Leveraged Property/Crowdfunding

Investment Questions and Chats Property
#1

Asalaam Alykum,

  1. What is the opinion of participating in crowd-funding of property where in addition to equity the capital stack includes debt/leverage? So I would be investing with equity, however, the sponsor/principal of the project has leveraged the remaining need with debt?
  2. Does the % leverage make a difference?

Jazak Allah Khair

#2

Wasalam

May Allah bless you.
Debt is not an issue it itself in shariah. The issue arises when the debt bears interest.
In this case, if the repayment of the interest is also your responsibility or the responsibility of the company, then it would not be permissible to invest in it.
However if the sponsor/principal is solely responsible to repay the debt with the interest, then it will be permissible to take part in the crowd-funding.
This is my initial assessment on the matter. @Mufti_Faraz_Adam might have a different approach which you might follow.

And Allah knows best!

#3

Wa alaykum salaam,

I agree with Mufti Billal’s view. The gearing by other investor’s will not impact your specific investment share in the property if the finance is paid by the investor himself.

#4

Asalaam Alykum,

Jazak Allah Khairan to you both for your insight.

I went back and checked the cash-flows. Here it is: https://spark.adobe.com/post/Rget2NlSvJ8NT/

From this, the interest is being paid by the company (not just the sponsor)

I had some follow-up questions to understand the general principals.

Based on my understanding of your answer, if you are an equity investor in a company that has interest bearing debt and the interest will be paid back by the company, then being an investor in this company is not allowed? If this is true, is the concept different for stocks? It seems, there are a lot of shariah compliant common stock that have interest-debt (long/short) on their balance sheets.

Jazak Allah Khair

#5

Wasalam

When investing in shares of companies listed on a stock exchange, contemporary scholars tolerate the presence of a certain amount of debt in a company. The debt level should not be more 33% of the total assets of the company.
The tolerance is based on the rule of “removal of hardship”. If they had not put this sort of tolerance rule in place, it would have been impossible for Muslim investors to trade on any sort of stock markets.

This, however does not mean that it can be applicable in all investment scenarios. Otherwise people will start to think it is permissible to borrow interest based loans from bank.

@Mufti_Faraz_Adam may have a different explanation.

And Allah knows best!