Ⅱ Framework of Real Estate Securitization
Figures 2-4 and 2-5 outline the framework of real estate
securitization in Japan today.

The first is commonly referred to as “monetization”
and involves the owner of the real estate (originator)transferring the real estate to a securitization vehicle from[ 1 ] Asset Monetization and AssetManagement Products

its balance sheet (moving the asset off the balance sheet)and procuring capital by using the future cash flow fromthe real estate asset to service the investment of third party

There are two categories for real estate securitization asa collective investment structure (Figure 2-6).

investors. This is known as asset monetization real estate

Figure 2-4 Classification of Real Estate Securitization Products
Vehicle (SPE)

Investment Targets

Base Laws

Tokutei Mokuteki Kaisha (TMK)

Actual real estate
Real estate's trust beneficiary rights

Assetmonetization

Primary Investment
Products

Tokutei Mokuteki Kaisha (TMK)
Special purpose trust (SPT)

Asset Monetization
Law (SPC Law)

Preferred equity securities,
Beneficiary trust certificates,
specific corporate bonds,etc.

Kabushiki Kaisha
Limited company (SPC)

Company Law

Investment inTKs, etc.

Monetary debt
Commercial real estate backed loans
CMBSResident real estate backed loans
RMBS(Note)

Actual real estate
Real estate's trust
beneficiary rights

Assetmanagement

Investment corporation
Investment trust (J-REIT)

Investment Trusts
and Investment
Corporations Law

Actual real estate

Real estatesyndication businessFor-profit companies(companies authorizedunder the Real Estate
Syndication Business Law)

Real Estate
Syndication
Business Law

Investment units
Beneficiary trust
certificates

TK investment
NK investment(Note) Under the new Company Law, KKs in principle survive as KKs.
Prepared by ARES

Figure 2-5 Real Estate Securitization Vehicles and Related Laws
Real Estate Syndication Act
Promulgated April 1995
Revised September 1999 ~Operators
with permits

Vehicle (SPE)Operators
with permits

Method (asset monetization/–asset management)–

Method (contract/company)––

Equity form

Investment in
TK

Investment inNK

Debt form––

Investment
format ofinvestor

Equitymonetization

SPC Law
Promulgated September 1998
Revised November 2000 ~Special purpose
companies(TMK)

Special purpose
trust (SPT)

Investment Trusts and Investment
Corporations Law
Promulgated December 1998
Revised November 2000 ~Investment
corporation

Investment trust

Asset
monetization

Asset
monetization

Asset
management

Asset
management

Company
Preferential
investment
securities
Specific
corporate bonds

Trust
Investment in
beneficiary trust
certificates

Company

Trust
Investment in
beneficiary trust
certificatesSpecific
promisedcommercial noteon demand

Investment
securities

Investment in
beneficiary trust
certificates

Investment
corporation debt

Investment in
beneficiary trust
certificates

Remarks
KK, YK(Note)

Monetization andmanagement
types
Company
TK equity, etc.

Corporate bond(case of KK)

Designation
as negotiablesecurities under
Nonethe Securities andExchange Law

None

Negotiablesecurities

Negotiablesecurities

Negotiablesecurities

Negotiablesecurities

Presence ofdistribution
market

None

None

None

Listing market
existsPresently no listed–firmNone–(Note) Under the new Company Law, YKs in principle survive as KKs.
Prepared by ARES

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CHAPTER 2: Overview of Real Estate Securitization

securitization and the securitization is built around the realestate itself.
The other category is known as asset management realestate securitization. In this securitization, the assets ofinvestors are gathered to form a fund and these funds arethen invested into real estate by the fund manager (assetmanager) and the earnings from the assets purchased are
distributed to investors. In contrast to asset monetization
securitization, fund securitization is built around capital.
These patterns of real estate securitization differ
not only in their objectives but also in the relevant laws
and securitization vehicles. Since different laws apply,
depending on the securitization vehicle used, the securitized
asset either can or cannot be switched (i.e., sold andreplaced with a different asset). Therefore, the choice ofthe securitization structure should be made only after giving
sufficient consideration to the objective of the securitization.

