The Upside of Working with Sharia' Compliant Partner

That old insatiable appetite for U.S. real estate still extends to the Middle East. So what is it like to partner with an entity that is Sharia' compliant (that is, one that adheres to Islamic law)" According to Jim Carpenter, executive director of investments for First Industrial Realty, it's pretty darned terrific. In December 2001, First Industrial entered into a joint venture with Kuwait Finance House (KFH), which is a merchant bank that is 52 percent owned by the Kuwaiti government. The connection had been made with the aid of Connecticut-based Arch Street Capital, KFH's exclusive real estate advisor. KFH sells interests in U.S. real estate to its customers. The venture was established to acquire certain First Industrial assets under development - a six million-square-foot portfolio.

That portfolio has recently been placed on the market and when it closes, Carpenter said, -I think "thrilled" is the word to describe everyone's reaction. We're just bowled over that the fund has wildly overperformed expectations."

And so, First Industrial and KFH started a second venture, intended to acquire single-tenant, net-leased properties. First Industrial's competitive advantage, Carpenter pointed out, is "working the corporate real estate angle; it's the linchpin of our game plan." The fund has acquired three assets this year, totaling about $65 million. "I've got a lot of wood to chop," said Carpenter, noting that some $400 million in capital has been committed to this fund.

Working with KFH has been a learning experience, he explained. Islamic investors cannot invest in anything involving pork, alcohol, pornography or some types of financial services. Although First Industrial initially "overestimated the restrictiveness" of Sharia' compliance, Carpenter said, there have been surprising issues. One prospective tenant - a casualty insurer - was rejected, as was another who was a defense contractor. On the other hand, one building in the initial portfolio had a "soldier-of-fortune "dream" store, and they signed off on that," he said. "By now, we've got it figured out."

KFH has proved to be an insightful partner, he went on. "They don't get into the details of a transaction the way real estate junkies do," he said, "but they always seem to ask the major key question. They get it; they're shrewd business people.

I would rather have someone who gets the big picture, instead of focusing on the minutiae.- Carpenter said that he also found the U.S. Treasury Department's involvement "comforting," because it is vigilant about making sure that money is coming from the right source. "We're with a squeaky-clean partner," he said.