Jurisdiction - Japan
Reports and Analysis
Japan – 2011 Amendment of Asset Liquidation Law and the Impact on Real Estate Securitization Practice.

29 September, 2011


1. Introduction 


The Amendment of the Financial Instrument and Exchange Law (the “Amendment”) was enacted on May 17, 2011 and was publicly announced on May 25, 2011. One of the legislative purposes of the Amendment is to improve the opportunities for asset investments to better promote the effective use of the nation’s assets, including the deregulation of the asset liquidation or securitization practice.  More specifically, the Amendment also revised the Law Concerning the Liquidation of the Assets (the “Asset Liquidation Law”, and as amended, the “Amended Asset Liquidation Law”) to streamline certain procedures under the Asset Liquidation Law which impacts real estate investments in Japan.


This article outlines the Amendment, especially the changes to the Asset Liquidation Law which simplifies real estate investments in Japan.  The Amended Asset Liquidation Law is scheduled to take effect by the end of 2011, the actual date is to be designated by the government ordinance within the six (6) months from the date of its publication.


2. Background of the Amendment of the Asset Liquidation Law as Applicable to TMKs


The asset liquidation or securitization business in Japan involves a structure in which certain assets, such as real estate, (the “Specified Assets”) are acquired for investment using an entity such as a TMK or Tokutei Mokuteki Kaisha. This is a limited liability company incorporated pursuant to the Asset Liquidation Law, and a vehicle in which investors make investments in the form of preferred shares or bonds issued by the TMK which distribute profits from the cash flow generated by the Specified Assets pursuant to the Asset Liquidation Plan (the “ALP”) of the TMK.  TMKs are often used as a vehicle for real estate investments in Japan especially by offshore investors.  TMK is a conduit entity, which means that distributions by a TMK are deductible from income and not subject to corporate tax at the TMK level if it meets certain requirements under the Special Taxation Measures Law (Article 67-14)*.


Currently, a TMK is required to file a Business Commencement Notification and the ALP, with the applicable Local Finance Bureau of the Financial Services Agency (“FSA”). Certain information about the TMK must be disclosed including, but not limited to, the Specified Asset and its financings, before the TMK is permitted to commence its business, i.e. business regarding the asset liquidation or securitization (Asset Liquidation Law, Articles 4 and 5).  If there are changes to the information provided in the ALP, the TMK is required to file an amended ALP with the Local Finance Bureau within the period provided under the Asset Liquidation Law Enforcement Rules (the “Enforcement Rules”) (Asset Liquidation Law, Article 9). 


Currently, the Enforcement Rules require the TMK to file the amended ALP with the Local Finance Bureau (Enforcement Rules, Articles 21.1(2) and 26.1):


(i) for changes related to the offerings of the asset backed securities (which include preferred shares or specified bonds), by the date of such an offering;

(ii) for changes related to the terms and conditions of preferred shares, specified bonds or specified loans, before the issuance of such preferred shares or specified bonds or the drawdown of the specified loan; or

(iii) for any changes other than items (i) and (ii) above, within two (2) weeks from such changes.


Generally, to amend the ALP, the TMK must obtain prior written consents from the related parties, which includes, but are not limited to, the common shareholders, preferred shareholders, bondholders and lenders, as applicable (Asset Liquidation Law, Article 151.3(2)). Therefore, the procedures to amend the ALP could be burdensome.  In addition, as discussed below, the requirements for TMKs to acquire Specified Assets is quite cumbersome. In response, the Amendment streamlines and improves these procedures significantly (See Reference Materials regarding the Amendment of the Financial Instruments and Exchange Law of the FSA **). 


3. Overview of the Amendment of the Asset Liquidation Law Applicable to TMKs


(1) Streamlining of the Procedures to Amend the ALP


As explained above, the Asset Liquidation Law (Article 9, Paragraph 1) requires a TMK to file the amended ALP with the Local Finance Bureau within a certain period if there are changes to the information provided in the ALP. The Amended Asset Liquidation Law (Article 9, Paragraph 1) provides for certain exemptions to such filing requirements in cases where (i) changes related to the date of the acquisition of the Specified Assets or (ii) any other non-material changes related to the ALP to be specified under the Enforcement Rules to be promulgated.  According to information provided by the FSA, the amended Enforcement Rules will (i) exempt TMKs from filing the amended ALP for certain non-material changes to the terms or conditions of the preferred shares, specified bonds or specified loans and (ii) permit TMKs to amend the ALP in a more simplified manner in such cases (e.g., by the TMK’s director without the consent of its preferred shareholders, bondholders or lenders).


Therefore, after the promulgation of the Enforcement Rules, real estate investments through TMKs will become simpler and more streamlined.


