Islamic Shari'ah- Compliant Project Finance: Collateral Security and Financing Structure Case Studies

FORDHAMINTERNATIONALLAWJOURNAL Fordham International Law Journal Case Studies - 2000 Article 6 Copyright c 2000 by the authors. Fordham International Law Journal is produced by The Berkeley Electronic Press (bepress). http://ir.lawnet.fordham.edu/ilj Islamic Shari’ah- Compliant Project Finance: Collateral Security and Financing Structure Case Studies Michael J.T. McMillen This Essay addresses collateral security structures and project financing structures used in project financings where the structure of, and documentation for, the financing is compliant with the precepts of Islamic Shari’ah. The Essay first provides a brief summary of the sources and exposition of Shari’ah principles in financing transactions. It then surveys economic and financial trends in Saudi Arabia promoting and supporting the project financings discussed in the Essay. General legal considerations influencing development of the structure are then identified, including the absence of a statutory structure, the inapplicability of stare decisis, and the fact that many laws are not published. A critical factor in any project financing, particularly in a jurisdiction in which Islamic law is predominant, relates to the available enforcement entities and paradigms and the degree to which Islamic Shari’ah is the basis for interpretation and enforcement of agreements. This Essay examines the enforcement regimen of Saudi Arabia and then examines three project financing case studies. Michaelj T. McMillen* This Essay addresses collateral security structures and project financing structures used in project financings where the structure of, and documentation for, the financing is compliant with the precepts of Islamic Shari'ah.' The Essay first provides a brief summary of the sources and exposition of Shari'ah principles in financing transactions. It then surveys economic and financial trends in Saudi Arabia promoting and supporting the project financings discussed in the Essay. General legal considerations influencing development of the structure are the identified, including the absence of a statutory structure, the inapplicability of stare decisis, and the fact that many laws are not published. A critical factor in any project financing, particularly in a jurisdiction in which Islamic law is predominant, relates to the available enforcement entities and paradigms and the degree to * Mr. McMillen is a Partner in the New York office of the law firm of King & Spalding and a member of the Firm's Islamic Finance and Investment Practice Group as well as the Project and Equipment Finance Group. Mr. McMillen was previously a partner in another large international law firm, where he was located in Saudi Arabia and had responsibility for Middle Eastern financings. Mr. McMillen represented the lenders in the Saudi Chevron petrochemical project financing and led the team that developed the rahn-adl collateral security structure discussed in this Essay. Mr. McMillen also represented the financiers in, and was Islamic counsel for, the sharikat mahassa-murabahafinancing discussed in this Essay and project and Islamic counsel for the istisna'a-ijaratransactions described in this Essay. Views expressed in this Essay are those of Mr. McMillen and not those of King & Spalding or his previous law firm. All copyright and other intellectual property rights in respect of this Essay are held by Michael J.T. McMillen. 1. Portions of this Essay addressing the rahn-adlcollateral security structure previously appeared in THE PROCEEDINGS OF THE THIRD HARVARD UNIVERSITY FORUM ON IsLAMIC FINANCE: LOCAL CHALLENGES, GLOBAL OPPORTUNITIES 111-31 (2000) [hereinafter THIRD HARVARD ISLAMIC FORUM]. A general description of the financing of the rahn-adl structure in the Saudi Chevron petrochemical project financing appeared in Michael J.T. McMillen, Special Report, Saudi Arabia, Briefing: ProjectFinance, Reconciling New Funding with the Sharia,38 MIDDLE E. ECON. DIG., Sept. 18, 1999, at 36-39. A general description of the financing of the Maconda Park Project istisna'a-ojaratransaction appeared in Michael J.T. McMillen, Special Report U.S., Briefing: Islamic Finance: Breaking the Mould, 38 MIDDLE E. ECON. DIG., Sept. 22, 2000, at 28-29. which Islamic Shari'ahis the basis for interpretation and enforcement of agreements. This Essay examines the enforcement regimen of Saudi Arabia and then examines three project financing case studies. The first case study focuses on a Shari'ah-compliant collateral security that was developed for, and implemented in, the first limited recourse project financing in The Kingdom of Saudi Arabia, the Saudi Chevron Petrochemical Project. The structure is a rahn-adl (mortgage/pledge-"trustee-arbitrator") structure that is now used in the Middle East. The second case study focuses on a sharikat mahassa-murabaha (joint venturebank purchase and sale) structure that was used in the financing of an expansion to a power project and related transmission equipment, in Saudi Arabia: the Utility Power Project. The final two case studies examine a Shari'ah-compliant istisna'a-ijarai (construction contract-lease) structure that was recently effected in the United States in the Maconda Park Apartments and the Truman Park Apartments Projects and which will be effected in various Islamic and non-Islamic jurisdictions. In each case, the transactional participants and documentary structure are considered in detail. In the case of the rahn-adl collateral security structure, the methodology of the development of the structure is also examined in order to provide an indication of the nature of structuring a transaction that bridges Western and Islamic financial systems and their divergent credit, economic, legal, and cultural parameters. The methodology is the opposite of that used in structuring project financings in other jurisdictions, commencing from the Islamic system and working to incorporate Western elements and, because it had not previously been undertaken, began with first principles under the Shari'ah and consideration of the nature of security interests in camels. Although the two Saudi Arabian transactions involved structures developed with primary sensitivity to the Hanbali School of Islamic jurisprudence, the Essay discusses variations for implementation of the structures in other jurisdictions where other schools of Islamic jurisprudence predominate. INTRODUCTION Commonly used definitions of "project financing" are focused on the productive capabilities of an economic unit (i.e., the project) and the needs and preferences of the debt partici FORDHAMINTERNATIONAL LAWJOURNAL pants in financing the construction and operation of such units, with the impact on the equity participants being implied by the debt structure. In general terms, a "project financing" is the financing of an economic unit in which the lenders look initially to the cash flows from operation of that economic unit for repayment of the project loan and to those cash flows and the other assets comprising the economic unit as collateral for the loan. It is an "off-balance sheet" method of financing from the vantage of the operator of the project. Project financing techniques have become a primary means for financing a broad range of economic units throughout the world. The application of these techniques has been refined in most industrial categories and with respect to most types of assets. For example, they are used for the financing of power generation, transmission, and distribution assets; for upstream, midstream, and downstream assets in the oil and gas industries; for petrochemical, paper, and mining projects; and for the entire panoply of infrastructure projects, including roads, airports, and desalination plants. These techniques have been used for the financing of tankers and other vessels, aircraft, and virtually every type of manufacturing, transportation, computer, and telecommunications equipment. And, with one major exception, project financing techniques have been used in most countries and economic systems in the world. The one major exception is that relatively little implementation has been made of those techniques in transactions that are compliant with the precepts of Islamic Shari'ah,be it in Islamic jurisdictions such as the Middle East, North Africa, Malaysia, Indonesia, or in other jurisdictions. A significant limiting factor relates to the conflict of certain Islamic principles with the fundamental debt-leverage principle of Western project financing, namely Islamic Shari'ahprohibitions on the payment or receipt of interest and other aspects of the doctrine of iba.2 2. Riba is traditionally translated as usury. However, jurists have a more expansive concept in Islamic jurisprudence, addressing not only prevention of the exploitation of those in a weak bargaining position, but also "the illegality of all forms of gain or profit which were unearned in the sense that they resulted from speculative or risky transactions and could not be precisely calculated in advance by the contracting parties." NOELJ. COULSON, COMMERCIAL LAW IN THE GULF STATES: THE ISLAMIC LEGAL TRADITION 11 (1984) [hereinafter COULSON, GULF STATES COMMERCIAL LAW]. See FRANK E. VOGEL & SAMUEL L. HAYES, III, ISLAMIC LAW AND FINANCE: RELIGION, RISK AND RETURN 71-95 (1998) [hereinafter VOGEL & HAYES]; NABIL A. SALEH, UNLAWFUL GAIN AND LEGITIMATE The essential participants in any financing of a large scale industrial, infrastructure, real estate, or similar project are (a) one or more equity investors (often the sponsors of the project) and (b) the availability of debt financing or an Islamically acceptable alternative to the debt portion of the financing.3 The determination by a bank or other financier as to whether to participate in a given project financing of this type centers on the project economics and, particularly, in a limited recourse project financings, the collateral package that is made available to secure the financing. Project sponsors and their affiliates have a strong aversion to guaranteeing a project loan or other financing and to otherwise incurring a balance sheet liability in respect of a project. This is particularly true of companies that may have to reflect the guarantee liability on, or consolidate project debt onto, a parent company balance sheet under generally accepted accounting principles. Thus, in addition to careful tax and ownership structuring, project sponsors and their parent companies also have a strong interest in providing the financiers with an acceptable collateral security package. And, to effectuate liability limitations and non-consolidation, sponsors and their parent companies want the collateral for the project to be, and to be limited to, the assets comprising the project and the cash flows from operation of the project. This highlights a second group of limitations on the implementation of project financing techniques in transactions that are Shari'ah-compliant: the difficulty of obtaining a collateral security interest under the Shari'ahand the constraints inherent in the nature of a rahn (mortgage/pledge) under the Shari'ah. There is a pressing need for industrial, infrastructure, and real estate development in the entire range of Islamic jurisdictions. And, as noted below, there is a significant trend in Islamic jurisdictions to broaden the capital base within each country, draw upon funds from a world-wide financing base, and reduce reliance on local capital for all financing needs. However, there is a dearth of available financing structures that bridge Western financial systems4 and Islamic systems. And there is a perception that the legal systems and principles of the Western systems and the Islamic systems are so diverse as to be unbridgeable. This Essay focuses on two aspects of project financings in an Islamic jurisdiction: (i) the design and implementation of a collateral security structure under Islamic Shari'ahprecepts and (ii) the design and implementation of Shari'ah-compliant financing structures so as to avoid, among other things, prohibitions on the payment and receipt of interest, and so as to comply with Shari'ah precepts applicable to the specific contractual arrangements used in those financings.5 To give structure to the discussion, four case studies are presented. Two of the case studies are of projects in Saudi Arabia, and the other two are of a Shari'ah-compliant structure recently implemented in the United States. The Saudi Arabian transactions were chosen (i) because of they were the first of their kind, (ii) because they involved both Western and Middle Eastern sources of financing (and thus had to comply with credit .policies and legal requirements applicable in multiple divergent jurisdictions), and (iii) because of the lack of an applicable statutory framework in The Kingdom of Saudi Arabia, which forced direct consideration of Shari'ah principles and precepts. The United States transactions were chosen because they also were 4. References to "Western" systems are primarily to financing techniques and expectations that predominate in the United States of America, Europe, and Japan. 