shariah compliant real estate transaction structures
DESCRIPTION
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”); - PowerPoint PPT PresentationTRANSCRIPT
Shariah Compliant Real Estate Transaction Structures
London (November 2006)
Hamid Yunis
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”);
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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)
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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
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
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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
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
Vendor
Funding Company
Charitable TrustIslamic Fund
Project Company
Occupational tenant
End user leaseOccupational tenant rent. $70k pa
Purchase price comprising bank facility and premium paid by Project Company for grant of Ijara Lease
Sale of Property from Vendor to Funding Company
Balance of all monies remaining after payment of rent under Ijara Lease representing return on“equity” investment. $20k pa
Rent payable under Ijara Lease (being equivalent to interest & amortisation payable under bank facility). $50k pa
Ijara Lease
Ijara Lease granted by Funding Company to
Project Company for $400k premium paid by Project
Company to Funding Company representing “equity” in transaction
$1m
Bank$600k
Interest $50k pa
100% share ownership
100% share ownership
Ijara Structure
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Occupational End User Leave
Project co
VendorCharitable
Entity
Islamic Investors
Occupational Tenant
Bank
100% share ownership
100% share ownership
Declaration of Trust
SUKUK(Discounted Bond
Instrument)Joint Venture
(MUSHARAKA)Agreement
Security
Senior Debt
Property Transfer
Fund CoPartner Co
100% share ownership
Joint Venture
Agreement
Musharaka Structure
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Property Development/Investment Ijara Sukuk
Investment Company Financial Product Developer
Special PurposeCompany
Sukuk Investor Sukuk Investor
Wakeel
Service Supplier
Admin and Registrar
Service Agency
Wakala Agreement
Purchase Contractfor Assets
Ijara Muntahia Bitamlik contract (plus sale contract)[PROCEEDS]
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Variations Commodity Murabaha (Tawarruq) Cash acquisitions and subsequent financings (UK) Dual lease structure (SWITZERLAND) “credit bail immobiliser” (FRANCE)
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Project
CompanyFunding
Company
Seller
Lease (Ijara)
Sale AgreementPurchasePrice
Title
Purchase Price
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Cash Acquisition and Subsequent Financing (# 1)
Project
CompanyFunding
Company
Bank
Lease (Ijara)
Financing AmountFinancing Amount
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Cash Acquisition and Subsequent Financing (# 2)
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
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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)
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HAMID YUNISTaylor Wessing
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BlackfriarsLondon
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Tel: 0207 300 7000Fax: 0207 300 7100
Direct Dial: 0207 300 4088E-mail: [email protected]
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