Islamic Finance in Real Estate: Is it immune to the financial crisis?

By: Yaqoub Alabdullah

REAE 5311 Blog Post

Introduction:

The area of Islamic finance is relatively new to the finance field. While it was commonly known among Muslims, Islamic finance has grown not only to include Muslims, but also to include non-Muslims. Now, Islamic banking is widely known in Europe and many Asian countries. It is growing in the United States as well, but it is in its first steps. That is primarily because of the attractiveness of many Islamic- compliant corporations who have enjoyed a relatively healthy financial position compared to other comparable corporations. Islamic finance now accounts for more than $500 billion worldwide, and it is projected that Islamic securitization will exceed more than $100 billion (Delaigue, 2009). Basically, Islamic finance prohibits the practice of “Riba”, interest earned on money. So how can Islamic corporations make profits if they do not deal with interest rates? And if they do not deal with interest rates, are they immune to the current financial crisis? And what is the relationship between Islamic finance and real estate?

This article tries to answer these questions. It should be noted that, because Islamic finance prohibits the practice of Riba, a major source of income for many Islamic financial institutions is in real estate. In fact, whenever two Muslims talk about an Islamic financial institution, they are primarily talking about the real estate sector of that corporation because of its importance to the corporation as a whole. In other words, real estate is the major source of income in Islamic finance but without dealing with interest rates, “Riba”, to earn revenue or to calculate mortgage payments.

What is Islamic finance?

Islam’s prohibition and condemnation of Riba is found in various places in the Quran (see 2:275–280, 4:161 and 30:39 for examples) and also in various Hadith (sayings of the Prophet Muhammad), which cite instances wherein the Prophet explained what qualified as Riba and what did not, such as ‘the selling of wheat for wheat is Riba, unless it is exchanged from hand to hand and is equal in amount. According to this traditional understanding of Riba, modern conventional finance is impermissible since it incorporates the lending of money for a later repayment that includes a premium (i.e. interest) for the time elapsed between disbursement and repayment (Nayeem, 2009).  Many Muslim scholars developed models that do not include Riba but allow for profit to occur. Such models include “Murabaha”, “Musharaka”, “Ijara” and “Sukuk”. While the definition and implementation of each model is beyond this article, it should be noted that each model allows for risk to occur between the borrower and the lender. For example, in the Murabaha (cost-plus sales) contract, the seller acquires the desired product at a price known to both parties and then agrees to sell the product to the buyer for the original price plus an additional premium (Nayeem, 2009). This is different from the traditional way of financing in that the premium is not based solely on interest rates or Riba. In other words, if a person would like to buy a home for $200,000 and wants to finance it in the Islamic way, the Islamic bank will acquire the house for $200,000 and sell it back to the buyer with a premium. The installment payments are simply the lump-sum amount divided by the number of years. If the Islamic bank sold the house back to the buyer for $400,000 in 20 years, then the annual payment is simply $20,000. In other words, a Muslim may earn a profit, for instance, by selling an item for more than he paid for it, provided the two transactions are kept separate. An Islamic-compliant mortgage may involve a bank buying the property on behalf of the customer, who then pays off the principal loan along with “rent” or a “fee” for using the property until it finally transfers into his name when the loan amount is fully settled. (Goodenough, CNSNEWS.com, 2008). The payment on the mortgage is not based on future value of money or some kind of discount rate because Islamic finance says that money cannot grow by itself. It should grow by real output in the economy, which is that risk should be shared among all parties. One cannot simply lend someone money and expect to be paid back with interest. Instead, one would acquire the product and sell it to the buyer with a premium and in this way share the risk with him. There is nothing risk free. This is a crucial concept in Islamic finance and the whole Islamic financial real estate sector depends on it.

Moreover, when a person deposits money in an Islamic bank, there is no guaranteed interest earned on that money. In fact, the person may lose that money because he/she agrees to share the risk with the bank in their operations. Despite that, as noted earlier, Islamic banking continues to grow worldwide despite what seems to be their higher risk compared to other financial institutions. One of the models that has been growing enormously in the past couple of years is the “Sukuk” which is basically an Islamic bond. But again, there is nothing guaranteed and everybody is sharing the risk. In fact, some kinds of Sukuks do not even have fixed coupon payments because that depends on the profitability of the project in question. For example, a developer may want to build an apartment complex and issues “Sukuks”, Islamic bonds, to finance his project. The lenders in this case would agree to share the risk with the developer and also agree to share the profits together. The payments on the “Sukuks” would depend on the rents paid by the tenants and that is the only form of “Sukuks” that tend to be steady over time because of relatively small changes in rental rates.

In short, “financial systems based on the principles of Islamic law (shari’a) have been growing in popularity in the Islamic world and increasingly among Muslims in western societies too. Shari’a forbids Riba or usury – the collection and payment of interest – and also shuns excessive risk and heavy borrowing, thus helping to insulate parties from overexposure to risk. “Shari’a-compliant” banking and financial products aim to avoid companies that are heavily indebted or have links to products or conduct frowned upon in Islam, such as gambling, pork, alcohol and pornography.” (Goodenough, CNSNEWS.com, 2008).

Islamic finance and the financial crisis:

Many Muslim Academics argue that the current financial crisis would not have happened if Islamic finance principles were employed in the global economy. For example, Dr. Mohammed Mahmud Awan, a leading scholar and Dean at Malaysia-based International Center for Education in Islamic Finance (INCEIF), told the participants of a conference in Manama, Bahrain that the current global economic crisis has opened many windows of opportunities for Islamic finance. “This crisis is seen as a big opportunity for Islamic finance as it has the capacity and capability to bring stability to the market.” Dr. Awan said.  The current global crisis which caused colossal financial losses running in billions of dollars, he said, would have not occurred if the Islamic principles regarding collateralized debt obligations (CDOs) were in vogue in the international financial market. “Islamic bonds, carrying unique structure features, cannot fall foul of a crisis such as subprime mortgage crisis. Subprime mortgages are backed by dubiously rated collateralized debt packages which subsequently precipitated a global credit crunch.” (Arab news, 2008). He added: “A crisis such as the mortgage one would technically be unthinkable in the Islamic capital markets sector because it would be against Shariah (Islamic law) principles to sell a debt against a debt.”