5. In addition to sources cited in this Essay (and other sources), many Islamic scholars, Islamic financiers, and Saudi Arabian legal practitioners have graciously provided invaluable assistance to the author in orally exploring Shari'ah principles and precepts, including those applicable to the structures discussed in this Essay. The author expresses particular gratitude to Dr. Mohamed Mi Elgari of the National Management Consultancy Center and of King Abdulaziz University in Jeddah, Saudi Arabia, Mr. Hafedh Maamouri, currently Senior Consultant with Islamic Finance Consultants in Manama, Bahrain, and previously Head of Islamic Banking for Saudi American Bank, and Hassan M.S. Mahassni, Esq. of the Law Office of Hassan Mahassni in association with White & Case LLP. Any errors in the statements of Shari'ah principles and precepts are the sole responsibility of the author. the first of their kind and because they illustrates application of Islamic financings in a more complex regulatory environment without diminution in Islamic compliance or the ability to apply the structure in other jurisdictions. An Islamically acceptable collateral security structure is discussed in the context of a case study for the first limited recourse project financing in Saudi Arabia, the Saudi Chevron petrochemical project in late 1998. In particular, it focuses on the development of the rahn-adl structure for that financing. This collateral security structure has been used as a model for, and has found a much broader implementation in, other secured financings throughout the Middle East. The first Shai'ah-compliant financing structure discussed in this Essay is a sharikat mahassa-murabaha(joint venture-share sale) structure that was used in the project financing of the expansion of a power plant and related transmission facilities in Saudi Arabia for an electric utility ("Utility") in 1998. The second Shari'ah-compliant financing structure was implemented (a) first in Austin, Texas, in June 2000, for the Maconda Park Apartments project and (b) second in Largo, Maryland, in April 2001, for the Truman Park Apartments project. Both the Maconda Park Project and the Truman Park Project (collectively, the "Projects") entail construction financing for residential housing developments. The Truman Park Project involved the take-out of a conventional construction loan using an Islamic structure. The Islamic structure in both transactions is an istisna'a-ijara (construction contract-lease) structure that involves bank construction and ownership of the project with a subsequent financing lease to the involved project company. I. SOURCES OFISLAMIC SHARIAH Islamic religious law as applied to commercial activities is comprised, for purposes of this Essay, of two parts: Shari'ah (literally, "the Way"), or perfect, immutable, divine law, as revealed in the Qur'an and the sunna; and fiqh (literally, "understanding"), or the sum of human comprehension of that divine law. While there is dispute among Islamic scholars as to the precise manner in which Islamic law is to be determined, those who determine Islamic law are religious scholars (ulama) that are skilled in interpreting the revealed sources of the Shari'ahand the fiqh and in financial and economic disciplines. The primary methodology used in this determinative and interpretive effort is ijtihad (literally, "effort"), or legal reasoning. Ijtihad observes a particular methodology, called the "roots of the law" (usual alfiqh).6 The roots (usul) upon which Islamic jurisprudence is based are (a) the Qur'an, being the holy book of Islam, (b) the sunna of the Prophet Mohammed, which are the binding authority of his dicta and decisions, (c) the ijma or "consensus" of the community of scholars, and (d) the qiyas, or analogical deductions and reasoning. In practice, Islamic Shari'ahis determined by ulama, acting individually or in groups. For purposes of this Essay, it is important to note that most significant Islamic financial institutions have Shari'ah supervisory boards, committees, and advisors ("Shari'ah Boards"), comprised of one or more Islamic scholars that have particular expertise in economic and financial transactions. These Shari'ah Boards will often examine in detail both the structure of a proposed transaction or financial product and the documentation giving effect to that transaction or product. In the course of structuring the transaction and documentation, there may well be multiple review sessions by the Shari'ahBoard with modifications to the structure and the documentation after each review session, a process of continual refinement to give effect to the determinations of the Shari'ahBoard with respect to the individual transaction or product. Given that Shari'ahBoard determinations are fiqh (human comprehension of Shari'ah,the divine law), there can be variations in interpretation and implementation from one Shari'ahBoard to another, with a multiplicity of views on a specific issue. These variations occur even though Shari'ahscholars in this period strive to achieve a consensus on difficult and novel issues, such as those involved in the development of new financial instruments and products.7 Is6. See generally NOEL J. COULSON, A HISTORY OF ISLAMIC LAW (1964); JOSEPH SCHACHT, AN INTRODUCrION TO ISLAMIC LAW (1964). See VOGEL & HAYES, supra note 2; NICHOLAS DYLAN RAY, ARAB ISLAMIC BANKING AND THE RENEWAL OF ISLAMIC LAW (1995) [hereinafter RAY]; SALEH, supranote 2; COULSON, GULF STATES COMMERCIAL LAW, supra note 2; see also SECOND HARVARD ISLAMIC FORUM, supranote 2; THIRD HARVARD ISLAMIC FORUM, supra note 1 (containing articles covering current issues in Islamic finance). While, as a precise matter, all discussion of Islamic jurisprudence is one offiqh, this Essay, in keeping with convention, will refer to precepts and principles of Shari'ahwithout further reference to fiqh. 7. See Nizam Yaquby, Islamic Finance in View of the Shari'ah, in SECOND HARVARD lamic investors, be they financial institutions or individual investors, rely heavily on the involvement of Shari'ah Boards in the structuring and documentation of a transaction or financial product and may request that the Shari'ah Board's fatwa of approval be provided before an investment is made. II. THE ECONOMIC AMD FINANCING ENVIRONMENT IN SAUDI ARABIA The economic and financing environment in Saudi Arabia prior to, and at the time of consummation of, the financings of the Saudi Chevron petrochemical project and the Utility power project (the first two case studies) involved a focus on diversification of the industrial base in the Kingdom. There was a trend toward accessing a broader financing base, with greater involvement of Saudi Arabian investors as well as foreign investors, internationalization of the financing process, and the use of project financing techniques rather than personal and corporate guarantees. Concurrently, the government and local businesses were considering and attempting to implement methods of reducing the role of government in the provision of financing. In the initial stages, industrial diversification proceeded most rapidly in the petrochemicals industry, particularly where affiliates of Saudi Arabian Basic Industries Corporation ("SABIC") were involved. Among the early petrochemical projects that obtained financing were expansions by Saudi Yanbu Petrochemical Company ("Yanpet"), a joint venture between SABIC and Mobil Yanbu Petrochemical Company, Saudi Petrochemical Company ("Sadaf"), UnitedJubail Fertilizer Company, a joint venture among SABIC and five SABIC companies, A1-Jubail Petrochemical Company ("Kemya"), and Eastern Petrochemical Company ("Sharq"). Notably, 1998 also saw the first international lending transaction in the electricity sector when Saudi Consolidated Electric Company in the Eastern Province executed a "dedicated receivables" financing for its Ghazlan II power project near Yanbu. Financings by these, and other, companies involved some degree of recourse to the project sponsors or their affiliates. They also involved some element of collateral security for the IsLAMIc FORUM, supranote 2, at 159-61 (summarizing these and other responsibilities of modern Shari'ah Boards). financiers of such projects. However, these projects did not fall within the "limited recourse project financing" concept that is being considered in this Essay and none of those projects involved the use of the rahn-adlcollateral security, sharikatmahassamurabaha, or istisna'a-ijarastructures discussed in this Essay. These early projects illustrate a broader involvement of Saudi Arabian investors. Each project involved significant or exclusively Saudi Arabian equity, and some involved joint stock companies that may eventually seek stock exchange listings. Foreign investors, such as Chevron, were allowed to participate in company ownership in Saudi Arabia, and there has been a significant advance in the encouragement of foreign investment in Saudi Arabia since the Saudi Chevron financing. In addition, Saudi Chevron and many SABIC projects, such as Yanpet, involve a combination of local, regional, and international lenders. The health and liquidity of local and regional banks were significant factors in industrial and infrastructure finance in Saudi Arabia in that period. Local banks reported profits in each of the years preceding the financings of the Saudi Chevron petrochemical and Utility power projects. Those banks experienced substantial liquidity and low loan-to-asset ratios. Profits were based more on investment income than interest, and loan growth had been low. This encouraged banks to increase lending to all economic sectors. To spread risks and increase the borrowing base, banks sought to join regional and international lending groups, particularly for large projects such as Saudi Chevron, Ghazlan II, and Yanpet. Governmental evaluations were ongoing regarding restructuring of the electricity sector, with initial consideration given to financing the Shoaiba project as an independent power project using a build-own-operate ("BOO") structure.' Privatization of the telecommunications sector, Saudi Arabian Airlines, and port operations, maintenance, and management were all being actively considered, and the privatization of the telecommunications sector did proceed. A public offering of SABIC shares was also being considered at the time. Regarding capital markets development, in April 1998, the Saudi Arabian Monetary Agency ("SAMA") issued a new binding draft of the Investment Business 8. The transaction Was not completed as a build-own-operate structure at that time. Restructuring of the electricity system was undertaken and is in process. Regulations, which regulate, among other things, the distribution of securities and the management of mutual funds. Accession to the World Trade Organization was also a frequently considered topic, together with its effects on brokerage, insurance, and commercial banking activities, as well as export/import markets. Each of these developments, and others, worked to expand the capital markets, permitting greater access to foreign funds and a strengthening of the economy over the longer term. One goal was to free up Saudi Arabian capital, allowing it be spread over a broader risk base within the economy. It was believed that this, in turn, would have the effect of a reduced burden on government and an allocation of risks to those willing and most able to bear them. It was anticipated that increased foreign equity investment would result in further technology transfer into the industrial and infrastructure sectors. As completed financings illustrate, the time frame for implementation of individual projects was reduced as businessmen sought to avoid additional costs of delays and other inefficiencies in implementing their