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Copyright 2004 - Majid & Associates, P.C - All Rights Reserved ISLAMIC REAL ESTATE FUNDS IN NORTH AMERICA OPPORTUNITIES AND PITFALLS Islamic Real Estate.

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Presentation on theme: "Copyright 2004 - Majid & Associates, P.C - All Rights Reserved ISLAMIC REAL ESTATE FUNDS IN NORTH AMERICA OPPORTUNITIES AND PITFALLS Islamic Real Estate."— Presentation transcript:

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

3 Copyright Majid & Associates, P.C - All Rights Reserved RESIDENTIAL PROPERTIES- USUALLY MULTI-FAMILY APARTMENT BUILDINGS RESIDENTIAL PROPERTIES- USUALLY MULTI-FAMILY APARTMENT BUILDINGS COMMERCIAL PROPERTIES– COMMERCIAL PROPERTIES– RETAIL (MALLS), OFFICE SPACE, WAREHOUSES, DISTRIBUTION FACILITIES AND RETIREMENT HOMES OVERVIEW

4 Copyright Majid & Associates, P.C - All Rights Reserved 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). VARIES FROM STATE TO STATE AND THAT IMPACTS HOW THE DEAL IS DONE (OR IF IT’S EVEN POSSIBLE).

5 Copyright Majid & Associates, P.C - All Rights Reserved Common Structures: Leveraging The Shuffle Game? SPV BANK Interest- bearing loan Loan Payments Lease-back (Ijara) Lease payments Sale ISLAMIC ENTITY Property/ Assets

6 Copyright Majid & Associates, P.C - All Rights Reserved WHY INVEST IN REAL ESTATE?  ISLAMIC PERSPECTIVE  PRACTICAL PERSPECTIVE  ECONOMIC PERSPECTIVE

7 Copyright Majid & Associates, P.C - All Rights Reserved WHY INVEST IN A REAL ESTATE FUND? LEVERAGE LEVERAGE DIVERSIFICATION DIVERSIFICATION LARGE MARKET AND INVENTORY LARGE MARKET AND INVENTORY SAFE HAVEN SAFE HAVEN

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

9 Copyright Majid & Associates, P.C - All Rights Reserved IS IT REALLY SHARIAH COMPLIANT?

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

11 Copyright Majid & Associates, P.C - All Rights Reserved OTHER ISSUES THE LEASE AGREEMENT – GENERALLY CONSISTS OF FIVE DOCUMENTS: 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.

12 Copyright Majid & Associates, P.C - All Rights Reserved CHALLENGES REALLY UNDERSTANDING THE STRUCTURE AND EXPLAINING IT TO THE INVESTOR PROPERLY REALLY UNDERSTANDING THE STRUCTURE AND EXPLAINING IT TO THE INVESTOR PROPERLY ISSUES OF DISCLOSURE AND TRANSPARECNY ISSUES OF DISCLOSURE AND TRANSPARECNY PEOPLE WANT PROFIT, BUT PEOPLE ALSO WANT COMFORT PEOPLE WANT PROFIT, BUT PEOPLE ALSO WANT COMFORT STRUCTURE COMPLEXITY AND INEFFICIENCIES HEIGHTEN COSTS AND CUT INTO PROFITS STRUCTURE COMPLEXITY AND INEFFICIENCIES HEIGHTEN COSTS AND CUT INTO PROFITS

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

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

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

16 Copyright Majid & Associates, P.C - All Rights Reserved THERE IS TREMENDOUS POTENTIAL BUT

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

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

19 Copyright Majid & Associates, P.C - All Rights Reserved MAJID & ASSOCIATES, P.C. Arshad Majid, JD MBA Phone: (631) Fax: (631) THANKS FOR NOT FALLING ASLEEP!


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