[ 2 ] Contract and Vehicles
There are two basic elements to real estate securitization; the contract and vehicle.
The typical contracts include the Tokumei Kumiai (TK,silent partnership) contract under the Commercial Code,the Nin-i Kumiai (NK, voluntary partnership) contract andtrust contract under the Civil Code. In the case of contracts,
the business of the real estate securitization is implemented
based on a contract between the parties (partnershipinvestors, operator, trust settlor, trustee, etc.). The TK
securitization contract and NK securitization contract
under the Real Estate Syndication Act are special contract

forms based on TK contracts and NK contracts as typicalcontracts. Trusts are also sometimes used as a vehicle andcan take the form of special purpose trusts (SPT) governed
under the Asset Securitization Law and investment trusts
under the Investment Trusts and Investment CorporationLaw.
Vehicles are formed as the entity created as a newentity to conduct the real estate securitization. The
representative type of vehicles are the Tokutei MokutekiKaisha (TMK, special purpose company) governed by theAsset Monetization Law (“Act on Securitization of Assets,”
revised and implemented in 2000) and the investment
corporation governed by the Investment Trusts Law(“Investment Trusts and Investment Corporation Law,”revised and implemented in 2000). There are also manycases where practical reasons lead to Godo Kaisha (GKs;limited liability companies) and joint stock corporations
being used as the securitization vehicle.

[ 3 ] Debt and Equity
The securities issued as part of the process for realestate securitization can be split into two broad groups: debtand equity.
Debt obligations require the issuer to pay principal
and interest, much like a loan or corporate bond, from therevenue of the asset being securitized. For the investor thisis a pledge from the borrower to receive fixed interest andprincipal payments on set dates designated in advance.
Equity is the remaining capital after debts aresubtracted from the total assets of the securitization vehicle.

Figure 2-6 Two Real Estate Securitization Structures

Concept

Representativevehicle
and base law
Primary
characteristics
of securitization
vehicleRemarks

Asset Monetization Structure

Asset Management Structure

A specific piece of real estate is transferred to a vehicle (SPE)and funds are procured based primarily on the cash flow
generated by that asset. By breaking the economic interestof the real estate into small units through securitization, theprocurement of funds becomes easy.

Funds gathered from multiple investors are pooled (formed intoa fund), invested in real estate and managed, and operating
earnings are distributed to investors.

SPC/Asset Monetization Law(YK+TK (note), LLC+TK/Commercial Code and/or CompanyLaw)

Investment corporation and investment trust/Investment Trusts
Law(YK+TK/Commercial Code, Company Law)

First the real estate is designated (in the case of an SPC basedon the Asset Monetization Law, it is necessary to designate thereal estate to be monetized in advance)

Create the fund using investments from investors. The realestate can be freely replaced in principle. In the case ofJ-REITs, management is outsourced to an outside investment
trust manager.

It is possible to create small investment units throughsecuritization and to secure liquidity.

Quality of property (cash flow) is key; in principle, the investment The key is the prowess of the fund manager.
period is limited (has an end).
In principle, an investment corporation is a “going concern.”
Secure bankruptcy remoteness through Chukan Hojin, Cayman
SPC + charitable trust, special interest trust, etc.
In the case of an SPC, the booking of dividends as expenses isallowed if certain requirements are met (pay through).

There are no special regulations on bankruptcy remoteness withinvestment corporations.
In the case of an investment corporation or investment trust,the booking of dividends as expenses is allowed if certain
requirements are met (pay through).