projects. Privatization, where determined appropriate, would allow governmental risk sharing with the private sector, cost reduction, and governmental management of the pace and depth of movement of functions to the private sector. III. THE SAUDI ARABIAN LEGAL ENVIRONMENT: GENERAL CONSIDERATIONS The fundamental and paramount body of law in The Kingdom of Saudi Arabia is the Shari'ah,as construed by the Hanbali School of Islamic jurisprudence.9 The sources of the Shari'ah 9. The four major schools of Islamic jurisprudence are: (1) the Hanafi School, which is predominant in the countries of the former Ottoman Empire and emanated from the disciples of Abu Hanafi (d. 767 H.) in the Iraqi center of Kufa; (2) the Hanbali School, which is predominant in The Kingdom of Saudi Arabia and few other jurisdictions and was formed aby Ahmad bin Hangal (d. 855 H.); (3) the Maliki School, which emanated from the Arabian center in Medina through the followers of Malik bin Anas (d. 796 H.); and (4) the Shafi'i School formed by the followers of Shafi'i (d. 820 H.). The four major schools differ in many respects in their interpretation of certain Shari'ahprecepts. Most scholars from medieval times until modern times aligned themselves with one of the four major schools of Islamic jurisprudence. However, in modern times many scholars do not believe it necessary to belong to any single school of Islamic jurisprudence. See VOGEL & HAYEs, supranote 2, at 34-41 (describing methods of elaboration of law). are the Qur'an, the sunna, ijma, and the qiyas. Certain matters are dealt with "statutorily," by Royal Decrees with respect to that matter. Where such a statutory body of law has been promulgated, such law is ultimately subject to, and may not conflict with, the provisions of the Shari'ah. Unlike other Middle Eastern countries, there is no statutory body of law in Saudi Arabia with respect to collateral security, mortgages and pledges, recordation of security interests, or related matters.1 ° Nor is there a comprehensive statutory regime pertaining to sale (istisna'a) or lease (ijara) transactions. There are statutes pertaining to joint ventures and other types of business organizations and foreign investments in Saudi Arabia. However, considerations, hereinafter set forth below in this Section III, limit the predictability of those statutes in certain circumstances. Thus, financiers and legal practitioners must look directly to the Shari'ahin structuring and applying legal principles relating to collateral security matters, sales transactions, and leases. Financiers and legal practitioners must also look to the Shari'ahin implementing existing statutory provisions. These factors, in addition to those discussed immediately below, render it difficult to provide definitive advice as to how collateral security and financing arrangements similar to those implemented in the Saudi Chevron, Utility Power, Maconda Park, and Truman Park transactions can be effected or would be interpreted by adjudicative bodies in Saudi Arabia.1 It is noteworthy, however, that under the Shari'ah, absent a prohibition in the Shari'ah, the agreement of the parties will control. In addition, under the principles of law applicable in Saudi Arabia, previous decisions of Saudi Arabian courts and other adjudicative authorities are not considered to establish binding precedents for the decision of later cases, and the principle of stare decisis is not accepted in Saudi Arabia. Also, Royal Decrees, 10. A unique exception in Saudi Arabia is in the area of ship mortgages, which is governed by the Commercial Court Regulations (Royal Decree No. M27 of 1931), the Ship Mortgage Regulations (which came into force on June 17, 1955), and the Regulations for Ports and Harbors (Royal Decree No. M27 ofJuly 14, 1974), the Regulations for Ports, Harbors and Lighthouses dated 19/6/1394 (Resolution No. 934 of the Council of Ministers). 11. This realization had a profound impact on the "scientific method" and approach chosen for development of the rahn-adlcollateral security structure. Predictability of outcome was a primary concern of the financing banks in the Saudi Chevron transaction. ministerial decisions and resolutions, departmental circulars and other governmental pronouncements having the force of law, and the decisions of the various courts and adjudicatory authorities of Saudi Arabia are not generally or consistently collected in a central place and are not necessarily available to the public. IV. ENFORCEMENT OFAGREEMENTS IN SAUDI ARABIA A. Jurisdiction of Enforcement Entities Considerations of choice of forum are critical in every financing and in every jurisdiction in the world. Different enforcement entities have different areas of expertise and different sensitivities to issues. Each enforcement entity has a different array of remedies that it can apply, particularly in a jurisdiction such as Saudi Arabia. Rights to appeal from each enforcement entity are different as are the procedural rules applicable to each enforcement entity. And, given varying dockets and procedures, the dispute resolution period can and does vary dramatically from one enforcement entity to another. There are a number of different courts, committees, offices, and boards (collectively, "Enforcement Entities") that might have jurisdiction over a matter in Saudi Arabia in which a bank could be involved. Three of these Enforcement Entities were of particular relevance in the context of the financings of the Saudi Chevron Project and the Utility Power Project: the Banking Disputes Settlement Committee ("SAMA Committee") of the Saudi Arabian Monetary Agency ("SAMA"); the Office of the Settlement of Negotiable Instruments Disputes, also known as the Negotiable Instruments Offices ("NIO"), which are under the jurisdiction of the Ministry of Commerce; 12 and the Board of Grievances (Qiwan Al-Mazal'im) under The Board of Grievances Law ("Board of Grievances"). In summary: (i) The SAMA Committee has jurisdiction over matters and disputes involving banks and their customers-that is, "settling" (mediating) disputes between banks and their customers "in accordance with the agreements concluded between them." Under the regulations constituting the SAMA Committee, all disputes between banks, 12. The NIO operates in practice like a court with hearings being held in a number of different circuit locations in Saudi Arabia. For ease of reference, references to the NIO will be in the singular. including foreign banks, and their customers (other than those involving negotiable instruments) are to be referred in the first instance to the SAMA Committee. 3 (ii) The NIO has jurisdiction over actions, matters, and disputes involving negotiable instruments (such as the promissory notes used in the financings discussed in this Essay), and in the context of such disputes, the NIO has jurisdiction superior to that of the SAMA Committee.' 4 (iii) The Board of Grievances has jurisdiction over commercial disputes (by implication, other than banking disputes and negotiable instruments disputes), including the enforcement of foreign judgments and bankruptcy matters.15 The jurisdiction of the various Enforcement Entities is, in certain respects, unclear and arguably overlapping. Numerous questions arise as to which Enforcement Entity would have jurisdiction in various matters involving one of the financing banks in the transactions discussed in this Essay. For example, although the Board of Grievances has jurisdiction with respect to enforcement of foreign judgments and awards generally, the SAMA Committee has jurisdiction with respect to all matters involving banks (other than in respect of negotiable instruments). Does this mean that the SAMA Committee should assertjurisdiction with respect to a foreign award obtained by a bank? Would this be true despite the express provisions of the various official pronouncements regarding enforcement of foreign awards, particularly those rendered in foreign arbitrations? In the bankruptcy context, although the Board of Grievances generally has jurisdiction, if a bank creditor has a claim, should the SAMA Committee take jurisdiction? Which Enforcement Entity has jurisdiction where the foreign judgment or award obtained by a bank is on a negotiable instrument? These are questions of first instance in Saudi Arabia that will be determined by each Enforcement Entity, and it is not possible to determine in advance the decision that will be made. Given the foregoing situation and issues, among others, it 13. SAMA Committee decisions are final and not appealable. 14. NIO judgments may be appealed to the Legal Committee of the Ministry of Commerce. 15. Determinations of the Board of Grievances may be appealed to the Board of Grievances Scrutinization Committee. was important to structure the Saudi Arabian transactions in a manner that would afford the banks initial access to, and an ultimate determination by, the Enforcement Entity of their choice in any given situation and the opportunity to raise these jurisdictional issues with the chosen Enforcement Entity. B. Examination of UnderlyingDocumentation Under the Shari'ah Creditors involved in disputes to be resolved through the SAMA Committee or the NIO are afforded certain advantages over creditors who pursue their claims before the Board of Grievances. Although the SAMA Committee is in theory obliged to apply the Shari'ahand its precepts, including the prohibition on interest, to banking disputes, in practice the SAMA Committee has generally shown a willingness to force a recalcitrant debtor to honor the terms of the agreement creating the indebtedness, regardless of whether the agreement requires the payment of monies in the nature of interest or is otherwise variant from principles of Saudi Arabian law. The SAMA Committee does examine the various underlying documents and will make inquiry as to whether these arrangements are in accordance with Saudi Arabian law, but it makes all reasonable efforts to respect the agreement of the parties even in the face of conflicts with the Shari'ah. It is noteworthy that review by the SAMA Committee is comprised of a legal review and an accounting review. The accountants of the SAMA Committee perform independent determinations based on their calculations of the amount of interest payable in respect of a given dispute. Interest is payable only to the date of commencement of the action with the SAMA Committee. Thus, no interest is payable in respect of periods after such date and no interest is payable in respect of overdue amounts. It is the author's understanding based upon discussions with Saudi Arabian lawyers and judges that in practice most actions before the SAMA Committee take from six months to one year. Remedies available to the SAMA Committee include (i) prohibition of the debtor from leaving Saudi Arabia and (ii) putting the debtor on a "notice list" that is circulated to banks in Saudi Arabia. The second alternative can be a very effective remedy, as banks in Saudi Arabia will decline to conduct banking business with the debtor so listed. Where the SAMA Committee, acting as a mediation body, is unable to bring about a settlement of a dispute, its implementing regulations require that the matter be submitted to the court of competent jurisdiction (i.e., the Board of Grievances) for a de novo hearing. Notwithstanding the express requirements of such implementing regulations, however, under present practice the Board of Grievances will generally decline to hear cases that fall under the jurisdiction of the SAMA Committee. 16 In resolving actions, matters, and disputes within its jurisdiction, the NIO will generally enforce a debt obligation as evidenced by a negotiable instrument without looking to the substance of the transaction giving rise to such instrument, including whether such indebtedness includes amounts in the nature of interest.17 The NIO will, however, consider general defenses such as whether or not a debt was actually incurred or a negotiable instrument properly formed. Thus, the NIO generally does not undertake an inquiry into whether the documents underlying a negotiable instrument comply with the Shari'ahand certain other principles of Saudi Arabian law.is Saudi Arabian legal practitioners have informed the author that actions before the NIO are resolved in less time that those before the SAMA Committee. The Board of Grievances will undertake a fulsome examination of any matter presented to it, and this examination will include a rigorous inquiry into matters of public policy (including the compliance of all documentation with the Shari'ahand other principles of Saudi Arabian law). Thus, if a foreign judgment or award is obtained and enforcement is sought in Saudi Arabia, the Board of Grievances may examine the underlying documentation and make what is essentially a de novo determination as to whether the documentation underlying the judgment complies 16. The author has been informed that the Minister of the Interior has instructed the Civil Rights Department, the department of the Ministry of the Interior that is responsible for enforcing judgments of the SAMA Committee, that decisions of the SAMA Committee are to be enforced in the same manner as a decision of a court. 