Best Banks for Commercial Real Estate Loans

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Property financing in Dubai

In this paper we examine the challenge banks face in funding the commercial real estate industry in Dubai and the funding structure in the real estate funding area. We have not taken into account for the purposes of this paper changes in the Dubai International Financial Centre, where another jurisdiction is applicable.

UAE, especially Dubai, is enjoying an unparalleled real estate booming. Great designers like Nakheel, Emaar and Dubai Properties are transforming the face of Dubai with evolutions like The Palm, Jumeirah, Downtown Dubai and Business Bay. The recent legislative changes have been advantageous to the industry and now allow foreign natural and juridical persons to own real estate in certain specified areas.

While there have been many changes in the legislation on real estate ownership, other elements of the regulatory environment have not developed at the same rate and further regulations would be advantageous in many areas. Recent real estate development in Dubai has been the focus of many article and debate.

Art. 4 of the Law (7) of 2006 on the Registering of Real Estate in the Emirate of Dubai limited the right to own real estate in the Emirate of Dubai to UAE and GCC citizens, 100 % controlled enterprises and common stock corporations. On the other hand, however, Art. 4 also gave foreigners the right to acquire either unrestricted title or beneficial or lease right to real estate for a maximum of 99 years in certain specified areas authorised by the ruler of Dubai.

The 2006 Ordinance (3) then identifies areas in Dubai that have been declared, including various Dubai Properties, Emaar and Nakheel development. Landowners in Dubai are usually able to grant a mortgages as collateral over their country. Privileged debt includes: court fees for the maintenance and sale of ownership, state tax, employees' wages, lessor's rent and sums paid to suppliers.

Commercial real estate financing in Dubai necessarily reflects the regulatory framework governing the real estate industry. Despite changes in legislation, apart from large business financing for the big developer, there is little interest in credit from global banks in this area. That is the case with real estate financing throughout the GCC.

Apart from all the commercial risk perceptions associated with funding property in Dubai, banks are discouraged by their incapacity to take out mortgage loans without naming a domestic broker, and by uncertainty over the adoption and enforcement of alternate collateral arrangements. Furthermore, there may be little or no alternate assurance, especially in the context of greenhouse gas emissions.

There is a local banker' s choice between granting loans at enterprise level (and not to a SPV through which a builder can develop a project) or otherwise to the SPV, with a guaranty from the mother-enterprise. Thus, the real amount of money is the amount borrowed from the mother corporation and the reimbursement of the amount is not entirely dependant on the outcome of the investment.

However, the loan from the mother institution is not always satisfactory to the developer as it must be disclosed in their annual accounts and these loans or warranties may affect the lending limits in their other banks. In some cases a trade-off is achieved where a mother organisation gives a warranty or other assistance until the appropriate process is complete.

Whilst mortgage loans are the banks' favoured option, the costs of registering cause many borrower to demand that banks look for alternate ways of convenience or collateral. Some real estate development companies in Dubai have certainly concluded a loan, whereby the main guarantee for their creditors is merely the depositing of originals with the safety agents or a non-binding patronage declaration from the respective mother comany.

Further securities that can be found on the commercial real estate markets in Dubai are: transfer of rental contract assets, transfer of sales revenue, transfer of banking account assets, transfer of building contract assets. Practice and law are difficult to perfect and implement in any way, and banks will usually try to reduce the risk associated with the enforcement of their collateral by appropriate agreements and other safeguards in the credit agreements.

Those rules are no different from those in other market (s) and may contain the following: to require the Mortgagor to maintain his banking account with the Facility or the Security Agent together with a set-off right; a cash sweep in which the Mortgagor's extra liquidity in excess of an amount specified in the Agreement is deducted from the advance payment of the Loan; authorisation powers over the conditions of master agreements and the identities of opposing parties, such as the master agreement relating to hospitality developments; step-in powers over master agreements; insurance conditions; a right to call in a consultant to supervise building activity on the Banks' account; extensive powers to call in a consultant to supervise building activity; and a right to take over the entire amount of the Credit Agreement.