But many other scholars disagree with that. In fact, many Muslim scholars disagree with that as well. Their main point of view is that Islamic finance and Islamic financial institutions do not live in a separate world as other traditional financial institutions. The basic macroeconomic factors affect both equally and the recent financial crisis affected Islamic financial institutions just as much as it had affected traditional financial corporations.

Performance of Islamic finance corporations:

To judge the quality and performance of Islamic finance principles, I took data from data stream and analyzed the quarterly return of the Dow Jones Islamic Index from the period of 1/1/2002 to 6/30/2009. Then, this was compared with the Dow Jones Industrial average returns for the same period. The results are shown in Figure 1. 

                                  Figure 1:

Certainly, the overall performance of the two is very similar. But what is interesting is the beginning of the financial crisis (just about the 27^th quarter in the graph). It can be seen from the graph that DJ ISLAMIC Index was in the positive category at the beginning of the crisis while the DJ Industrial was at the negative side. But just after that, we can see a sharp fall in the Islamic index while the DJ Industrial started to recover (probably because of some confidence in the stimulus package). Finally, both of them are recovering but the Islamic index at a faster rate. This will certainly create a debate between Islamic finance scholars and those of traditional finance. Pro-Islamic finance scholars are arguing that since the financial world is governed by traditional finance concepts, the crisis brought the losses to the Islamic corporations’ assets as well, which are primarily in real-estate. And that the healthy industries, those who did not participate in all the derivatives and risky operations that started the crisis, will survive at the end and that is evident by the apparent recovery of the Islamic financial institutions. For example, Kuwait Finance House (KFH), one of the leading Islamic banks in the world in terms of market capitalization, has just distributed 4.5% on its deposits to its customers as a profit from their Islamic finance operations in Kuwait. That happened at a time when most of the Kuwaiti banks lost more than 50% of their market value.

Traditional finance scholars would argue that while the Islamic finance concepts are creative and new in the area of finance, they are not immune to the financial crisis. It would be interesting to add those concepts into the already existing financial system, but it is not an alternative model. The financial crisis affected both equally and that is a fact. It should be noted that the traditional finance scholars are not arguing against Islamic finance. In fact, many large financial corporations (like HSBC, Citi Bank, and many traditional financial corporations in the Middle East) have just opened Islamic banking units not just to attract Muslim customers but also to take advantage of this new concept, which is apparently very healthy. They are arguing that this new concept should not be used as an alternative to the existing system. Conversely, pro-Islamic finance proponents are arguing that it should be an alternative because of its reduced risk and rejection of money growing by itself without real output in the economy. Plus, many of the Islamic models like “Murabaha” and “Musharaka” eliminate many of the disadvantages of the traditional system. For example, in Islamic finance there is no buying debt by debt or many other risky operations simply because they are not allowed under Shari’a law. This would add greater efficiency to and reduce risk in the financial system. 

Conclusion:

In conclusion, I think that time is needed to judge the new idea and concept of Islamic finance. As noted earlier, the introduction of Islamic finance is relatively new, and, in my opinion, it should take more time to mature, just like any other industry. While pro-Islamic finance scholars argue that this model is better than the existing one, it is not realistic, at least at this point in time, to present it as an alternative.

I think that Islamic finance added some interesting new models like “Murabaha”, “Musharaka” and “Sukuk” in real estate in order to eliminate Riba. The healthiness of the Islamic corporations in general is very evident and they had enjoyed a profitable position in the last couple of decades. That is primarily why many big corporations joined this new system. However, the global financial crisis did not leave the Islamic financial industry alone. It affected them just like it affected the traditional industries despite their totally different operations. Nevertheless, Islamic corporations apparently are recovering although that is debatable.

This financial crisis affected real estate markets around the world. And, since real estate is the primary asset to any Islamic-compliant corporation, they suffered heavily by the crisis even if they did not participate in the risky practices that started the crisis. But, as pro-Islamic finance proponents would say, the healthy ones will survive at the end.  

 

References:

-       Aidham, A, (2009), “Sukuk: Pushing Innovation”, International Financial Law Review, Vol. 28 Issue 3, p32-32, 1p.

-       Delaigue, B and Reillac, A, (2009), “France Adopts Tax Measures to Promote Islamic Finance”, European Taxation, Vol. 49 Issue 5, p286-289, 4p.

-       “Growth of Islamic finance”, International Financial Law Review, Mar2009, Vol. 28 Issue 3, p35-35, 1p.

-       “How Islamic Bond Refinancing will work”, International Financial Law Review, Mar2009, Vol. 28 Issue 3, p17-17, 1p.

-       Nayeem, O, Shiliwala, M and Shiliwala, W (2009), “A CONFLICT OF INTEREST: ISLAMIC HOME FINANCING IN AMERICA”, Economic Affairs, Vol. 29 Issue 2, p22-27, 6p.

-       http://www.arabnews.com/?page=6&section=0&article=109247&d=24&m=4&y=2008

-       http://www.todayszaman.com/tz-web/yazarDetay.do?haberno=156567

-       http://www.businessweek.com/globalbiz/blog/eyeonasia/archives/2008/10/islamic_finance.html

-       http://www.free-press-release.com/news/200902/1233484780.html

-       http://www.cnsnews.com/Public/content/article.aspx?RsrcID=37332

http://www.islamic-finance.com/indexnew.htm 

Offer from Mark Kingston, CEO of Argus

I just got back from a week of Argus training in Houston. The Argus group is a very nice bunch and last week the CEO of Argus, Mark Kingston developed a plan to expand their Argus Certification program and including a special offer to get people certified. Please note that this program is limited to 2,000 participants.

Program cost for each individual varies based on your specific circumstances. If you respond to this offer, the only thing that I ask is that you be truthful with Argus regarding your situation so they can offer an appropriate package.

The message from Mark Kingston and program details are copied below. Please note that contact with Mr. Kingston is through LinkedIn at the e-mail address cited below.

