The recent $48 million sale of the Amazon Robotics headquarters in North Reading was financed under a legal structure designed to comply with Muslim financial principles to satisfy one of the new owners, Bahrain-based Ibdar Bank.
Like many overseas sources of capital, Middle Eastern investors are seeking to buy Greater Boston commercial real estate because of the region’s thriving tech cluster and growth prospects.
That made the Amazon Robotics headquarters in North Reading a prized acquisition for Ibdar Bank of Bahrain and its U.S.-based partners, Ritz Banc Group and Lincoln Property Co. They paid $48 million in October for the 229,000-square-foot office and R&D building at 300 Riverpark Drive, which is 100 percent leased to the e-commerce leader for research on its 100,000-strong army of warehouse robots.
The deal was notable because it was structured to be Shariah-compliant under Islamic banking rules, which forbid the payment or collection of interest and prohibit speculative investments. None of the three investors makes direct payments on the $27 million mortgage issued by Blue Hills Bank. That falls to a holding company, 300 Riverpark Property Corp., which was formed to collect the investors’ payments and pass them on to the bank.
Such lease-type arrangements, sometimes referred to in the financial industry as a “Shariah wrapper,” provide a layer of separation between the property owners and interest payments. They enable Middle Eastern syndicators to broaden the pool of prospective investors in real estate funds, said Sula Fiszman, a partner at Morgan, Lewis & Bockius LLP in Boston.
“They need to be able to say that the investments are Shariah-compliant so they can cast as wide a net as possible when they drum up investors, just like any fund here,” Fiszman said. “That means as a purchaser of commercial real estate, they can’t just buy the property and mortgage it up and pay interest to the lender.”
An upfront deposit paid as part of the lease agreement often acts like a down payment for the investors’ equity, said John O’Neill, a partner at Holland & Knight and head of its Boston real estate practice group.
It’s the first transaction in this category for Blue Hills Bank, but U.S. financial institutions of all sizes are becoming more comfortable with Shariah-compliant deals. Kevin Malone, who joined Blue Hills Bank in February as executive vice president of commercial banking, helped put together similar deals in a previous role at Dutch bank ABN Amro, which has a division specializing in Shariah compliance.
“The transaction from the bank’s perspective looks like any other,” Malone said. “We have a mortgage on the piece of property and we collect payments from the owner, who collects payments from the tenants. It’s not as complicated as people think it is, but it gets people nervous on the surface.”
Idbar Bank, which formed in 2013, had $388 million in assets and 28 percent of its portfolio invested in real estate as of Dec. 31, 2016. Last year it acquired a multifamily complex in Maryland and two housing development parcels in Great Britain. 300 Riverpark Drive is its first Massachusetts acquisition.
“The Boston metropolitan area has witnessed substantial growth within the technology and medical sectors driven by the presence of prominent companies and universities, such as the Massachusetts Institute of Technology and Harvard, that offer the world’s best programs in robotics, IT, research and science,” Bassam Kameshki, the bank’s director of real estate, said in a statement. “During the investment period, we will be working to add further value to the property, and ensure a profitable exit scenario.”
Not All Properties Fit The Bill
For Muslim investors, the list of criteria when evaluating a real estate acquisition goes far beyond cap rates and return on investment. Not all types of real estate assets fit the bill.
Shariah-compliant banks each rely on their own Shariah supervisory board – comprising at least three Muslim scholars – to determine which properties are eligible for acquisition.
Ownership of properties involved with alcoholic beverages, entertainment and insurance is typically prohibited. Multifamily, industrial and single-tenant-occupied office buildings are usually acceptable, as long as tenants don’t engage in prohibited activities, said Claudio Sgobba, a director for brokerage HFF.
But some banks have recently shown more flexibility. Shariah scholars have approved back offices occupied by lenders and life insurance companies, Sgobba said. Others have signed off on hotel acquisitions, if the property doesn’t derive more than 5 percent of its revenues from alcohol sales.
“The independence given to scholars and investors in interpreting Islamic principle has widened the spectrum of what is deemed Shariah-compliant,” Sgobba said.
Prohibitions on speculative investments also come into play, Sgobba said. Instead of capital appreciation, most Shariah-compliant investors are seeking stable commercial assets with long-term leases to tenants with strong credit.
Exit strategies are often determined by “put” or “call” type agreements, Fiszman said. Those enable the investors to force the sale of the property under certain circumstances, or to compel the investors to buy the property.
“The investor winds up having all of the same control over the property that it would have had, but it’s not the direct borrower of the loan,” she said.
