The Wall Street Journal’s Real Estate Journal has a fascinating article, apparently in response to the collapsing sub-prime housing marking, that explores how Islamic law handles foreclosure. A prominent condominium conversion in Greenwich, Conn., whose financing is structured to abide by Islamic laws, presents a new test for real-estate investments: How does foreclosure work in such a deal? Whoa, whoa, whoa. In Greenwich, CT, a financing structure can be based on Islamic law and still within the perimeters of American law? How is that even possible? That is the question real-estate executives are asking as Lehman Brothers looks to take possession of Greenwich Oaks and Greenwich Place, one of the most-expensive condominium conversions in the country. The complexes were purchased for $223 million in 2006 by Antares Investment Partners, which planned to spend more than $100 million to convert the low-end rental units into high-end condominiums. But the project was plagued by sluggish sales and senior-citizen tenants who refused to move. Lehman Brothers, which lent the developers money to purchase and renovate the complexes, began foreclosure proceedings Dec. 7. Antares’s principal equity partner in the deal is Arch Street Capital Advisors, which represents a Kuwaiti client that structured a $45 million equity investment in the condos to be “Sharia compliant” or in accordance with Islamic law that forbids interest. Such financial structures have grown rapidly in recent years as money from oil-rich Islamic countries pours into real estate in the U.S. and elsewhere. Holy Monkeys. If a condo complex is financiall Sharia Compliant, does that also mean that it is also socially Sharia? Are single women permitted to buy the condos? Can they have a gentleman caller in their home, if they so choose? Islamic financial investments avoid the use of interest by being structured as leases on the property. Thus, instead of interest, the investor receives rent directly from the property. The amount of the rent is pegged to an amount a traditional investor would have received in interest. In theory, the foreclosure of a Sharia-compliant investment shouldn’t pose major problems for lenders. The lease that serves as the Sharia-compliant investment vehicle is subordinate to the underlying mortgage. So when a lender forecloses on the mortgage, the lease is canceled. Doug Callantine, president of Grosvenor Investment Management, which has participated in several Sharia deals on behalf of clients, says that, in theory, Sharia deals are structured so that a lender has the same rights in Sharia investment as in conventional loans, but done under a lease mechanism. He says the Antares deal “will test it and probably improve the process.”Michael McMillen, chairman of the American Bar Association’s Islamic Law Section, says of the 500 or so investments he has seen, he has yet to see a Sharia-compliant investment go into foreclosure. He says dealing with a Sharia-compliant foreclosure shouldn’t be any more complicated than foreclosing on a leveraged lease, such as ones that are used for aircraft, railroads or power plants. “There’s not a lot of magic” in these, he says. Last Friday, Radco Cos., designated by the project’s lender, Lehman Brothers, issued a notice that it would auction a $62 million controlling piece of the debt known as a mezzanine loan that Antares has failed to repay. Antares also owes Lehman as much as $228 million in a first mortgage on the properties. Antares purchased the two 1960s-era apartment complexes in February 2006. The Islamic finance investment came in the summer of 2006, as the residential market showed signs of softening. Arch Street, representing the Kuwaiti client, put in $45 million, of which $30 million was used by Antares to pay back Lehman for a bridge equity loan. But by the fall of 2006, it was clear the project was in trouble. Sales were slow and making matters worse, there were more than 100 senior-citizen tenants who under Connecticut law were protected from eviction and refused to leave. John Freeman, an Antares vice president, says the senior-citizen issue was “one of many factors” and puts most of the blame on the “credit crunch” and the fact that the “condo market has softened.” Mr. Freeman says Antares is still talking with Lehman about restructuring the loan and is hopeful that a deal can be worked out. This is preposterous. While I believe that banks can structure loans however they want, I think it’s dangerous to introduce Sharia law into American culture.