Cheers,
Dr. Hansz

Message from Mark Kingston, CEO of Argus:

Let me help you…My team and I are willing to invest in you…No questions asked...Well maybe one or two… Lost your job, starting up or in a position to hire...Please, Stop and Read This
Situation:

1. A large number of people have become unemployed and need help moving forward into new opportunities.

2. Over 1,500 email replies came back to me after my recent outreach indicating that the person no longer works for that company.

3. A Large number of individuals have expressed their desire to gain access to ARGUS Training, certification and license to ARGUS software as a way to get back on their feet. They have stated that ARGUS training and experience is a pre-requisite for many job opportunities.

4. Many lost their access to our tools when they were laid off. This limits their ability to maintain proficiency and or their ability to create income opportunities for themselves.

5. Many will need experience modeling in ARGUS that can be referenced as a way to strengthen their credentials for job search.

6. Many have expressed their desire for a job placement site for those seeking trained-experienced users of the ARGUS Software solutions.

7. Many emails requesting elearning-web based learning capabilities.

8. Many requests for demo or student copies of the software.

9. Many individuals are starting new ventures. They have limited capital. They have suggested that it would be extremely helpful to provide our software during their startup phase at a significant discount, or on a project by project basis.

10. Many are asking for case studies and examples of how the ARGUS solutions can be better employed for improving their decisions and outcomes.
Many want to change their situation but do not have the money. The choice is roof over the head, food on the table and gas in the car.
Posted 3 days ago | Reply Privately

Mark Kingston
CEO
See all Mark’s discussions »
Comments (13)

Mark Kingston
CEO
Target(s):

1. Assist recently unemployed real estate professionals and start-up companies in their efforts to enter the marketplace

2. The approach should satisfy the following objectives:

a. Prepare the unemployed real estate professional for reentry into the marketplace

b. Produce more “ marketable” professionals in the industry with education and certifications

c. Produce “ARGUS Software Certified” professionals that are prepared to be immediately productive in their new endeavors

d. Enable start-ups to spend their limited resources on employees while having access to the tools that enable them to thrive.

e. Create new opportunities
Posted 3 days ago | Reply Privately

Mark Kingston
CEO
Plan:

1. The program will be affordable to 100% of those participating.

a. This means, little or no cost

1. Eligibility will include:

a. Unemployed
b. Startup companies launched in 2009, or
c. companies hiring individual(s) that have been unemployed for more than six months
d. others, that I haven't identified but need an assist

1. The packaged offering includes a combination of training, software and experience as outlined below:

a. Access to DCF eLearning modules 1 through 10 (90-day access from the start of each module)

b. Perpetual license of ARGUS Lite (comes with 6 months of ARGUS Standard)

c. Advanced training documentation (mailed hardcopy)

d. ARGUS Certification

e. Opportunities to work with our services group on contract engagements as they become available

1. The cost will be $ 995 per package

a. We reserve the right to waive the cost to any individual.
b. We reserve the right to let any individual pay us when they can pay us (maybe never).
c. We reserve the right to make a difference for any person or company that will let us help.

1. What do we hope the benifits will be to you?

a. Learn ARGUS DCF and become certified in the solution at a fraction of the cost or no cost depending on your situation.

b. Use the full version of ARGUS for 6 months without limitations and then the Lite version perpetually.

c. ARGUS is investing a net value of $ 5,000 toward each person that needs help or will help (e.g. companies that hire), $ 6,000 if we wave the package cost.

d. You succeed in improving your position

e. Employers, you get a well trained professional that is able to make an impact from the moment they come through your door without the cost or need to send them off for ARGUS Training.

1. Our limitations:

a. We will need to limit this to the first 2,000 people that request this package. Unfortunately we are constraied by the need to keep our heads above water. For us to be able to help, we have to stay strong too. We do have to sell a few higher prices copies. In any, given period as we exceed our cash-flow requirements we will expand the number of packages that we make available and or give to those who can’t afford any payment.

b. For those who think this is a big marketing gimmick, please swim in another pond. Our employees have taken a 15% pay reduction and two furlough days a month. Six of our top executives have taken their pay down to zero. Yes, I am working my rear off for free. At this point, nothing in it for me but the ability to help. In addition, I have had to lay off 100 people in the last twelve months. We do understand the pain you are experiencing. But we are fortunate in that we have kept our head above water. So we can try to help. FYI, no employee is actually taking their furlough days because of their desire to help. This gives us the margin required so that we can absorb this effort without compromising our obligations.

c. We will accept the risk that a few in the world, that can afford to buy the solution at the market value, will try to take advantage of this effort. Our team decided this is an acceptable risk if we can make a difference for the people that need help. For those who might be so inclined, please reconsider. Make your decision knowing that you would be breaking a trust and hurting the caring employees of ARGUS Software.

1. What do you have to do to get your package?

a. Send me an invite to connect on LinkedIn: mkingston@argussoftware.com

b. Join the “ARGUS Commercial Real Estate Network” group site on LinkedIn.

c. Once I have accepted your invitation to connect, send me an email on LinkedIn regarding your situation. Within 24 hours you will have the tools you need.

d. Remember, if you cannot afford the price of the package or cannot afford to pay it all up front let me know. We will not shut the door on the ability to help you
Posted 3 days ago | Reply Privately

Mark Kingston
CEO
8. How can others help?

a. If you have jobs available, please post them in the job listings located in “ARGUS Commercial Real Estate Network” group site.

b. If you have contract work for analysis, modeling or reporting requirements please contact us. We are going to invest in training a lot of people here that can benefit from having that practical application on their resumes. We will provide the service at cost and guarantee that all work will be supervised and reviewed by our best consultants. Who knows you may find a superstar to add to your team.

c. If you are a solution provider to the real estate industry, get in the game. What are you waiting for? Help this industry, bend a few of your rules and give some software and training away that can make a difference. It’s a currency that you have an abundance of. Use it.

d. If you are an industry participant that is interested in joining our effort to make a difference, connect to me as outlined above and join the ARGUS Commercial Real Estate Network. Success is a choice, and so is your decision to make a difference. As a minimum, it cost you less than five minutes to see what it’s all about. Join us in breaking convention. We are going to ignite a new market direction with the launch ARGUS Zone and the new transaction zone (A global property exchange). Everybody that is plugged in to this initiative to help will have access to this platform as another way to succeed in this market. It’s your choice. Make a difference.

e. Last, for those who have already joined, send this to someone you know that may need the help.



