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Muslim investors are not allowed to earn interest on their money or pay interest. So working on deals involving Muslims isn’t the easiest practice area. Nevertheless, Bracewell & Patterson finance and real estate partner Alfred G. “Al” Kyle is developing a niche practice of representing banks in deals financed in part with money from Muslim investors. Kyle’s first Muslim-money deal closed in 2000, when Kyle represented client KeyBank NA in a real estate transaction in Texas. “My only job was to make sure the deal complied with the unique Texas issues,” Kyle recalls about the apartment deal in Austin, in which Middle Eastern investors provided some of the equity. But since then, Kyle has worked on six similar deals involving Muslim money, although he says the process became more difficult following Sept. 11, 2001, and the resulting need to ensure that the deals comply with the USA Patriot Act and that they don’t benefit terrorists. “We’ve got to constantly monitor new borrowers [and investors] to make sure they aren’t on the list of terrorist organizations,” Kyle says. Kyle represents domestic lenders in domestic transactions in which there is Muslim money. He’s one of a few lawyers nationwide who work on the transactions, says Michael McMillen, a partner in King & Spalding in New York who has been representing Islamic investors in deals in the United States for several years and who Kyle considers the guru of the field. “It wasn’t until really in the late ’80s, mid-’90s that people tried focusing on structures and financial instruments that can be used to effect Islamic financial instruments,” says McMillen, who now spends most of his time on Islamic finance. “There are relatively few people who do this in the U.S. or Europe, really who do it anywhere in the world.” “It’s fascinating. It’s very creative,” says McMillen, who says Kyle is one of the few domestic lawyers he’s met who has taken the time to learn how to structure a deal to allow for participation from Muslim investors. The deals are complicated because the Muslim investors are not allowed to earn interest on their money or pay interest because Islam’s religious law, known as the Shariah, considers it usurious. Kyle and McMillen say the structure of the contracts that allow for Islamic investment has to be approved by a board of Shariah scholars through legal opinions known as fatwas. ISLAMIC FINANCE Kyle, a former Marine who joined Bracewell in 1998, says KeyBank hired him in 2000 simply to handle Texas issues on the deal with Muslim money. But after he took the time to learn the intricacies of the structure of the Shariah-compliant transaction, KeyBank hired him to represent it in several other deals involving Muslim investors in California and Florida. He has worked on six more deals since that first Texas project, most for KeyBank, including three in the 12-month period that ended in July 2003. It’s a relatively small portion of his practice — less than 10 percent of his workload during the four years — but Kyle expects the deal volume to pick up over time. So does Michael Boulden, a business and international partner in Vinson & Elkins in Dallas who also has worked on Islamic transactions. Boulden says in 2003 he represented a lender he declines to identify in two Texas real estate deals involving Muslim investors. “I don’t know whether it’s a niche practice or the coming thing, but I think it’s something … we will see more of,” Boulden says. “Essentially it’s a transaction with compliance with secular law and with the Koran, or religious law.” “The skill set to put together a Shariah-compliant transaction is not much different from a structured finance transaction, an off-balance-sheet transaction. These things are not as complicated as some of the transactions involved in Enron [Corp.] or Dynegy [Inc.] or one of those,” Boulden says. Kyle says the market for Shariah-compliant deals is an “interesting study in the economics of supply and demand” because virtually no lawyers wanted to work on the deals until asset managers and lenders began to make money off them. Put simply, a Shariah-compliant deal not only provides the lender with an acceptable level of profit, but also insulates the Islamic investor from the interest. “The insulated entity leases the project and then the lease payments would go to a special-purpose entity to use them to make mortgage payments, but the Islamic investor is insulated [and] does not participate in an interest-bearing transaction,” Boulden says. McMillen says the biggest constraint in making the deals viable comes from the lender’s side since a U.S. bank isn’t about to change the way it does business to accommodate Islamic investment. From the bank’s perspective, there are lots of regulatory issues, says Robert Bowes, a senior vice president and associate general counsel at KeyBank who hired Kyle. “It was a [financing] product we put a lot of time and effort into because there are lots of regulatory issues. It has to be set up as a lease, and I had to go back and have long discussions with our regulators because we’re a national bank,” Bowes says. Kyle says the real estate deals are a form of sale-leaseback. The important element is the deal must be structured as a lease instead of a loan, he says. The deal structure still provides the bank lending the money the return it desires, he notes. To keep the interest away from the Muslims, the amount of rent will equal the amount of debt service, McMillen says, adding that most of the deals are set up so Christians can invest side-by-side with Muslims. McMillen says the modern era of Islamic finance began in the 1970s when banks in Egypt, the United Arab Emirates and other countries began to try to get a greater return for their depositors, but it wasn’t until the late 1980s and early 1990s that finance people began to develop new deal structures, for real estate deals for instance, that would accommodate investment from Muslims. McMillen says no one knows how much Islamic money from the Middle East is waiting in the wings to be invested in the United States, but he says he’s heard estimates as high as $200 billion. He says the Sept. 11 attacks on America had little effect on Shariah-compliant deals in the United States. He says any slowdown in the volume of deals after Sept. 11 was related more to what happened to the U.S. stock market than public opinion or lender skittishness. “What did happen is people wanted it to be quieter, [with] less publicity associated with the investment,” he says. In McMillen’s view, any reluctance on the part of lenders is not associated with taking money from Middle Easterners. Such reluctance stems from the difficulties of getting clearance from the Office of Foreign Assets Control, the U.S. Department of the Treasury agency that enforces economic sanctions against terrorists. McMillen, who typically represents Middle Eastern investors in the Shariah-compliant deals in the United States, says the institutions making the investments are financial institutions, pension funds or well-known Islamic families, so screening currently is not a problem. But he says issues could develop as more money comes into the market. McMillen, who joined King & Spalding five years ago, says he had no knowledge of Islam and the Shariah until he went to live in Saudi Arabia in 1996; at that time he was a partner in White & Case doing project finance work. Over about 18 months there, he had a series of meetings with a Shariah scholar, where he learned the fundamentals of the Islamic business rules, which originated more than a thousand years ago and are built around camels, fruit trees and items of simple trade. He says, “It’s not a primitive body of law. It’s extensive. It just came from a different set of principles.” That knowledge of the Shariah helped him work through the problems, and he began to work on developing financing structures. “There are … the basic Islamic contracts that were settled 1,200 years ago and have persisted and what’s happening right now is instead of using … contracts just as they were approved historically … you are making entirely new combinations,” he says. “They become building blocks.”

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