17. Many transactions are thus structured to provide separate notes for principal, interest, and other costs and expenses. These transactions frequently have a requirement for on-going provision of such notes. 18. Ajudgment issued by the NIO may be enforced through a presentation of the judgment to the Civil Rights Department of the Ministry of the Interior. Saudi Arabian legal practitioners have indicated that, unfortunately, the Civil Rights Department is often somewhat less than diligent in enforcing judgments. with the Shari'ahand other Saudi Arabian law. In the context of considering the position of the Board of Grievances, it should be noted that the Board of Grievances generally does not recognize provisions of agreements with respect to choice of foreign law or submission to the jurisdiction of foreign courts. Actions before the Board of Grievances often take from two to ten years, although the author has been informed by Saudi Arabian legal practitioners that actions for enforcement of foreign judgments are likely to take approximately one year if the order or award, on its face, does not contravene the Shari'ah or Saudi Arabian law. C. Enforcement of ForeignJudgments and Awards; Arbitration As noted above, large industrial, infrastructure, real estate, and other projects are increasingly international in scope. Thus, they frequently involve the law of two or more countries. A critical set of legal and financial issues involve the enforcement of a foreign (e.g., American, English, or French) arbitral award or court judgment against the project company or its assets in the country in which the project is located (in this case, Saudi Arabia). The court with jurisdiction over applications seeking enforcement of foreign judgments is the Board of Grievances. There is an unresolved jurisdictional issue where the foreign judgment or arbitral award is obtained by a bank because of the jurisdiction of the SAMA Committee over disputes involving banks. The author is aware of only one case where a foreign bank has sought to enforce in Saudi Arabia a decision of a foreign court or arbitral body.19 There is little precedent for the recognition and enforcement of foreign judgments by the Saudi Arabian courts.2 1 In19. It is likely that, on the basis of Council of Ministers Resolution No. 729/8 (which establishes the jurisdiction of the Board of Grievances to enforce foreign awards) and the animosity with which many Board of Grievances judges view non-Islamic banks, the Board of Grievances will refuse to exercise jurisdiction over the enforcement application submitted by a non-Islamic commercial bank. On the other hand, the Board of Grievances might decide that it is inappropriate for a decision of a foreign arbitral body or court to be referred to a non-judicial body (such as the SAMA Committee) for enforcement, particularly where jurisdiction over enforcement actions is specifically given to the Board of Grievances. 20. See A. Kritzalis, Saudi Arabia, in INTERNATIONAL EXECUTION AGAINST JUDGMENT DEBTORS (D. Campbell ed., 1993) (providing a comprehensive analysis of issues arising in respect of enforcement actions). stance. deed, other than a small number of 1989 cases involving judgments of courts in member states of the Arab League, the author is aware of no instance where the Board of Grievances has afforded final recognition to, and enforced, a judgment of a foreign court or a foreign arbitral award. The author has been informed of a single recent case in which a bank sought enforcement of a foreign judgment or award.2 ' In that case, the Board of Grievances reportedly declined to exercise jurisdiction because of the involvement of a bank. Presumably, enforcement would be sought from the SAMA Committee in such an in22 Nevertheless, Saudi Arabian law does give the Board of Grievances the power to issue a judgment recognizing a foreign judgment for enforcement in Saudi Arabia if the state of origin would afford reciprocal recognition to the judgments of the Saudi Arabian courts and provided that nothing in the foreign judgment contravenes the Shari'ah2.3 In the only recent cases of which the author is aware that sought enforcement of decisions of the courts of England, the Board of Grievances declined to enforce the judgments because no showing had been made that the English courts would afford reciprocal treatment to a Saudi Arabian court decision. 24 As noted above, the Board of Grievances is said to have recently declined to exercise jurisdiction in 21. The author is unaware of whether this is a foreign courtjudgment or a foreign arbitral award. 22. The author has been unable to determine at this time whether the party seeking enforcement of the foreign award has sought enforcement by the SAMA Committee in the referenced case. 23. Rules of Civil Procedure Before the Board of Grievances, Council of Ministers Resolution No. 190 dated 16/11/1409 A.H. (June 20, 1989), Article 6. Additional requirements for the enforcement of foreign judicial awards are set forth in Circular Number 7 of the President of the Board of Grievances, 15/8/1409 A.H. (May 5, 1985). 24. In these companion cases, the Board of Grievances initially issued a decision recognizing the three English High Court decisions. On appeal, however, the Board of Grievances found that there was no treaty between Saudi Arabia and the United Kingdom allowing for the reciprocal enforcement ofjudgments and that, on the evidence submitted, no law of the United Kingdom would provide for automatic recognition of a Saudi Arabian judgment. Rather, the Board of Grievances concluded that a judgment creditor seeking to enforce a Saudi Arabian court judgment in England would have to commence a common law action against the English judgment debtor in the English High Court to recover the debt evidenced by the Saudi Arabian judgment. In such new action, the English High Court could accept the Saudi Arabian judgment as proof of the debt. The Board of Grievances, therefore, held that the enforcement of the three High Court judgments should be denied. the case of a foreign court judgment or arbitral award obtained by a bank. In 1994, Saudi Arabia filed an instrument of accession to the New York Convention on the Recognition and Enforcement of Arbitral Awards of 1958 ("New York Convention"). The authorizing decree incorporates the requisite reciprocity requirement and specifies that jurisdiction over actions seeking enforcement of foreign arbitral awards shall lie with the Board of Grievances. 2 5 To date, the Board of Grievances has not issued procedural rules for actions seeking enforcement of international arbitration awards. The author understands from Saudi Arabian legal practitioners who have consulted Board of Grievances officials that no such rules will be issued in the near future. This being the case, it appears that an application for the recognition of a foreign arbitral award would be submitted and would proceed in accordance with the procedures specified for applications in respect of the recognition of foreign judicial awards. The author also understands that only one application seeking recognition of a foreign arbitral award under the New York Convention has been filed to date. In that case, the Board of Grievances declined to exercise jurisdiction because a bank obtained the foreign court judgment or award. Presumably, the bank must then make application to the SAMA Committee for enforcement of the judgment or award. Since any such application to the Board of Grievances would be quite rare at this point in time, it would be reasonable to anticipate that the Board of Grievances would consider such an application, as well as any objections filed with respect to the application, carefully and deliberately. De novo Board of Grievances proceedings normally last from two to ten years, with the long duration being in large 25. The structure for the Saudi Chevron transaction was designed to allow the banks, through the Onshore Security Agent, to attempt to enforce the foreign award through the SAMA Committee, rather than through the Board of Grievances. The structure of the Utility power project transaction was similarly structured. In each case, this should result in (i) substantially quicker resolution and enforcement and (ii) avoidance of a de novo review of the underlying documentation by the Board of Grievances in the enforcement action. The respective jurisdictional ambits of the SAMA Committee and the Board of Grievances in this situation are unclear and, to the author's knowledge, except as noted in the text, no actions have been brought by a bank in either forum for enforcement of a foreign arbitral or judicial award to date. lamic Investors"). To implement the Maconda Park financing arrangements, the Islamic Investors formed a special purpose project company as an investment entity, the Maconda Park Limited Partnership ("Maconda Project Company"). In the Truman Park transaction, an existing limited liability company, Truman Park LLC ("Truman Project Company"), was reorganized in connection with the Islamic financing and the infusion of the Islamic investment. A Fairfiled Residential affiliate serves as the "General Partner" of the Maconda Project Company, and a Dolben affiliate serves as the "Managing Member" in the Truman Park transaction. GIH and the Key Global Capital affiliates invested as the limited partners and members in these transactions. KeyBank, National Association ("KeyBank") provided financing for each of the transactions8" through an affiliated entity (each, an "Owner"). FF Development L.P., an affiliate of Fairfield Residential, as the general contractor ("Maconda General Contractor"), is constructing the apartment buildings and other improvements for the Maconda Park Project ("Maconda Improvements") and Bovis Lend Lease, Inc. is acting as the general contractor ("Truman General Contractor") for construction of the apartments and other improvements ("Truman Improvements") for the Truman Park Project. The Maconda Improvements and the Truman Improvements are referred to as the "Improvements" and the Maconda General Contractor and the Truman General Contractor are referred to as the "General Contractors." The Truman Park transaction involved an entity not present in the Maconda Park transaction, the "Construction Arranger." The Construction Arranger is an "orphan" special purpose vehicle that was created to enter into the Construction Contract with the General Contractor and to enter into the Construction (Istisna'a) Agreement with the Owner. The relevant Owner is leasing and will lease the Maconda Park Project to the Maconda Project Company, and is leasing and will lease the Truman Park Project to the Truman Project Company, in each case as described in this Essay. Each of the Project Companies also acts as a managing contractor ("Managing Contractor") for the construction and operation of the respective Projects. The Maconda Project Company owns the site on which the Maconda Park Project is being constructed ("Maconda Site") together 88. The "debt equivalent." with various easements, licenses, and other real estate interests (collectively with the Maconda Site, "Maconda Premises"). Similarly, the Truman Project Company owns the site on which the Truman Park Project is being constructed ("Truman Site") together with various easements, licenses, and other real estate interests (collectively with the Truman Site, "Truman Premises"). The Maconda Site and the Truman Site are collectively referred to as the "Sites" and the Maconda Premises and the Truman Premises are collectively referred to as the "Premises." The primary documents for the construction and miniperm financing of each of the Maconda Park Project and the Truman Park Project are, in each case: (a). "SITE LEASE": The