Let’s change the outcome,

Mark Kingston

Valuation Job Opportunity

The North Texas Chapter of the Appraisal Institute posted the follow job notice.

The Pinnacle Companies in Dallas is looking for qualified appraisal candidates for long-term contract work at Fannie Mae. The NUC Review Appraiser is responsible for conducting retrospective valuation reviews of appraisal reports used by seller/servicers to support lending decisions and determine if they meet Fannie Mae guidelines, the Uniform Standards of Professional Appraisal Practice (USPAP) and other professional appraisal standards. Pay range is $40/hr - $45/hr. Please forward your resume and contact information to Clay Findley at clay@pinnaclestaffingjobs.com for immediate consideration.

Dr. Hansz's Summer Office Hours

My office hours will be from 2 to 4 PM on Mondays and Wednesdays. Please note, I will not have office hours on June 15, 17, 22, and 24.

UrbanPlan Competition Comes to an End

The Urban Land Institute (ULI) UrbanPlan competition came to a conclusion last night with the City Council event.

From UrbanPlan City Council

From UrbanPlan City Council

All teams did well this semester but the Council selected a plan by (left to right) Demarqus James, Irene Yang, Luz Henry, Paul Mehlmann, and Victoria Dick (not in picture).

From UrbanPlan City Council

Read about this year's UrbanPlan competition in the Shorthorn:

http://www.theshorthorn.com/content/view/17060/209/

and

http://www.theshorthorn.com/content/view/16870/209/

Thank you to all the ULI council members Steve Stamos, Kip Daniel, Mike Wadsworth, and Lindsay Allen. Finally, special thanks to organizers Philip Bankhead and Jon Molnoskey.

Archon Looking for Summer Real Estate Research Intern

Research Intern – 2009

Primary Job Duties

Performs predetermined task/projects that are designed to benefit Archon's business needs while also contributing to the Intern’s business exposure. Serve as analytical support to Research Associates and Analysts on special assignments such as region/property type, national. economy, capital markets, international markets, etc.

Position will perform in-depth analysis of real estate and capital market data to provide Archon decision makers with critical, timely information to accomplish tactical and strategic goals. Will have the opportunity to work on Archon Group geographic systems to improve the reporting with proprietary Archon databases as well as work in economic databases to update Archon’s viewpoint by region.


Required Skills

Strong organizational and inter-personal skills with an understanding of real estate economics & analysis as well as an interest to learn about advanced real estate research. Aptitude for the art of discovery a plus. Excellent PC skills in Excel, Word and PowerPoint as well as some experience in conducting Internet research are required.


Preferred Skills

Some research experience and an understanding of RE market data terms and data products a plus. Strong writing and presentation skills preferred.

The ideal candidate will be a junior going into their senior year.

If interested, please send a brief cover letter and resume to:

Doug Prickett, CRE
Director of Research
Archon Group, LP
a Goldman Sachs Company
6011 Connection Drive
Irving, Texas 75039
Tel: 972-368-2586 | Fax: 972-368-4198
email: doug.prickett@archongroup.com

Josh Been's Summer Class Summer I

If anyone is looking to register for Josh Been's summer class, this class is being held in the Summer I session. Just fyi.

Looking for Summer Real Estate Intern

Hudson Peters Commercial

Commercial Real Estate Office Looking for Summer Intern

Dear Fellow Broker,

We are looking for a summer intern. The ideal candidate will have the following qualifications:

* Desire to work in a Commercial Real Estate upon graduation in BROKERAGE!!!
* Working on a Business, Finance, Marketing or similar degree with graduation in 2010 or later
* Good Computer Skills--Familiarity with Excel, Word, Publisher and PowerPoint

Position is 15-25 hours per week. 3-4 days/week

$10/hour

See Our Listings 24/7 at: www.HudsonPeters.com
Michelle Hudson, CCIM
HUDSON PETERS COMMERCIAL
972.980.1188 x202 | F: 972.980.1181 | C: 214.534.0226
4055 Valley View Lane, Ste. 260, Dallas, TX 75244
Hudson@HudsonPeters.com

UrbanPlan City Council This Week!

The UrbanPlan City Council will be held this Thursday at 7:30 PM in room 633/634 Business Building. Anyone is welcome to check it out and see which of three UP student proposals the Urban Land Institute mock City Council will select.

Professional dress recommended (and required for presenting students).

REAL ESTATE 5311 BLOG: Sustainability For Real Estate Developments

The images show night shot of Toronto during Earth Hour
Toronto Image source: Earth Hour 2008, Ivy Images

On March28, 2009 during Earth Hour, initiated by WWF ( http://www.earthhour.org/ ) between 8:30 p.m. and 9:30 p.m. the global lights-out event was observed. We all need to reduce the power we use at home to help save a planet threatened by the overproduction of energy. What we do during Earth Hour is not going to save the planet, but it is going to inspire people to make their lives and surrounding more ‘sustainable’.

The term 'sustainability' peaked on blogs, boards and discussion groups after Al Gore’s “Inconvenient Truth” took home the Oscar for Best Documentary Feature in February 2007. Per Nielsen Buzz Metrics reports, the buzz levels on this term went up by 169 percent in July 2007 versus one year ago. Innovations or actions to promote sustainability make up daily headlines, such as the following, for every newspaper or T.V. channels.

Greenest Computers Rated By PC Mag
300 Schools On Green Building Council’s Certification Waiting List
Dell To Favor Suppliers That Report GHG Emissions
NAHB Certification Program Will Compete With LEED
Target Targets Eco-Friendly Prototypes
or Mitsubishi Has Big Plans for Electric Vehicles

The question that comes to mind is whether ‘sustainability’ is for real or just another buzz word? I will like to share this educational video (click on the video below)
http://www.youtube.com/watch?v=eEFwaQej_0E

Sustainability — the ability to meet our needs without compromising the ability of future generations to meet theirs. Let us ponder for a moment and ask the question - are we really using our recourses wisely? The answer is no. The fast growth in the last few decades have left us with scarcity of natural resources, climate changes, and uncertainty for future generations. Argument here is not anti growth but how judicious we are while using our resources.

