Transcript Shariah Compliant Real Estate Structuring

Shariah Compliant Real Estate
Structuring
Contents
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Fundamentals
Basic Assumptions
Use of Islamic Finance in Real Estate
Conventional Lender Concerns
Additional Assumptions
Various Structures
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b)
c)
d)
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Ijara
Musharaka
Murabaha
Investment Sukuk
Variations: Cash Acquisition and Subsequent Financing (x2)
Considerations for Development of the Market
Additional Matters
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Fundamentals Islamic (Shariah) Finance:
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Quranic (Shariah Law) principles;
Riba (“interest/unjustified rewards/unlawful gain”);
Gharrar (“uncertainty, risk, speculation”);
Halal (“religiously permissible”);
Haram (“not religiously permissible”);
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Basic Assumptions
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Underlying asset must be acceptable
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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)
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Products / Structures have to be:
 understandable
 tax effective
 useable and easy to administer
 competitively priced
 not “alien” to existing regulatory requirements
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Use of Islamic Finance in Real Estate
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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:
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Cash Purchase
Ijara Lease Structure
Mudaraba
Musharaka
Diminishing Musharaka
Others – see variations later
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Conventional Lender Concerns
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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:
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Risk of insurance to stay with owner/landlord/lessor
Risk of structural maintenance to stay with owner/landlord/lessor
No rent after termination
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Assumptions
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Acknowledge Shariah and Non-Shariah compliant sides
Issues:
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Documentation
Put and call options
Managing contractor provisions
Tax matters
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Stamp Duty/SDLT
Income Tax
Capital/Chargeable Gains
Capital Allowances
Other Direct and Indirect Taxes
Country specific structural risks
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Ijara Structure
Vendor
Purchase price comprising
bank facility and premium
paid by Project Company
for grant of Ijara Lease
Islamic Fund
Charitable Trust
Sale of Property
from Vendor to
Funding Company
100% share
ownership
100% share
ownership
$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
$600k
Funding Company
Bank
Ijara Lease
Interest $50k pa
Ijara Lease granted by
Funding Company to
Project Company for $400k
premium paid by Project
Company to Funding
Company representing
“equity” in transaction
Project Company
End user lease
Occupational tenant
rent. $70k pa
Occupational
tenant
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Musharaka Structure
Islamic
Investors
Declaration of
Trust
Vendor
Charitable
Entity
100% share ownership
Property
Transfer
100% share ownership
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
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Property Development/Investment Ijara Sukuk
Investment Company
Financial Product Developer
Ijara Muntahia
Bitamlik contract
(plus sale contract)
[PROCEEDS]
Purchase
Contract
for Assets
Wakeel
Special Purpose
Company
Service Agency
Service Supplier
Admin and Registrar
Sukuk Investor
Sukuk Investor
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Variations
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Cash acquisitions and subsequent financings (UK)
Dual lease structure (SWITZERLAND)
“credit bail immobiliser” (FRANCE)
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Cash Acquisition and Subsequent Financing (# 1)
Purchase Price
Project
Funding
Lease (Ijara)
Company
Company
Purchase
Price
Title
Sale Agreement
Seller
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Cash Acquisition and Subsequent Financing (# 2)
Bank
Financing Amount
Financing Amount
Project
Funding
Lease (Ijara)
Company
Company
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Considerations for Developing
Market
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Awareness of Acceptable Structures
 Familiarity with developing and accepted documentation
 Awareness of Shariah Scholar Dialogue (FATWAS)
 Credit Process
 Issues for Lenders Generally
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Additional Matters
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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)
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HAMID YUNIS
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