lease of each of the relevant Site (and assignment of related easements) and the remainder of each of the relevant Premises from the Project Company for that Project, as the site lessors, to the relevant Owner, as the site lessee, to allow such Owner to occupy such Site and cause construction and leasing of the Improvements thereon; (b). "CONSTRUCTION (Istisna'a) Agreement": The Shari'ahcompliant construction contract between the relevant Owner and the Maconda General Contractor (in Maconda Park) and between the relevant Owner and the Construction Arranger (in Truman Park), in each case for the construction of the Improvements for the relevant Project, having attached thereto the Construction Terms (in Maconda Park) and the Construction Contract (in Truman Park), including the specifications and details of the cost of construction; (c). "CoNSTRUCTION TERMS" and "CoNSTRUTION CONTRACT": A standard construction contract 9 between the Maconda General Contractor and the related Owner (in Maconda Park) and between the Construction Arranger and the Truman General Contractor (in Truman Park) with respect to construction of the Improvements for the relevant Project, including all specifications for such Improvements; 89. Such a standard construction contract might be the American Institute of Architects Form A 11I, Standard Form of Agreement Between Owner and Contractor, and Standard General Conditions and Special Conditions Relating Thereto, as was used in the Truman Park transaction. In the Maconda Park transaction, the Construction Terms were the General Contractor's own customary form of construction contract and conditions. (d). "LEASE (Ijara)": A lease of the Improvements constituting part of each Project, and a sublease of each Premises for such Project, from the Owner thereof to the each of the relevant Project Company;90 (e). "PUT OPTION AGREEMENT": An agreement allowing each Owner to cause the related Project Company to purchase its related Project at various times and under various circumstances at the election of such Owner; (f). "CALL OPTION AGREEMENT": An agreement allowing each Project Company to purchase its related Project from the relevant Owner at various times and under various circumstances at the election of the such Project Company; (g). "MANAGING CONTRACTOR AGREEMENT": An agreement between each Owner and the relevant Project Company pursuant to which the such Project Company performs various construction and operation activities as the representative of the related Owner; and (h). "TAx MATTERS AGREEMENT": An agreement to clarify the characterization of the transaction for United States tax and other laws. The mortgage (rahn), security agreement, and other collateral security documentation, including guarantees of payment, completion of construction, and environmental matters (collectively "Security Documents"), are not discussed in this Essay. In addition, there are various consents and similar documents between and among the parties to the transaction that allow for assignment of documents in connection with the Security Documents and also make provision for the exercise of remedies in various default scenarios and provide for damages in such scenarios. In summary, in the Maconda Park transaction, the Developer and the Islamic Investors formed the Maconda Project Company, with each such entity making equity contributions. The Maconda Project Company, using such equity contributions and the other financing amounts provided by KeyBank through the related Owner as described herein, purchased, and holds title to, the Maconda Site and the other portions of the Maconda Premises. The Maconda Project Company leased the Maconda 90. The obligations of the Lessee under the Lease (Ijara) are evidenced by a Basic Rent Note. 2001] SHARJ'AH-COMPLIANT PROJECTFINANCE Site and granted other rights to the remainder of the Maconda Premises to the Owner pursuant to a Site Lease. In the Truman Park transaction, the Developer had previously formed the Truman Project Company and had purchased the Truman Site prior to the conversion of the conventional construction loan to an istisna'a-ijarafinancing structure. The Islamic Investors made equity contributions to the Truman Project Company after restructuring of that company. The Truman Project Company, using such equity contributions and the other financing amounts provided by KeyBank through the Owner as described herein, converted the conventional loan financing to an Islamic financing and undertook construction of the Truman Park Project. The Truman Project Company leased the Truman Site and granted other rights to the remainder of the Truman Premises to the related Owner pursuant to a Site Lease. KeyBank provided and provides financing for both Projects by making amounts available to separate affiliates of KeyBank, the respective Owners. The Owner of the Maconda Park Project disbursed the financing amounts into the Maconda Park Project by making payments with respect to acquisition of the Maconda Premises. On a periodic basis, the Owners of each of the Projects will disburse further amounts with respect to construction of the Improvements pursuant to the Construction (Istisna'a) Agreements. Each Owner holds legal title to the Improvements constituting a part of its related Project. In the Maconda Park transaction, the Owner is causing the General Contractor to construct the Improvements pursuant to the Construction (Istisna'a)Agreement between such entities. The Construction (Istisna'a) Agreement incorporates the General Contractor's conventional construction contract, the Construction Terms, including specifications and milestone payment provisions, and also modifies the Construction Terms to comply with applicable Shari'ah precepts. In the Truman Park transaction, an "orphan" special purpose entity was established to enter into the Construction (Istisna'a) Agreement with the Owner and to enter into the Construction Contract with the General Contractor. The Construction Contract is incorporated in, and modified in accordance with Shari'ah precepts by, the Construction (Istisna'a)Agreement. The use of this entity resulted in the General Contractor being able to use its customary Construction Contract without adaptation to the Islamic structure, isolated the General Contractor from the Islamic transaction, and resulted in substantial savings in transactional costs and implementation time. Each Construction (Istisna'a) Agreement contains the "lending and disbursement half' of a conventional loan agreement, including conditions precedent to funding. Each of the Owners is leasing and will lease its constructed Improvements, is subleasing and will sublease its related Site, and has grant rights to the remainder of the relevant Premises to the related Project Company in its capacity as lessee under each Lease (Ijara) (in their respective capacities thereunder, each Owner is referred to as the "Lessor" and each Project Company is referred to as the "Lessee"). The Lease (Ijara) is the primary financing document for the transaction, particularly as regards repayment of financing amounts through rent mechanisms, events of default, remedies, and covenants. Each Project Company will be permitted to purchase the Project that it is leasing on a date elected by such Project Company pursuant to the Call Option Agreement. The provisions of the Call Option Agreement include the voluntary prepayment concepts of a conventional loan agreement. Similarly, each Owner will be permitted to sell its Project to the related Project Company in certain circumstances, such as defaults under the Lease (Ijara), pursuant to the Put Option Agreement. The provisions of the Put Option Agreement are akin to the mandatory prepayment provisions of a conventional loan agreement. As a general rule, put option agreements are disfavored under the Shari'ah. As a result and despite the name of the agreements, the Put Option Agreement and the Call Option Agreement were structured to comply with the many Shari'ahprecepts applicable to agreements of sale and purchase. Each Owner, as the holder of title to its related Improvements and lessee and grantee of the related Premises, and each Project Company, as the Managing Contractor for the related Project, entered into a Managing Contractor Agreement. Pursuant thereto, the Managing Contractor supervises construction activities under the related Construction (Istisna'a) Agreement, inspects the related Project as it is being constructed, and upon completion of milestones accepts that Project on behalf of the related Owner. The Managing Contractor also maintains the related Project to the extent that its Owner does not do so under the Lease (Ijara). Applicable Islamic Shari'ahprecepts permit a managing contractor or agent to act in this capacity. Each Owner, each Project Company, and other entities also entered into the Tax Matters Agreement, which acknowledges the transaction as a financing for purposes of U.S. tax law. This acknowledgment allows each Project Company to take economic advantage of various expense and depreciation provisions of the U.S. tax law (such as allowing the payment of certain amounts to offshore investors without withholding tax) and other U.S. federal and state laws pertaining to the liability exposure of financiers (such as environmental liability laws). B. Structural and Documentary Shari'ahIssues 1. Site Lease Each Site has been made available to the related Owner, as the site lessee, pursuant to a Site Lease from the relevant Project Company, as the site lessor (in such capacity, "Site Lessor"), in consideration for the payment of site lease rent ("Site Rent"). The Site Lease is unusual, considered from the vantage of a customary project financing or real estate financing in the United States. The differences from a conventional ground lease relate to applicable Islamic Shari'ah precepts and to risk allocations that must be made to accommodate use of the istisna'a-ijara structure in the United States with parties that are accustomed to a specified pattern of risk allocations. As examples of the structural differences from customary ground leases, in the istisna'a-ijarastructure, the Site Lessor, as owner of the Site, retained responsibility for environmental liabilities, the state and condition of the Site, unforeseen circumstances pertaining to the relevant Site, compliance with legal requirements by the Lessee, and payment of taxes and other amounts, among other things. In addition, the Site Lessor has the obligation to prevent unlawful use of the Site, unlawful conditions on the relevant Site, and other uses of that Site that may give rise to damages or liabilities pertaining to use or occupation of that Site, including compliance with environmental laws. The Site Lessor also provided indemnities to the related Owner/Site Lessee and other indemnitees in respect of such matters. 2. Construction (Istisna'a)Contract; Construction Terms; Construction Contract; Total Construction Cost The Maconda Park Project is being and will be constructed by the Maconda General Contractor pursuant to the Construction (Istisna'a) Agreement with the relevant Owner. The Construction Terms were negotiated by the Maconda Project Company with the Maconda General Contractor. The Construction Arranger will cause the construction of the Truman Park Project (by the Truman General Contractor) pursuant to its Construction (Istisna'a) Agreement with the Owner, which incorporates the Construction Contract between the Construction Arranger and the Truman General Contractor. The Construction Contract for the Truman Park Project was negotiated by the Truman Project Company with the Truman General Contractor." The Maconda General Contractor (in Maconda Park) and the Construction Arranger (in Truman Park) agreed in the Construction (Istisna'a) Agreement to construct and deliver the relevant Project to its Owner, who has legal title to the related Improvements. The total cost for construction of each Project pursuant to the Construction (Istisna'a)Agreement is referred to as the "Total Construction Cost" of that Project. Payments under each Construction (Istisna'a) Agreement are made in the same manner, on the same schedule and subject to the same conditions that advances would be made in connection with a conventional construction financing arrangement. Those conditions precedent that would be conditions precedent to the initial advance and all subsequent advances in a conventional construction financing are conditions precedent to the making of payments under each Construction (Istisna'a)Agreement. Conditions precedent for subsequent advances are addressed through the construction payment request mechanism, which, in turn, incorporates a milestone completion payment mechanism. Thus, for example, each General Contractor, the Construction Arranger, and the Managing Contractor will pre91. The customary practice is that each construction contractor (i.e., each General Contractor in the istisna'a-ijaratransaction) dictates the form of construction contract that it uses. Many construction contractors use a widely recognized standard form (such as those of the American Institute of Architects, which was used, in modified form, by Bovis Lend Lease, Inc. as the General Contractor in the Truman Park transaction). Others use their own forms, which are precisely tailored to that individual construction contractor, such as in the Maconda Park transaction. 