In the real estate financial services industry in Dubai, Islam financial institutions are widespread. Ijara is the most frequent type of financing arrangement used in connection with real estate in Dubai. Ijara is used for both retailer and company real estate financings and is a combination of an operational leasing agreement and a financial leasing agreement.

Within this framework, the investor usually keeps possession of the real estate throughout Ijara and possession of the real estate can be granted to the final tenant of Ijara. There are certain specific questions related to the use of an Ijara funding framework to make sure that the framework is Shari'a-conform.

Shari'a conforming entities were used for real estate succuk and banking finance in Dubai, but the Ijara entities were recently used in the Nakheel Development Limited emblem, $3.52 billion Sukukuk, which was quoted on the Dubai International Financial Exchange in December 2006. The Nakheel Development Limited used the revenue from the Sukukuk emission to acquire from a Nakheel Group company a long-term lease interest in part of the country on the Dubai Waterfront.

Under an Ijara, this property was then rented to another unit of the Nakheel Group, using the rents for voucher payment to the Sukukuk owners. Nakheel PJSC, the Nakheel Group's principal investment subsidiary, was to be used to finance Nakheel's project, which included well-known icon designs such as The Palm Jumeirah.

Under the sukukuk system, it is important to remember that the owners of the sukukuk have a right of title to the basic sukukuk assets (the rented land). Following the recent changes in real estate laws in Dubai and the fact that the Nakheel country is located in identified areas, there was no problem with Sukukuk owners from outside the GCC having an interest in the country.

Nakheel Development Limited, the emitter, itself was a free-zone company held by a not-for-profit corporation. In the Nakheel sukukuk, the Ijara texture used comprised the following main documents: Nakheel Development Limited has entered into a 50 year contract for the acquisition by Nakheel Development Limited of long-term leases on certain plots, properties and other properties on the Dubai Waterfront.

Nakheel Development Limited will be leased to a Nakheel Group company for six successive six-months. According to the Shari'a Act, a leasing company has certain liabilities which it cannot transfer to the owner under the Ijara. This includes the insurance of the leased item, the payment of real estate tax (other than that levied against a leaseholder or hirer by law) and any significant repairs and upgrades to the leased item.

Accordingly, Nakheel Development Limited has transferred the risks of fulfilling these commitments to a distinct Nakheel unit. Commitment to buy is the most important documentary from a loan point of view as it allows to pay the Sukukuk owners in case of premature ending or during the period of Ijara. As part of the commitment, the other party undertook to repurchase the shares of Nakheel Development Limited in the leasing asset at a specified amount on a specified date following the issuance of a notification either in the case of late payment or immediately prior to the planned repayment date of the Sukukukuk.

As before, most real estate development in Dubai that was based on third-party funds was taken up by banks under traditional credit lines. Frequently, these operations are not publicly traded and banks provide loans to a developer with whom they have an established bilaterally based business relation, using the bank's internal document.

A number of transactions - usually signed syndications - are, however, published in the domestic media, among them development finance for the Dubai Festival City, the Wafi Mall (including the new Raffles Hotel in Dubai) and business finance for Sama Dubai, a Dubai Holding company. Amendments are made to this paper to take account of the respective collateral structures and other safeguards arrangements between banks and the borrowers.

As the LMA recommends that LMA compliant application form be designed for use with UK IFR debtors, further amendments to the document are appropriate to take into account that the respective debtor is likely to be raised in Dubai for real estate finance in Dubai, that the applicable legislation is often Dubai legislation and that it is often the case that the debtor or his sponsor does not match the IFR.

Dubai's commercial real estate industry is expected to remain a day-to-day business, with the traditional and Islamist finance mix in both the banking and financial sectors. We expect, however, that the development process will become fully developed and that further funding opportunities will be found next year or so.

This also includes the use of securitisations, in which a client can finance itself on the strength of rentals. Furthermore, the real estate funds markets have grown in recent years and we anticipate that this will persist and that our structure will be refined.

As regards legislation, it is likely that supplementary rules will be adopted to reflect or reflect recent changes in property legislation. It is unlikely, however, that any of these changes will impact the real estate funding markets or the funding patterns observed there.