT – GENERALLY CONSISTS OF FIVE DOCUMENTS: THE LEASE ITSELF (USUALLY THE FATWA'S PURVIEW IS LIMITED TO THIS DOCUMENT AND THE PUT AND CALL OPTION LETTERS) THE PUT LETTER & THE CALL LETTER (DOCS MEANT TO MIMIC ACCELERATION, DESTRUCTION, AND CONDEMNATION MECHANICS IN A CONVENTIONAL CREDIT ARRANGEMENT). THE TAX AGREEMENT – SIMPLY STATES THAT THE PARTIES AGREE FOR US TAX AND ACCOUNTING PURPOSES THAT THIS DEAL IS A INTEREST BEARING FINANCING DIFFERENT IN FORM BUT SIMILAR IN SUBSTANCE TO A CONVENTIANAL LOAN FOR TAX PURPOSES ONLY. SUPPLEMENTAL AGREEMENT - DOES NOT USUALLY INVOLVE SHARIAH - POTENTIAL FOR UNISLAMIC ASPECTS OF A LEASE, SUCH AS REQUIRING THE LESSEE TO BEAR RESPONSIBILITY FOR STRUCTURAL MAINTENANCE.

  11. CHALLENGES • REALLY UNDERSTANDING THE STRUCTURE AND EXPLAINING IT TO THE INVESTOR PROPERLY • ISSUES OF DISCLOSURE AND TRANSPARECNY • PEOPLE WANT PROFIT, BUT PEOPLE ALSO WANT COMFORT • STRUCTURE COMPLEXITY AND INEFFICIENCIES HEIGHTEN COSTS AND CUT INTO PROFITS

  12. CURRENT SUCCESS • APPROXIMATLEY $50 TO $200 MILLION PER FUND (MINORITY AS EQUITY – MAJORITY AS INTEREST BEARING LOAN VIA SPV) • RATE OF RETURN – APPROX. 7%-12% • NUMBER OF FUNDS IS VERY LIMITED • FUNDS NOT MARKETED WELL

  13. WHOLESALE 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)

  14. 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

  15. BUT THERE IS TREMENDOUS POTENTIAL

  16. 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?

  17. SOLUTIONS • CREATE GREATER UNDERSTANDING • NEED SUBSTANTIAL GRASS ROOTS, MEDIA AND PROMOTIONAL EFFORT • NEED SIGNIFICANT CORPORATE SPONSORSHIP • NEED GREATER COMMUNITY SPONSORSHIP AND LEADERSHIP

  18. THANKS FOR NOT FALLING ASLEEP! MAJID & ASSOCIATES, P.C. Arshad Majid, JD MBA Phone: (631) 582-5558 Fax: (631) 582-5558 Advocate1001@yahoo.com

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