2001] pare payment requests and milestone completion certificates that will resemble advance requests in a conventional construction financing. The obligation of each Owner to make such payments will be conditioned upon compliance with performance of matters relevant to the payment request. In the event that a payment request cannot be given due failure of a Project Company to satisfy one or more of the relevant conditions precedent, the General Contractor (in Maconda Park and Truman Park) and the Construction Arranger (in Truman Park) will continue to be entitled to pursue their respective rights to payment, but only against the relevant Project Company. However, it will have to do so under the Managing Contractor Agreement and certain other documents. The amount of damages that a General Contractor and the Construction Arranger will be entitled to collect will be limited to amounts obtainable from the relevant Project Company and other amounts payable through performance bonds, warranties, completion bonds, insurance proceeds, and similar arrangements. Neither of the General Contractors nor the Construction Arranger is entitled to pursue remedies against an Owner for failure to perform a funding condition. 3. Lease (Ijara) The Lease (Ijara) is the primary financing document on the repayment side of the transaction. Each Project Company, as the Lessee, repays the financing amounts made available by its related Owner through the payment of periodic basic rent ("Basic Rent"). Commencing upon an agreed date, the Lessee will be required to begin paying Basic Rent in installments over the agreed rental period ("Rental Term").92 The Lease (Ijara) was executed at the same time as the other financing documents, but cannot become fully effective at such time due to a Shari'ahprinciple that prohibits the payment of rent for an asset until that asset has sufficient economic value and sufficiency for Shari'ah purposes-i.e., until the asset can be, and is, put to the intended use. Different Shari'ah Boards take different positions as to 92. The documentation for each of the Projects is for a construction financing. As such, the Rental Term is likely to be in the range of one to four years, with a permanent long-term financing take-out contemplated during, or at the end of, such period. The structure could be extended to cover a long-term financing of either Project. In other transactions, a long-term lease (ijara) has been used. when an asset has sufficient economic value and sufficiency. This determination is dependent upon the specific facts of the project being considered. For example, each of the Projects is comprised of numerous buildings with many units in each building. Construction commences with the first building and moves in sequential fashion through each of the buildings. As a result, the first building will be completed and occupied prior to completion of construction on the last building. Rental activities with respect to the buildings will thus commence substantially before the entire project is constructed.9" Under one of the strict interpretations of relevant Islamic principles, Shari'ah Boards may allow an ijara to become effective only on a building-by-building basis as construction nears completion. Such an interpretation might require the use of nine lease (ijara) agreements (assuming eight buildings and common property), and nine construction (istisna'a) agree93. Significant construction or expenditure may be completed or made at the time of entering into, or very shortly after execution of, the Lease (jara) because approximately 20-25% of the construction costs may already have been incurred and related activities completed. The 20-25% represents the equivalent of the equity investment in the project that must have been spent on approved expenditures before the Owner thereof will make payment advances under the Construction (Istisna'a)Agreement. As a result, the related Site will have been acquired, much of the site preparation work may be completed, and the related Premises may already contain sewers, roads, water, and other infrastructural improvements. Some Shari'ahBoards have indicated that this degree of expenditure upon a project is sufficient to cause the Basic Rent provisions to become effective because the value of the related Premises will be substantially, and sufficiently, increased by this time. Further, and as noted in the Lease (Ijara), construction of certain blocks and segments of the Improvements for each Project will be completed before completion of other blocks or segments. Certain blocks and segments will have considerable lease value, and units will actually be rentable, prior to completion of other blocks and segments. Thus, significant rental income will already be generated prior to completion of the entire Project in either financing transaction. This, in turn, allows full effectuation of all provisions of the Lease (jara) at a relatively early time. Although the determination of sufficient economic value and sufficiency of status to permit the intended use are significant and vexing Shari'ahissues, they are not difficult issues in a practical sense in projects such as the Maconda Park Project and the Truman Park Project. This is because the transaction is a construction financing in which no Basic Rent is payable during the construction period, i.e., for approximately two or two and one-half years from commencement of the financing. Construction is complete for the entire Project by the end of that period. Although no Basic Rent is payable during that period, most construction financings include a feature that capitalizes interest (in a conventional financing) or profit (in an Islamic financing) during the construction period. The capitalization method used in each Project, and in similar projects, is particularly complex and has received the approval of various Shari'ah Boards. That capitalization method is not discussed in this Essay. ments, to provide financiers with required certainties of repayment and perfected security interests over all funds advanced in respect of construction.9 4 This, in turn, might require nine filings under local law of memoranda of leases, mortgages, and other security agreements. Filing and recordation fees and title insurance costs alone might make such an approach prohibitively expensive. Such a transaction would be complicated and difficult to implement. Other Shari'ahBoards acknowledge the practical difficulties of multiple filings of mortgages and have taken a pragmatic view of the financing process in Europe, the Middle East, Southeast Asia, and the United States. Those Shari'ahBoards have allowed a single lease (ijara) to become effective as to all provisions other than the Basic Rent provisions at the inception of the transaction. The Boards have allowed the Basic Rent provisions to become effective at the time that marketing and rental activities commence with respect to any part of the project or some other similar date that relates to commencement of binding activities in respect of rent generation. The date of effectiveness of the Basic Rent provisions ("Full Effectuation Date") for the projects is then determined in accordance with relevant Shari'ah principles as specified by the Shari'ah Board. The GIH Shari'ah Board that considered the structure of, 94. The author has worked on transactions in which multiple leases were used, one for each phase of the project. This approach permits different leases, and financing arrangements, for different aspects of construction, and allows each lease to be tailored to a different intended use. Given that the Shari'ahprecept focuses on the intended use, effectuation of the leases under Shari'ah precepts can be obtained at an earlier point in the overall financing transaction, and the various leases can be closely tailored to construction milestone completion and funding. The author is presently working on an istisna'a-ijaratransaction that poignantly raises the effect of factual variation on the Shari'ahdetermination of full effectuation of the lease. The transaction involves the acquisition of a large farm. An Islamically acceptable joint venture has been formed to subdivide the farmland, obtain certain permits for construction and related activities, and construct infrastructure (roads, sewers, lighting, and the like). Each parcel will be sold off to another residential or commercial developer, or a commercial enterprise, which will construct the housing or commercial facilities for that specific parcel. The entire purpose of the joint venture is so limited. Clearly, the intended construction activities are limited, and substantial economic value and sufficiency, especially when considered from an "intention" perspective, is obtained at a very early stage in the business cycle. Another factor affecting substantial economic value and sufficiency issues, particularly in the United States, is the fact that obtaining a permit or zoning approval, without more, will frequently substantially enhance the value and sufficiency of the land (without regard to any physical construction). and documentation for, the Maconda Park Project and the Truman Park Project was intimately involved in defining and implementing the mechanism for determining and implementing the Full Effectuation Date. The Board took a rigorous position with respect to the determination of sufficient economic value and sufficiency. However, based upon the factual configuration of each Project and its development, the Board also allowed each of the transactions to be structured using a single Lease (Ijara), a single Construction (Istisna'a)Agreement, and a single set of Security Documents. In each Project, if the Full Effectuation Date has not occurred by a stated date, then the Owner may cause the relevant Project Company to purchase that Project in accordance with the Put Option Agreement. Pursuant to the Lease (Ijara), each Owner, as the Lessor, leases its Improvements, and subleases the related Site, to the relevant Project Company, as the Lessee. The Improvements and the Site will be leased and subleased, respectively, as-is, where-is, as the same is constructed or otherwise provided to the Owner.95 Property becomes subject to the Lease (Ijara) on a continuous on-going basis as construction is completed and each Project is inspected and accepted by the relevant Managing Contractor. Except as prohibited by applicable Shari'ah precepts, the Lease (Ijara) is a triple net lease, with all costs associated with the use and operation of the relevant Project being payable by the related Lessee,96 and with broad indemnity provisions similar to those found in triple-net financing leases, although such indemnity provisions must themselves be modified to comply with Shari'ahprecepts.97 Each Lessee has and will have the right to operate and use its Project and the obligation to maintain that Project (except, for example, that structural maintenance will remain the responsibility of the Owner as the Lessor). The Basic Rent payable under the Lease (Ijara) has been structured to include a profit to the Lessor. The profit amount is determined on the basis of a weighted group of LIBOR refer95. As noted in Section VII(B) (6), a Managing Contractor, among other things, supervises construction activities, inspects construction of each Project on an on-going basis, accepts that Project, and provides for maintenance (including major and structural maintenance) pursuant to the Managing Contractor Agreement. 96. Certain modifications to the triple net lease concept that are necessary for compliance with Shariahprecepts are discussed below. 