(Note) “YK+TK” represents the combination of a Yugen Kaisha and Tokumei Kumiai. Under the new Company Law, TKs that existed when the Law came into effect in principle survive as KKs.
“LLC+TK” represents the combination of a Limited Liability Company and Tokumei Kumiai.
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This capital is most commonly comprised of shares andequity-like securities (investment securities issued byinvestment corporations, specific investments and preferred
equity securities of TMKs, etc.) issued by the securitization
vehicle, investments in TKs and NKs and other investmentsthat take the first loss if anything negative occurs.
Note: On the balance sheet of a TK, the investment of a TK member isshown on the “Asset” side of the balance sheet but the balance
sheet of the operator itself is limited by the amount indicatedas paid-in capital in the commercial registry. Therefore, theinvestment of a TK member is ordinarily indicated as a “long-termdeposit” or, when the amount is not material, the account categoryof “other liabilities” is used. (Excerpt from page 89 of “Monetizationand Securitization Accounting and Taxation, Second Edition”
published by Chuokeizai-sha).

Equity investors can only receive dividends after all debt
obligations have been met and so they receive dividends
from the property remaining after the principal is repaid tothe debt investors at the time of settlement. Thus the debt
investor has preference over the equity investors.

While the debt investor has the right to receive only
the principal and interest agreed to in advance, distribution
to the equity investor is greatly impacted by the successor failure of the business. While the equity investor may
obtain a very high return, the equity investor may receive
less absolute distribution than the debt investor; thisincreases the risk, but equally the returns, if successful, arehigh.
Financial institutions that provide loans to asecuritization vehicle are the debt investors. Financial
institutions often take a different approach that involves
pooling a diverse range of credits from real estate backed
loans, placing these in an SPE as an asset and then issuingasset-backed securities (ABS) backed by these loancredits. These ABS securities are known as mortgagebacked securities (MBS) and can be subdivided further
into commercial mortgage-backed securities (CMBS) andresidential mortgage-backed securities (RMBS); bothof these have been issued continually since 2001 by theJapanese Government Housing Loan Corporation (theJapan Housing Finance Agency since April 2007).

Ⅲ Key Legal, Tax and Accounting Considerations in Real Estate Securitization[ 1 ] Legal Considerations(1) Bankruptcy Remoteness: Concept and Necessity
As mentioned in the first section of this chapter, one of
the most basic requirements of the real estate securitization
structure is to ensure that the entity bankruptcy is remotefrom the originator and any investors and vice versa. Thus
the concept of bankruptcy remoteness is that even if aninterested party of a securitization, especially the originatorand vehicle, goes bankrupt, the cash flow of the securitized
asset and thus the redemption of the principal and interest
and any equity returns as defined at the inception of thesecuritization are not affected by the bankruptcy of theinterested party as a result of the performance of the assets
being based on the assets in the structure and the structure
itself with cash flow continuing to be paid.
Securitization transfers the securitized asset from theoriginator and places it in a securitization vehicle which
has a capital structure created based on the cash flows thatthe asset can generate. In principle the securitization is notdependent on the creditworthiness of the originator and soinvestors demand that any direct impact on the investorsof bankruptcies to the originator or the vehicle itself beeliminated; this is referred to as being bankruptcy remote.
Bankruptcy remoteness is essential in an asset
monetization securitization, which requires the stabilityof the securitization vehicle, and the steps taken to ensurebankruptcy remoteness would include:

22i.	Legally separating the securitized asset from any
influence of the bankruptcy of the originator; andii.	Minimizing the bankruptcy risk of the actual vehicle
owning the asset subject to securitization (TMKsunder the Asset Monetization Law, SPEs with theform of KKs and LLCs, etc.).
(2) Separation from Originators
If a securitization vehicle receives staffing or capital
influences in its administration from the originator or equity
investors, the vehicle may become embroiled in bankruptcy
proceedings if the originator were to go bankrupt. This
may lead to the investors being treated as general creditors,
which may disallow investors from receiving profit
distributions or receive the redemption of principal andinterest.
For this situation to occur the custodian appointed on
bankruptcy of the originator would judge that the transferof the asset was not a true sale (see (4)) but that it was atransfer of collateral and thus deny the original transferof the asset to the securitization vehicle. If this were tooccur, the collection of investment funds is only possible
through reorganization of collateral rights in relation to thecorporate reorganization of the originator.
The following are considered when judging thebankruptcy remoteness of a securitization vehicle from its
originator.
i.	Rational intent of the interested parties as indicatedby the contract

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