As commercial real estate investment has increasingly become global in nature, banks and other lenders are likely to see Sharia’h compliant financing opportunities in markets across the United States. Few law firms in the United States have the knowledge and experience to properly represent banks and lenders on Sharia’h compliant financings.
Polsinelli attorneys recently represented a regional bank in a Sharia’h compliant financing transaction involving a senior living facility controlled by an Islamic private equity and real estate investor. This transaction involved a structure known as an “ijara.” The Ijara (derived from the term ‘rental’ in Arabic) is a structure commonly used in Sharia’h compliant transactions that utilizes an asset’s rental stream to produce a return to the owner of the asset.
To implement an ijara structure, the purchaser will create a bankruptcy remote, single purpose entity (“PropCo”) to hold title to the fee interest in the real property (together with all of the applicable furniture, fixtures, and equipment). PropCo then enters into a traditional mortgage loan agreement and receives loan proceeds that can be used for the acquisition. PropCo grants a mortgage on its fee interest in the real property to the PropCo lender to secure its obligations under the mortgage loan agreement.
Simultaneously with the property’s acquisition, PropCo, as landlord, master leases the real estate to an operating company (“OpCo”). OpCo is the tenant under the lease from PropCo and operates the commercial real estate. The rental stream from the master lease can be structured to produce a cash flow sufficient to allow PropCo to satisfy the loan's servicing requirement and fund reserve accounts under the mortgage loan. The end result is a sale and lease of an asset as opposed to a loan under which principal and interest are payable.
If you have questions on how can the Ijara structure be used and adopted for your loan originations, please contact one of the authors listed to the right.