97. See M.A. Elgari, supra note 86, at 151-54. ence rates for different time periods and advance allocations ("Lessor Profit")."8 The Basic Rent is due and payable on the leased assets (i.e., the relevant Improvements) commencing upon the Full Effectuation Date or a later scheduled repayment commencement date thereafter. The Basic Rent payable at any given time is a pro rata portion of the Total Construction Cost paid to the Maconda General Contractor or the Construction Arranger, as appropriate, at such time, plus the Lessor Profit on such amount. Thus, the Basic Rent will be redetermined on a time schedule (for example, a monthly basis) in lock step with the payments by the Owner to the General Contractor (in Maconda Park) and the Construction Arranger (in Truman Park). This arrangement keeps the Basic Rent Payments in harmony with the on-going partial payments in respect of the Total Construction Cost and the increase in the portion of each Project that has been completed, inspected, and accepted. The mechanism for achieving this recalculation of Basic Rent, which involves change orders accepting completed work, has been structured so as to comply with relevant Islamic Shari'ahprecepts and does not involve an uncertain rent amount under such precepts.99 Change orders for each transaction will become effective only when agreed upon by the General Contractor, the Construction Arranger (in Truman Park), the Managing Contractor, the Owner, and the Lessee for that transaction. Part of such approval process will include an addition of such items to the leased asset base under the Lease (Ijara) in the relevant period (i.e., for future periods). The standard supplemental rent provision is used to provide for payment of costs of use and operation of each Project above and beyond the Basic Rent ("Supplemental Rent"). Supplemental Rent includes taxes, impositions, third-party payments, and indemnity payments. Pursuant to the sublease arrangement for each Site under the relevant Lease (Ijara), the Lessee is responsible to pay the Site Rent directly to the relevant Site Lessor. Basic Rent, Supplemental Rent, and Site Rent for each Project are collectively referred to as "Rent" for that Project. In the event that the Lease (Ijara) is terminated during the Rental Term of a Project, and in a case where no long-term financing takes out the construction financing pursuant to the Lease (Ijara) for that Project, all Rent due to such date of termination or otherwise permissible under relevant Shari'ah precepts will be immediately due and payable. In addition, the relevant Owner will be entitled under the Put Option Agreement to cause the relevant Project Company to purchase its Project at such time. 0 0 Various Shari'ahprecepts pertaining to leases resulted in the Lease (Ijara) being structured differently from customary United States leases. For example, under the Shari'ah, a lessor must retain responsibility for structural maintenance of leased property. The obligation for structural maintenance cannot be passed to the lessee under an ijara. Similarly, some Shari'ah Boards require the lessor to retain the obligation to provide 100. The form of lease (ijara) that served as the structural basis for the Lease (Ijara) has been used in numerous Islamic financings and the adjustment mechanism has been approved by several Shari'ah Boards. Analytically, the Lease (Ijara) can be thought of as a lease for a specified period (for example, one month). The Basic Rent payable under the Lease (Ijara) is determined by dividing the absolute amount of the Total Construction Cost paid to the first day of such month by the overall payment period, and then adding the applicable Lessor's Profit. Analytically, the Lease (Ijara) will then terminate on the last day of such month unless the parties agree to extend for another period (say, another month). If the Lease (Ijara) is so extended by virtue of a new and otherwise identical lease, the Basic Rent is recalculated to increase by the amount of Total Construction Cost advanced to the first day of such second month, and, again the weighted reference rate analysis is applied to determine the applicable Lessor's Profit for the new lease. This process is repeated with respect to each subsequent rental period. Payment of some or all of the Rent is deferred during the construction period so long as there is a continuous and contiguous series of leases. If the Lease (jara) is not renewed at the end of any month or other rental period, the Lease (jara) terminates and the total amount of Rent accrued to such date becomes immediately due and payable and can no longer be deferred. Pursuant to the Put Option Letter, the relevant Owner is entitled to cause the relevant Project Company to immediately purchase its Project in its then-existing state and condition for a specified amount. In practice, the Lease (Ijara) is written such that it automatically renews each period (for example, each month) unless there is a cancellation. These, and other structural elements, are designed to minimize the administrative and financial burden on the parties (especially the Lessee) and streamline the renewal and recalculation process and to avoid various complications of various United States laws, including bankruptcy laws, mortgage recordation laws, and recordation and taxation requirements in different jurisdictions. property casualty insurance. The Lease (Ijara) for each of the Projects was structured in compliance with these, and other similar, Shari'ah precepts. The events of default in the Lease (Ijara) are those that are customary for a lease of such type, and include most of the events of default usually found in a conventional construction financing. Certain other events constitute events that permit the purchase and sale of each Project under the related Put Option Agreement. As with a conventional construction financing, an event of default will allow the Lessor a broad choice of remedies, including the ability to terminate the Lease (Ijara) and related arrangements, to sell the related Project, and to collect the purchase price in respect of such sale. The remedies provisions have been structured to reflect those available to a lender in a conventional loan financing. The overall structure also allows each Owner to exercise its right under certain of the financing documents to suspend or cease making payments to the General Contractor (in Maconda Park) and the Construction Arranger (in Truman Park) upon the occurrence of events of default under those documents, assign rights under the Lease (Ijara) (and/or related documents) to the related General Contractor in certain circumstances, and be relieved of further liability to the General Contractor, the Construction Arranger, and the Lessee. 4. Put Option Agreement and Call Option Agreement In order to allow each Project Company to prepay the financing and obtain ownership of its Project, each Owner and its related Project Company entered into a Call Option Agreement. The applicable provisions of each Call Option Agreement basically reflect the optional prepayment provisions of a conventional loan agreement, with certain limitations to preclude adverse bankruptcy and other undesirable results. In addition, to allow the Owner to exit the transaction in certain cases (such as defaults by the Lessee and certain instances of illegality), each Owner and its related Project Company entered into a Put Option Agreement. The Put Option Agreement allows the Owner to sell its Project to the related Project Company. Cases in which such sale will be permitted include defaults under the Lease (Ijara) or the other financing documents, including the failure of the Project Company to make payments or to accept any property that is required to be subject to the Lease (Ijara) or the other Project Documents, termination of the Lease (Ijara), the Site Lease, the Managing Contractor Agreement, and certain other agreements prior to the last day of the stated Rental Term, certain agreed termination events, illegality, and certain termination events relating to excess payments in respect of the Project. There are significant Shari'ah issues with respect to any put option as put options are generally considered to be executory agreements that are cancelable by either party to the options. With the assistance of the GIH Shari'ah Board, the Put Option Agreement (and the Call Option Agreement) for the Maconda Park and the Truman Park transactions were structured to comply with Shari'ahprecepts applicable to valid sale and purchase agreements. Numerous Shari'ah precepts are applicable to irreparable damage or destruction of assets and to the application of insurance, condemnation, or similar payments that are received in respect of destroyed assets. These precepts require termination provisions to be structured quite differently than conventional construction and project financings. However, within the ambit permitted by applicable Shari'ah precepts, the transaction must be structured to insure full repayment of all financing amounts and put the financiers in the same position they would occupy in a conventional financing. In the Maconda Park and Truman Park transactions, upon destruction or total condemnation of the relevant Project, the Lease (Ijara) will terminate immediately as required by Shari'ahprecepts, the Rent then due and payable (but not future rents) will be paid to the Lessor, the related Project Company will be required to purchase its Project and pay the purchase price therefore, and the proceeds of such insurance, condemnation, and other payments will be applied to the payment of the purchase price for that Project (and related transfer costs) and any excess thereafter remaining will be paid over to the relevant Project Company. Difficult issues arise in connection with the determination of the relevant purchase price as Shari'ahprinciples generally restrict payments to the fair market value of the Projects after the event of destruction or condemnation. Upon any purchase by a Project Company of its Project, the Construction (Istisna'a) Agreement (and related rights and agreements) will be assigned to that Project Company and that Project Company will assume all of the obligations of the related Owner thereunder. Similarly, all insurance policies and warranties will be assigned and assumed such that the Project Company is afforded complete ownership rights. 5. Security Documents The obligations of the Maconda Project Company and the General Contractor, in the Maconda Park transaction, and the Truman Project Company and the Construction Arranger, in the Truman Park transaction, are secured by the related Security Documents, which include a mortgage (rahn) on, and other security interests in, the relevant Site, the cash flows of such entities, including in respect of operation of the relevant Project, and any other assets of such entities. Those Security Documents also include various guarantees of the Developer or others that would be required by a bank in a conventional construction financing (such as general guarantees, completion guarantees, and environmental guarantees). These documents are provided to, or assigned for the benefit of, the relevant Owner and KeyBank in the Maconda Park and Truman Park transactions. 