This calls for a dramatic change in our lifestyles and carbon habits to resolve this issue. As a real estate student and architect by profession, I know that real estate development has been a big contributor to this problem.

As per US Green Building Council (USGBC), buildings take up:

40% of total primary energy use
72% of total electricity consumption
32% of total CO2 emission
13.6% of total potable water consumption

Building sector leads the global CO2 emission followed by transportation and industrial
This is a huge strain on our eco system. The solution is our…. buildings need to be smarter in the use of these resources or in other words ‘GREEN’.


According to USGBC, green buildings can reduce
energy use by 25-50%,
CO2 emission by 33-39%,
water use by 40%, and
solid waste by 70%.

From the year 2006 to 2010, projected market value of green buildings is going to increase for new construction from $12 billion to $30-$60 billion and for renovations from $130 billion to $240billion.

Leadership in Energy and Environmental Design (LEED) standards established by USGBC has set the benchmark ( http://www.usgbc.org/ ) for certification programs related to buildings and neighborhood development. There are many such certification programs, few of which are:

NAHB national green building program
( http://www.nahbgreen.org/)
US department of energy ‘Energy Star’ program
( http://www.energystar.gov/)
Environmental Protection Agency Green Buildings
( http://www.epa.gov/)

Apart from this, many cities in America adopted their own certification programs. For example, the City of Austin's Green Building Program has been implemented very successfully.
( http://www.austinenergy.com/). In our own backyard, the City of Dallas recently adopted a standard that all new commercial buildings will have to be built to meet the sustainibility standards ( http://www.greendallas.net/).

USGBC, a non-profit trade organization, was founded in 1993. As mentioned earlier, it is best known for the development of LEED rating system and Greenbuild, a green building conference that promotes the green building industry. LEED is a third-party certification program and the nationally accepted benchmark for the design, construction and operation of high performance green buildings. LEED gives building owners and operators the tools they need to have an immediate and measurable impact on their buildings’ performance. LEED promotes a whole-building approach to sustainability by recognizing performance in five key areas of human and environmental health: sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality.

There are LEED projects in all 50 states and 91 countries and 81,155 LEED Accredited Professionals.

19,957 members of USGBC members includes building owners and end-users, real estate developers, facility managers, architects, designers, engineers, general contractors, subcontractors, product and building system manufacturers, government agencies, and nonprofits.

Now apart from tree hugger approach the million-dollar question for developers is does it cost more to build green and does it payback?
As per Peter Morris & Davis Langdon, the answer is yes. But most of the times the people who are green averse are happy to relate anecdotes of premiums in excess of 30% to make their case not to build green. These numbers are simply not, however, borne out by the facts, as evidenced by many studies of the cost of green building. Even though there is no one-size-fits-all answer to the cost question, it is clear from the substantial weight of evidence in the marketplace that reasonable levels of sustainable design can be incorporated into most building types at little or no additional cost.

Very frequently a comparison is made between the cost of the green project and the original project budget or the original anticipated cost of the project. Most of the studies that use this methodology report average green premiums in the range of 1% to 2% to achieve a moderate level of sustainable design, generally equivalent to LEED Silver rating. Higher levels of sustainability are usually linked to higher green premiums.

An alternative approach, also used in many green cost analysis, is to look at the cost of individual green features, effectively comparing the building to itself without the green features. Most of the studies that use this individual add-on methodology report somewhat higher green premiums, in the range of 2% to 6%, to achieve a moderate level of sustainable design (such as LEED Silver).

Keep in mind these are studies and they can be only used as a guidance in planning and budgeting the project. The real question should not be “How much more will this cost?” but “How will we do this?” Sustainability is not a below-the-line item.

But the cost of building GREEN is reducing every day mainly due to:

1.Bigger market for sustainable products, which help reduce the unit cost of these products due to, increased volume.

2.Also, new inventions and technology is making cost of the green product less. As per the studies published by Photon consulting cost of solar power is racing to be $1/W by 2012.



3. New changes at federal government has made it very clear that achieving energy efficiency is the one the main agenda of this administration. In addition, recently extended and announced tax rebates, grants and programs is the step in the right direction. Further information could be found on US Department of energy website (http://www.energy.gov/) and US EPA website ( http://www.energystar.gov/ )

4. Many state and local government run the incentive programs and tax breaks for building Green. More information is available at DSIRE (http://www.dsireusa.org/). Also many utility providers have rebates available for building sustainable products

5. Many financial institutes like retirement pension funds are asking developer to achieve certain sustainibilty standards to qualify for the funding.

6. Also private funding are demanding for green standards so that the value of their investments is maintained

All these incentives are definitely driving the cost of building green down and adding value to the real estate projects.

How does it pay back?
It pays back owner of the building by
- Reduced operating cost
- Energy savings
- Less maintenance cost due to higher standards in construction
- Owners can demand higher rents
- Fewer turnovers of tenants due to less utility bills and health benefits tenants
- Property retains more value at the point of turnover
- Marketing tool

Green buildings help the tenants or its end user in many ways. It increases the efficiency of the employees due to increased natural light, Better ventilations and less toxic material used for the construction. The students have shown better results in schools that are built based on sustainable principles. The patients have shown faster improvements in the hospitals those are certified by green building programs. The residents in the sustainable communities have shown significant improvement in their health and productivity due to change in their life styles use of environmental friendly materials during construction.

Blair Towns, Silver Spring, MD a development by The Tower Companies is a LEED Gold rated project completed in 2003.

You can visit their website, http://www.blairapartments.com/ and how developer is using the LEED certification as a marketing tool.
Natural Recourses Defenses Council (http://www.nrdc.org/) has conducted a case study for this project, which could be viewed online by visiting
http://www.nrdc.org/buildinggreen/casestudies/blair.pdf

All these benefits to the tenants or end users definitely pay back developers in increasing or retaining the value of their properties.

