JOHN L. OPAR
Partner, Shearman & Sterling LLP
The Shari'ah countenances an asset-based system of investment that promotes ethical activities and prohibits the use of conventional leverage. Given these basic tenets, it is no surprise then that real estate has been at the core of the brief history of compliant investment in the United States. The reasons are understandable. First, real estate offers an obvious target for an asset-based investment system. Second, concerns about noncompliant (or unethical) use of the asset can be readily evaluated by review of leases and visual inspection. Finally, the very nature of real estate as a tangible asset eases the concerns with participating in an investment with noncompliant leverage. While one must consider the effects of project-level debt, there is no need to be concerned about internal or imbedded company-level leverage, as has plagued compliant private equity and capital markets investors. The possibilities for noncompliance are lessened relative to investments in operating businesses.
In the earliest days, compliant investors targeted the least complex of real estate holdings—parking garages. They afforded investors a steady revenue stream and a nonmanagement-intensive asset, with essentially no concern for noncompliant use. As compliant investment has evolved in the United States, multifamily has become the asset class of choice, again offering a steady revenue ...