6. Managing Contractor Agreement As previously noted, Islamic Shari'ah precepts require an Owner to retain obligations in respect of structural maintenance of its Improvements. Other Shari'ahprecepts pertain to inspection of property being constructed, responsibility for latent defects, acceptance of leased (or purchased) assets, and operation and maintenance of leased assets. In order to achieve, as closely as possible, the risk allocations found in a conventional financing, it was necessary to structure the transaction in reliance upon a body of Shari'ahprinciples that allows an owner of property to contract with other entities to perform activities on behalf of such owner. Generally, these principles pertain to concepts of agency and contracting for services under the Shari'ah. Those principles also incorporate certain of the doctrines of Western jurisprudence applicable to the retention of independent contractors to perform activities on behalf of a property owner. It is permissible under applicable Shari'ah precepts for an Owner to retain a Managing Contractor to perform certain of 1258 FORDHAMINTERNATIONAL LAWJOURNAL the activities retained by that Owner under the Lease (Ijara) and accept responsibility for them in connection with the performance of its duties. The Maconda Park and Truman Park transactions were each structured to allow the Owner to hire and appoint the related Project Company as the Managing Contractor for the primary purposes of (a) supervising and managing the design, engineering, and construction of the relevant Project by the General Contractor (and the Construction Arranger, in Truman Park), (b) inspecting that Project, (c) accepting delivery of that Project, (d) enforcing the rights of the Owner as against the related General Contractor and the Construction Arranger, and (e) operating and maintaining that Project, all pursuant to the Managing Contractor Agreement. This Managing Contractor Agreement has been structured such that the Managing Contractor bears the risks (i) of construction of the relevant Improvements in compliance with specifications and other terms and conditions of the Construction (Istisna'a) Agreement (including the Construction Terms or Construction Contract, as applicable) to the extent permissible applying Shari'ah precepts pertaining to the options of inspection and defect, and to precepts applicable to supervision and acceptance, and (ii) for maintaining the structure of the relevant Project and certain related matters throughout the Rental Term. The arrangement facilitates immediate and continuous inspection and acceptance by each Project Company of the work and assets comprising its Project and insures on-going maintenance of that Project, including in respect of its structural integrity. In accordance with Shari'ah precepts, each Owner, as the titleholder of its Improvements, retains some of the exposure on these items. The liability exposure of each Owner for such defects and conditions will be limited by express substantive provisions and by provisions that limit the payment obligation of that Owner to amounts actually collected under applicable warranties, performance bonds, completion bonds, guarantees, insurance policies, and similar documents and instruments. Similarly, claims of the Project Companies under each respective Lease (Ijara), and other documents, against each of the respective Owners, including as the Lessor and the owner of the related Project, are limited to amounts collectible from the relevant Managing Contractor, the relevant General Contractor, the Construction Arranger (in Truman Park), and relevant insur SHARI'AH-COMPLANT PROJECTFINANCE ance policies, performance bonds, completion bonds, warranties, guarantees, and similar documents and instruments. The Managing Contractor also has responsibility for enforcing the insurance agreements, condemnation award proceedings, performance bonds, completion bonds, warranties, and similar documents and instruments in respect of the related Project, although these obligations and related rights are restricted in various situations (such as default scenarios) and are subject to defined parameters. This arrangement removes the Owner from involvement in the enforcement process to the greatest possible extent. The Managing Contractor Agreement extends to enforcement, on behalf of the relevant Owner, of any claim under the Construction (Istisna'a) Agreement that such Owner may have against the Maconda General Contractor, in the Maconda Park transaction, or the Truman General Contractor and the Construction Arranger, in the Truman Park transaction. As a corollary, in any circumstance where the claim of a Project Company relates to any matter covered by insurance, bonds, warranties, or similar arrangements, that Project Company's damage recovery will be limited to amounts recovered thereunder or otherwise from the relevant General Contractor (and the Construction Arranger, in Truman Park). 7. Tax Matters Agreement; Other Documents The Tax Matters Agreement has been designed to afford legal recognition to the fact that the istisna'a-ijarastructure is a financing arrangement under applicable United States law. Various characterizations are also made under relevant state law (for example, New York law for the financing, and the relevant state law for mortgage and other real property purposes). These characterizations may be somewhat different than those appearing in the Construction (Istisna'a) Agreement or the Lease (Ijara). For example, the Tax Matters Agreement clarifies that the entire transaction is, for purposes of United States tax law and applicable state law, a loan financing, and that all amounts (other than costs and expenses) payable to an Owner in excess of the Total Construction Cost are to treated as interest for United States tax and bank regulatory purposes. This is important in order to allocate tax benefits (such as depreciation, interest deductions, and various project expenses) to each Project Company (and thus to the General Partner or Managing Member and the Islamic Investors). It additionally allows payments to Islamic Investors that are not U.S. persons to be made without tax withholding in accordance with the relevant portfolio interest provisions of U.S. tax laws. Environmental matters are also addressed in this agreement, with the relevant Project Company having all risks in respect thereof as regards any exposure of the relevant Owner. Various consents and other documents have been structured to specifically address structural matters, including Shari'ah principles. For example, payment obligations of the relevant Owner under the Construction (Istisna'a)Agreement cannot be conditioned on the status, actions, or omissions of its Lessee under the Lease (Ijara). Thus, a default by, or bankruptcy of, a Lessee will not relieve an Owner of its obligation to make payment to the Maconda General Contractor or the Construction Arranger under the Construction (Istisna'a) Agreement, except in certain circumstances. Documents have been structured to address this difference from a conventional construction financing in a manner that puts the various parties, as nearly as possible, in the same position they would occupy in such a conventional financing. This is effected in part by documents that provide for agreed methods of enforcement of claims and agreed limitations on damage amounts and sources of damage awards or compensation in delineated circumstances. For example, in certain situations awards and damages are limited to amounts collected in respect of insurance policies, warranties, performance bonds, completion bonds, guarantees, other similar documents and instruments, and other security and amounts available from the estate of the bankrupt entity. In other situations, mandatory and voluntary assignments of rights and assumptions of liabilities, temporary and permanent, are operative to reallocate risk and responsibility to effect the allocations that would exist in a conventional financing. CONCLUSION The application of Islamic structures to project financings is in the early stages, just as the development of a true Islamic economy is in its infancy. The transactions described in this Essay, and others, are efforts to lay the critical base and explore the use of a variety of Islamic techniques within a framework that must acknowledge the critical security, credit, economic, cultural, religious, and legal concerns of both Western and Islamic participants. The techniques and structures thus far implemented will be further refined to achieve simplicity, greater economics of implementation, and a smooth interface between a Western interest-based system and an Islamic interest-averse system. New structures are being developed as more and more Western financial institutions move into Islamic banking, which is an accelerating trend. The Saudi Chevron structure is now the basis for a wide variety of project financings and other secured lending transactions in Saudi Arabia and elsewhere in Islamic jurisdictions. Lending transactions of all types are incorporating the possessory concepts relating to a rahn of a marhoun, even where additional collateral is available to secure the loan. Various business groups, as well as banks, are considering ways in which to use the rahn-adl structure to promote residential housing finance in Saudi Arabia where the absence of a dependable collateral security system (and, particularly, the unavailability of recordation of security interests) has resulted in an unavailability of financing for home purchases by anyone that is not wealthy. The rahn-adl structure has been implemented in the collateralization of large equipment leases and fleet leases. Proposals are being discussed for the establishment of a private security interest recordation system in Saudi Arabia to achieve the broadest possible achievement of notice of a rahn. As lender comfort increases, there should be decreased reliance on personal and corporate guarantees and greater use of secured financing techniques. This would allow individuals and companies to deploy assets over a wider investment base and banks to make loans of longer tenor, increasing capital investment throughout the economy. The adl structure is also being implemented in diverse transactions. These range from employee stock participation programs to securitizations to debt instrument issuances to project financings. The increased certainty and stability of adl arrangements will insure that its use becomes commonplace in capital market transactions as well. The author is unaware of any use of the sharikat mahassamurabaha structure in project financings other than in the financing of the Utility Power Project. The structure does hold promise for use in similar financings although the Shari'ahissues involved in this structure are somewhat more problematic than those in other structures. The Maconda Park/Truman Park istisna'a-ijarastructure is being widely used, particularly in residential, commercial, and industrial real estate projects throughout the world. The availability of a practical Islamic structure of this type has also given rise to the development of a range of related Islamic financial products. For example, the author is currently working on a number of real estate funds that will invest in properties and projects in Europe, Southeast Asia, Australia, New Zealand, Canada, and the United States. The majority of those funds will investment in residential real estate projects in the United States, all financed using the istisna'a-ijarastructure. Those projects will be diversified as to geography, tenant base, and other characteristics. The funds will be sold to Islamic investors, primarily in the Middle East and Europe. A similar fund will use Islamic acquisition (primarily ijara) and istisna'a-ijaratechniques to invest, initially, in commercial (primarily) and residential and industrial properties in Australia, New Zealand, France, Japan, Portugal, Spain, Sweden, the United Kingdom, Canada, and the United States. This fund has obvious geographical risk diversification. It is also being structured to provide industrial and credit diversification through its focus on leases to select tenants in different Shai'ah-compliant industries. A Shari'ahscreen, similar to those used for Shari'ah-compliant equity funds, will be applied to tenants under the various iara agreements implementing the financings." 1 That fund will be sold to Islamic investors in the Middle East and Europe. The istisna'a-ijarastructure is also being applied to equipment and vessel financings, including Shari'ah-compliant ijara charter parties for liquified natural gas tankers. This will enable Islamic construction financing for those vessels and the development of related financial instruments to allow Islamic investment in those financings. We are on the threshold of a bright future for Shari'ah-compliant project financing. The structures discussed in this Essay, and many others, are being developed to facilitate Shari'ah-compliant financings with joint participation, as to both equity and 101. See, e.g., DowJones Islamic Market Indexes, at http://indexes.dowjones.com/ djimi/imiinvest.html; IBFNET, at http://islamic-finance.net/islamic-equity/equityl.html; Abdul Hamid, supra note 99, at 91-101. 98. See id. at 151-54. 99. See , e.g., DowJones Islamic Market Indexes , at http://indexes.dowjones.com/ djimi/imiinvest.html; Islamic Business & Finance Network ("IBFNET" ), at http://islamic-finance.net/islamic-equity/equityl.html; Abdul Hamid, Investing in Equities: Some Issuefrom the Islamic Perspective, in THIRD HARVARD ISLAMIC FORUM, supranote 1 , at 91- 101.