Apart from financial pluses and minuses, the government is making sure new developments meet sustainability standards. Federal government has made it mandatory for all federally funded projects to obtain some level of LEED certification. The number of state and local governments developing or requiring sustainability standards is increasing everyday. A report published by American Institute of Architects (AIA) in mid 2008, shows that there are 92 cities with green building programs -- or to put that in perspective, over 42 million people live in cities with green building programs.

With the increasing regulations and benefits, developers need to revaluate their spreadsheets. Even if developers do not want to pay the added cost, they will still be able to create sustainable developments with better design, construction and development practices such as:
Selecting site locations near to public transport
Orientations of the building to take advantage of natural light and ventilation
Using environmental friendly and local materials during construction
Emphasis on using right construction practice
Use of native landscape

And the list can go on........

To summarize sustainable development is need of the time and is here to stay, it is in developers’ interest to start practicing it and be a leader before the competition catches on it.

Post by Yogesh Patil, REAE 5311 student

Credits and resources:

http://www.usgbc.org/
http://www.energystar.gov/
http://www.nahbgreen.org/
http://www.dsireusa.org/
http://www.earthhour.org/
http://www.energy.gov/
http://www.greendallas.net/
http://www.austinenergy.com/
http://www.environmetalleader.com/

UrbanPlan Facilitation

Check out Ali's story on the UrbanPlan facilitation:

http://www.theshorthorn.com/content/view/16870/209/

Job/Internship Posting

Ali Samee wanted to pass along some job postings (one in Houston).

http://www.pky.com/hr/careers.aspx

Have you guys been following our two Interns this semester at http://reae5399.blogspot.com? It has been interesting to see the weekly experiences.

REAE 5311 Blog Post: Zoning 101

As anyone involved in real estate can attest to, understanding zoning as it relates to the acquisition of any type of property, is of the utmost importance. This posting is meant to provide a brief overview of zoning and how nonconforming use can affect the property and what remedies exist in order to prevent a situation that is summarized at the conclusion of this essay.
Zoning is the mechanism municipal jurisdictions use to control desired growth and development, while trying to eliminate or at least minimize problems of crowding and land use conflicts. Zoning tells property owners what and how they can and cannot build on their land. Decades of court cases have shown that cities and towns have both a responsibility and a constitutional right to protect the public welfare by placing limits on the uses of private property.2

The history of zoning dates back many years. As cities grew larger and more complex in the late 19th and early 20th centuries, governments became increasingly involved in providing municipal services, promoting the development of public infrastructure, and regulating private real estate development. Also in the latter part of the 19th century, cities began to limit to certain areas within the city those hazardous but necessary business and industrial activities that might cause fires or expose people to disease, harm or noxious odors. Selective prohibition of these uses by geographic location was an early form of land use zoning. Overall, the private sector-not just community groups but also many real estate entrepreneurs-strongly favored the growing number of public laws and codes regulating urban development and land use. They supported zoning restrictions to stabilize real estate markets, increase property values, and encourage new investment because the understood that the restriction enabled them to build or buy property with less risk of unfavorable change on the adjoining lots and the surrounding neighborhoods.2

In order to first understand zoning as it relates to real property transactions the following is a brief overview of permitting, use classifications, and items that need to be collected to perform the necessary due diligence before an acquisition:

Use of property is permitted four ways:
· Permitted by right
· Permitted by conditional/special use permits
· Permitted by variance
· Permitted as an accessory use (manager’s residence within a mini-warehouse)

Generally there are five major types of use classifications:
· Commercial
o Retail, Restaurants, Personal service, Hotels, Office
· Agricultural
· Residential
o Multi-Family, Nursing Homes, Student Housing, Single Family
· Industrial
o Manufacturing, Warehouse, Research & Development
· Planned Development/Special Use
o A use that would not be appropriate generally, or without restriction throughout a zoning district or classification, but, which is controlled as to number, area, location or relation to the neighborhood in which it is proposed. Examples would include nursing homes, restaurants with patios and/or drive thru windows, communication towers, and gas stations
In a transaction, a list of necessary due diligence items should be reviewed:

1. The specific zoning designation of the site, as established by the current municipal code, as well as any prior designations
2. The uses allowed under the zoning designation established by the zoning ordinance and whether the present use of the subject site is legally permitted
3. The minimum yard or setback requirements, and a review of the survey for compliance
4. The building height requirement, whether by number of stories or actual height above ground level, and a review of the survey for compliance
5. The bulk or density restrictions of the property. The relationship of the square footage of the land area versus the square footage of existing buildings would be checked for proper ratio. Specific density per acre requirements based upon number of units, and floor area ratios based upon the total square footage of multistory buildings, would also be considered
6. The formula for determining the minimum parking requirement and the “mix” of existing units on the site. When calculated, comparisons of the required parking count to the actual site count, as shown on the survey. Handicap and compact spaces would also be addressed.
7. Special circumstances to be considered would include legal non-compliance of any of the above factors, the issuance of zoning compliance letters from the municipalities, the existence of variances, council minutes, certificates of occupancy, building inspections, the effect of site plan approvals, airport zoning districts, and businesses serving alcohol, just to name a few.
The variety of types and definitions can be overwhelming, even for professionals. That is why it is most important to pay attention to definitions. Much of the law of zoning is in the definition, in other words, how you can and cannot use the land.
To give an idea, of how definitions can rule the day, consider the movement to zone away fast food chain restaurants. Some towns, in the belief that this is not a good use, have simply banned all formula restaurants, generally defined as restaurants with a set architecture and set menus that have more than a small number of outlets. A developer could have paid big money for a great site at a prime intersection for a national franchise fast food restaurant and then have the zoning rug yanked out from under them with the adoption of a prohibition on formula restaurants.1

Zoning laws are constantly changing but are not enforced retroactively.1 A building in existence at the time a new zoning law is adopted is said to be “grandfathered” or “legally nonconforming” and cannot be declared illegally nonconforming. But if the legally nonconforming structure is destroyed beyond the threshold set forth in the Code, the owner may be allowed to rebuild only in accordance with present zoning laws. There are three zoning conformance status of the site: legal conforming, legal nonconforming, and nonconforming:

In legal conforming, the project meets all zoning district use, area, setback, height, density, and parking requirements according to the most recent zoning ordinance or land use requirements in your jurisdiction. The (legal) nonconforming rebuildability clause will not apply because your project is legal and has 100% right to rebuild in the event of any percentage of destruction.