(2) Deregulation of the Acquisition of the Specified Assets


(a) Exemption from the Segregation of Ancillary Specified Assets


A TMK must entrust its Specified Assets to a trustee for its management and disposition (Asset Liquidation Law, Article 200), however, if the Specified Assets are real estate, the TMK may delegate its management and disposition of such Specified Assets to an appropriate asset manager or a property manager. In such case, such an asset manager or property manager must segregate the Specified Assets from its own or other managed assets and satisfy certain requirements provided under the Asset Liquidation Law (Article 200).


Furniture, fixtures and equipment (the “FF&E”) are generally regarded as separate Specified Assets from the land or buildings.  Accordingly, if the TMK owns FF&E, technically it currently needs to entrust the FF&E and delegate its management and disposition on a segregated basis.  However, such a practice is often not practical in the management of real estate investments, perhaps, other than for hotels.


To address this issue, the Amendment exempts the TMK from the entrustment and segregation of ancillary assets. More specifically, the Amended Asset Liquidation Law (Article 200) defines ancillary assets associated with real estate or other assets to be specified under the amended Enforcement Rules to be promulgated as the “Ancillary Specified Assets” and permits the TMK to delegate the management of the Ancillary Specified Assets to an appropriate asset manager without the requirement for the asset manager to segregate the Ancillary Specified Assets. While the Amendment is quite helpful in addressing this issue, it is not clear at this time whether hotel FF&E will be included as Ancillary Specified Assets or not.


(b) Streamlining the Valuation Requirements of the Specified Assets


Currently, before a TMK can acquire real estate or trust beneficiary interests of trusts owning real estate it needs to obtain both (i) an appraisal by a licensed real estate appraiser and (ii) an inspection of the value by a thirdparty. The Amended Asset Liquidation Law streamlines this process by eliminating the need for an inspection of the value by a third party and thus only requiring an appraisal by a licensed real estate appraiser. 


(c) Abolition of the Disclosure Requirements by the Seller of the Specified Assets


The seller of Specified Assets to a TMK is required to disclose to the TMK any important matters in a securities registration statement or any other disclosure documents (Asset Liquidation Law, Article 199). Similar disclosure obligations are imposed on the trustee or the asset manager of the TMK. As a practical matter, sellers are sometimes unwilling to agree to such disclosure requirements. In response, the Amendment abolishes this disclosure requirement.


(d) Deregulation of Obtaining Loans


The Amendment eases the current restrictions on the objectives of the borrowings by TMKs. Currently, the Asset Liquidation Law (Article 210) limits the TMK to obtain specified loans (“Specified Loans”) only to finance the acquisition of Specified Assets.  In addition, Asset Liquidation Law (Article 211) currently prohibits TMKs from obtaining loans except for: (i) Specified Loans under Article 210; (ii) loans to repay the obligations under the specified bonds, promissory notes or Specified Loans in accordance with the ALP; or (iii) as permitted under the Enforcement Rules.


The Amendment will permit the TMK to also use the proceeds of Specified Loans for purposes other than acquiring Specified Assets (Amended Asset Liquidation Law, Article 210).  Furthermore, the Amended Asset Liquidation Law expressly permits TMKs, in addition to obtaining Specified Loans, to obtain loans: (i) for up to one (1) year to repay the obligations under the specified bonds, promissory notes or Specified Loans (including refinancing); (ii) as a temporary cash management measure where preferred shares or specified bonds are issued or a Specified Loan is obtained; and (iii) as permitted under the amended Enforcement Rules (Amended Asset Liquidation Law, Article 211).


4. Conclusion 


In conclusion, the Amendment streamlines the TMK’s filing requirements and the procedures relating to the amendment of its ALP, and eases and streamlines the regulations on the acquisition of the Specified Assets and on obtaining loans. These details will be promulgated by the forthcoming amended Enforcement Rules. The Amendment will make the Asset Liquidation Law more user-friendly and will reduce the time and cost to use TMKs for real estate investments in Japan.


Please note that there are further possible amendments to the Asset Liquidation Law being discussed at this time for future legislative action such as allowing TMK’s to more freely acquire additional Specified Assets. Whether and when such additional changes will be promulgated is uncertain but the Amendment is a positive step in the right direction to make real estate investments in Japan more attractive.



* In addition, TMKs can receive the benefit of the favorable real estate acquisition tax and registration tax rates.


** See FSA’s website: http://www.fsa.go.jp/common/diet/index.html 



For further information, please contact:


Alexander Jampel, Baker & McKenzie GJBJ Tokyo Aoyama Aoki Koma Law Office

[email protected]


Haruhiko OgasawaraBaker & McKenzie GJBJ Tokyo Aoyama Aoki Koma Law Office

[email protected]

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