In legal nonconforming, the project was conforming at the time of construction but due to changes in the zoning ordinance, the governing jurisdiction, or zoning designation, the project is no longer conforming. Jurisdictions have different rules governing legal nonconforming projects. Some allow 100% rebuild in the event of destruction while other require planning commission approval to rebuild, regardless of the percentage of destruction. All are subject to the nonconforming rebuildability clause of the zoning ordinance as they have been granted certain legal protections for rebuild. The following are a few causes constituting legally nonconforming:
· Built prior to the establishment of the zoning code
· Changes in the zoning code over time
· Annexation from one jurisdiction to another
· Subdivision of the property
· Condemnation proceedings (often affects building and parking setbacks)
· Rezoning of the property

The following are examples:
· Legal nonconforming buffer yards- A Florida café that has enjoyed patio seating for years, but current Code now requires a buffer between the property line and any improvements. If the patio area were to be destroyed by storm or fire, it would not be allowed to be rebuilt.
· Legal nonconforming setbacks and parking-An Arizona hospital that was built in the county and later annexed in the city. Differences in code requirements between the two jurisdictions caused setback and parking deficiencies.
· Legal nonconforming to height-A multi-family complex that was built prior to changes in the zoning code, which lowered the allowable building height from three stories to two stories.
In nonconforming status, the project does not conform to current zoning requirements, and did not conform to the requirements in place at the time of construction. In the event of destruction of any percentage or value, the project will require to be reconstructed according to the requirements of the current zoning ordinance. The nonconforming rebuildability clause of the zoning ordinance will not apply to a nonconforming project because the site does not have a legal status. Situations that could possibly lead to a property becoming nonconforming include:
· A change of use (retail to restaurant) done without approvals, which requires additional parking
· Illegal use (retail in residence)
· Re-striping of the parking lot which causes spaces to be lost
· Removal of landscaping to accommodate additional parking or structures
· Conversion of apartment, hotel or nursing home units that exceed the total number approved at the time of construction
· A structure built closer to the property line than what was originally approved
· Construction error
Examples of nonconforming uses include the following:
· Nonconforming to parking-A resort hotel in Michigan was approved with parking to be constructed on an adjoining lot also owned by the owner, the parking spaces were never built, the city never noticed, a certificate of occupancy was issued, and then the owner sold the land
· Nonconforming to density-An assisted living center in Arizona was approved for 85 beds, the certificate of occupancy was issued for 85 beds, and it now has 95 beds by converting other space in the building which was never applied for or approved in the zoning process
· Nonconforming to density and open space-A multi-family site in Georgia was approved and developed on 30 acres, the owner sold 10 acres of unimproved land which caused density, open space, and landscaping problems, which are not easily cured
There are gambles with a nonconforming use: (1) local zoning authorities can change their minds and take steps to gradually cancel the nonconforming use over time; (2) you can lose the right if you substantially change the existing use of the business (i.e., a garage becomes a Blockbuster video franchise), your building is damaged or destroyed (i.e., your garage has to be rebuilt because of a fire), you shut down operations for several months (the length of time varies with local law), you discontinue operations entirely, or you significantly expand your business operations (i.e., your garage now includes an auto parts store)
The following are remedies if the project is nonconforming:
· Fix the problem (example: stripe more spaces, move the encroaching accessory building)
· Apply for a variance or special use permit
· Draw up a reciprocal parking agreement with the adjoiner
· Purchase land from the adjoiner
· Apply for a change in the zoning district

Variances
Variances are a discretionary relaxation from the strict application of certain zoning requirements granted by the Board of Adjustment to alleviate conditions peculiar to a particular property which places an undue burden upon the individual landowner.2 In more simplified terms, a variance is a zoning approval granted by a zoning board of appeals to do something that is otherwise illegal. It is for this reason that in most communities there is real tension between the zoning board of appeals and the separate zoning authority, which may be a planning board, zoning board, or local legislative body. Variances, like special permits, run with the land and attaches to the property and is generally about the use and not the land.1
There are many examples of zoning violations: Overflowing dumpsters, proper landscaping not provided, dumpsters located on parking spaces, illegal banners and signs, loss of striped parking, tenants parking on neighboring property, criminal activity by tenants, i.e. prostitution/drug dealing, graffiti, etc., taking place on the premises with landowner disregard, abandoned vehicles, etc.
Building Violations can include: Building permits not being final, certificates of occupancy not issued usually due to lack of final inspection, elevator violations, tenant complaints for structural problems, such as leaking roofs, cracked walls, faulty plumbing, etc.
Some requests for a variance – such as the same request that everyone else nearby has already obtained -- are a simple matter that can be handled alone. However, if the variance is important, or time is important, and the person does not want to risk getting turned down, or the matter is sort of unique, they may need the assistance of an attorney familiar with local zoning laws and practices. In fact it may also be necessary to obtain an architect or other expert to assist the attorney.

Special Use Permits
In most jurisdictions, special permits are an administrative, not legislative type like variances are. Special permits command that great middle ground between the largely discretionary zoning amendment and the process with little or no discretion which includes not only the zoning enforcement review but other administrative approvals such as subdivision and site plan review.
Protection
When negotiating a contract there is language in the document that will protect the buyer and the seller. This language in the contracts is found under “Representations and Warranties” in order prevent the previous case from happening, assuming both parties are honest:

A. Knowledge
Sellers have become increasingly wary of making any meaningful representations and warranties, and any that are given are likely to be qualified by some degree of knowledge -- "to the best of Seller's knowledge", "to the best of Seller's current actual knowledge without inquiry" and statements that "Seller is aware of no..." are a few examples of the lengths Sellers will go to say very little. Most Purchasers are not looking to set the Seller up for a breach of warranty or misrepresentation suit; they just want to elicit information that is not readily available from other sources. The Purchaser would like to know if there are any lawsuits, condemnations, violations (environmental, building code, etc.), and other pertinent facts about the property, but the Seller is cautious to go on the line for any of these things. The courts interpret actual knowledge to refer to those things of which the one sought to be charged has express information and those things which a reasonably diligent inquiry and exercise of the means of information at hand would have disclosed.4
Therefore, to make a statement to one’s “actual knowledge” implies a duty of inquiry. One common solution that may satisfy both the Seller and the Purchaser is to define “knowledge” and identify a person or persons within the Seller's operations who knows about the Property and its operations. The Seller is then not in a position of having to conduct internal due diligence of its many employees to determine who might have knowledge, and the Purchaser has the person who is most familiar with the Property actually telling something about it.

B. Disclaimer – “AS IS, WHERE IS”
In 1995, the Texas Supreme Court determined that the agreement to sell and purchase commercial property "as is" effectively negates any cause of action for DTPA violation, fraud and negligence, because the disclaimer defeats the element of causation.5 This reasoning has been extended to residential contracts as well.6 To be successful in relying on an “as is” disclaimer, the Seller should verify that all of the following apply:
• The Seller must disclose all known defects to prevent the Purchaser from claiming it was induced to buy, due to Seller’s fraud, misrepresentation or concealment of information.
• The Seller cannot obstruct the purchaser's ability to inspect the property.
• The "as is" clause must be an important basis of the bargain. It cannot be an incidental provision or a part of the "boiler plate" of the provision.
• The Purchaser and Seller must have relatively equal bargaining positions.

C. Disclosures
Regardless of what representations and warranties are made and what amount of disclaimers are required by the Seller to give its concerns, the Seller needs to disclose to the Purchaser any known defects, violations or conditions pertaining to the property (especially environmental or building code violations). A Seller of real estate is under a duty of disclosing material facts which would not be discoverable by the exercise of ordinary care and diligence on the part of the Purchaser, or which a reasonable investigation and inquiry would not uncover.7 The duty to disclose arises when one party knows that the other party is ignorant of the true facts and does not have an equal opportunity to discover the truth.7 However, a Seller has no duty to disclose facts it does not know.8 And a Seller is charged only with disclosing such material facts as to put a Purchaser exercising reasonable diligence on notice of the condition of the property.9 The Seller has no duty to disclose the legal status of the Property (e.g. zoning) to the Purchaser.10
In Conclusion, it is essential that a Seller knows all of the facts about the Property that may be of concern to the Purchaser, and thus should be disclosed in writing to the Purchaser. This is particularly true with respect to environmental conditions of the Property, all of which should be thoroughly and carefully disclosed to the Purchaser. The simplest way to do this is in the Contract itself, or in an addendum attached there. Many lawsuits as well as additional money spent by the developer to remedy the situation can be avoided if the proper and necessary steps are taken by both the Purchaser and the Seller.

Posted by Josh Smith-REAE 5311 Student

References
1 Merriman, Dwight. The Complete Guide To Zoning. New York City: Mcgraw-Hill, 2004.
2 Miles, Mike PHD, et. Al. Real Estate Development: Principles and Process. Third edition. New York City: Urban Land Institute, 2003.
3 Prudential Insurance Company of America v. Jefferson Associates Ltd., 896 S.W.2d 156 (Tex. 1995).
4 Erwin v. Smiley, 975 S.W.2d 335 (Tex. App. – Eastland 1998, pet. denied); Larsen v.Carlene Langford & Associates, Inc., 41 S.W.3d 245 (Tex. App. – Waco 2001, pet.denied); Cole v. Johnson, 157 S.W.3d 856 (Tex. App. – Fort Worth 2005, no writ)
5 Oat Note, Inc., v. Ampro Equities, Inc., et al, 141 S.W.3d. 274, 280 (Tex. App. –Austin 2004, no writ).
6 Smith v. National Resort Communities, Inc., 585 S.W.2d 655, 658 (Tex. 1979)
7 Coldwell Banker Whiteside Associates v. Ryan Equity Partners, Ltd., Cause No.01571-CV (Tex. App. – Dallas 2006, no writ).
8 Robinson v. Preston Chrysler-Plymouth, Inc., 633 S.W.2d 500, 502 (Tex.1982); Prudential, supra at162 (Tex. 1995)
9 Cole v. Johnson, supra at 860 (Tex. App.-Fort Worth 2005). (Refers to a seller of a house)
10 Coldwell Banker, supra.

A Change This Fall

Dear Graduate Real Estate Students,

For those of you who have visited with me at my office, you can see by the piles of projects, exams, and research papers that I have been at UTA for a very long time (10-years to put a number to it). North Texas and UTA have been great places for me, real estate, and REAE@UTA, but I will try a little different challenge this fall. In August, I will move to Central California to help run the Gazarian Real Estate Center.

I will keep my e-mail address ahansz@gmail.com if anyone needs to contact me. Also, as I promised, I will keep this blog active. I have really enjoyed the student blog posts this past year and I think the post topics and quality have been outstanding. Thank you to my bloggers for the good work. I know that others inside and outside of UTA have enjoyed your posts too.

David Gray will be handling questions and concerns about the real estate program going forward and Fred Forgey will officially run the program starting this Fall semester (see the post below for more details).

Cheers,
Dr. Hansz

Message from David Gray Regarding the Real Estate Program

Dear MSRE Student:

The purpose of this message is to inform you that the MSRE program is alive and well and will certainly continue into the foreseeable future. Dr. Andy Hansz is leaving us but Dr. Fred Forgey is joining the College of Business in August 2009 to provide leadership for the program. No changes are contemplated in terms of degree requirements; however, starting Fall 2009 all graduate courses in real estate will be offered at the UT Arlington-Fort Worth campus. The new class schedule will adhere to a primarily Saturday based degree program with elective courses being offered evenings during the week. All courses needed for the degree will be offered at the Fort Worth Center. More details about the class schedule will be communicated to you in the coming weeks.

This course (class) re-location change is being made to better integrate the degree program with industry professionals and raise the profile of the program to a national level. Additional steps are being planned in this regard; information will be communicated to you during the next two or three months so that you can be more fully informed.

At this point if the class schedule and location changes become problematic for you, please contact me at gray@uta.edu or 817-272-3387.

David A. Gray

Associate Dean