In general, investments in real estate occur through several well established statutory vehicles and contractual forms, including the following:

(1) Japanese real estate investment trusts (J-REITs)

An investment corporation is an entity type specially provided for under the Act on Investment Trusts and Investment Corporations (the “ITICA”) as a joint stock style entity with a narrowly-defined business scope and mandatory external management. J-REITs are investment corporations focused on acquisition, management and transfer of real estate. While REITs can be listed or private, references to “J-REITs” typically mean listed REITs. J-REITs are supervised by the Financial Services Agency of Japan (the “FSA”) and subject to a fairly extensive supervisory and disclosure framework.

(2) Tokutei mokuteki kaisha (TMK)

Tokutei mokuteki kaisha is an entity type provided for by the Act on the Securitization of Assets (the “Securitization Act”). As the name of the act implies, TMKs are a mainstay of private and conduit-style real estate securitizations of large single assets. Originators prepare a detailed and extensive asset securitization plan and obtain approval from the relevant governmental authority. TMKs may acquire real estate directly or trust beneficial interests in real estate, fund themselves through asset backed securities or borrowings and distribute cash flows in accordance with the approved asset securitization plan. TMKs are subject to a detailed governance and disclosure framework under the Securitization Act.

(3) Godo kaisha (GK) and tokumei kumiai (TK)

Godo kaisha is a type of company established by the Companies Act and is substantially the equivalent of a limited liability company. Tokumei kumiai is a type of partnership established by the Commercial Code and is formed by a partnership contract among an operator (typically a GK) and one or more silent partners (TK investors), which are independent of one another and do not necessarily know the identity of the other silent partners. Investments in trust beneficial interests in real estate through a combination of GK and TK are often called the GK-TK structure. In the typical GK TK structure, a GK holds legal title in its role as TK operator and raises capital through TK investors. The GK-TK is a standard investment structure broadly used for private real estate acquisition transactions. GKs have high operational flexibility and may operate with a light procedural burden in relation to the public authority. However, GKs do not share TMK’s conduit nature as TMKs have, and certain statutory tax benefits available to TMKs are not applicable.

(4) Joint real estate ventures

A number of different real estate syndication regimes are provided for under the Act on Specified Joint Real Estate Ventures (the “Real Estate JV Act”). Corporations or special purpose vehicles may engage in joint investment businesses in specified real estate in compliance with a regulatory framework under this legislation, including solicitation rules, cooling off rights, segregation of joint venture assets, and ongoing reporting to participants. Joint real estate ventures are often used in crowd type and smaller scale pooled investments aimed for raising capital from a broader retail base.

Yes: these structures generally provide limited liability to passive investors. Under a GK-TK structure, the TK investor is a contractual silent partner, and does not owe liability to third parties. In a TMK structure, holders of specified equity or preferred equity benefit from statutory limited liability up to the subscription price of their equity. In a J-REIT structure, investors hold investment units, so their economic exposure is limited to the amount invested in those units.

The structures listed in #1 above are available for any sector or strategy. While REITs tend to favour core strategies, private funds adopt a wider range of investment strategies, from core to opportunistic. REITs consist of a portfolio of properties and are managed with a long-term investment strategy. While some private funds are structured as blind-pool funds, in many cases they are set up specifically to manage particular properties. These funds typically have a fixed investment horizon, and upon maturity, the funds wind up by selling their assets or are refinanced.

The Financial Instruments and Exchange Act (the “FIEA”) applies to all real estate funds with respect to their formation and management.

In addition, regulations applicable to the underlying real estate assets depend on their form: physical real estate is subject to the Real Estate Brokerage Act (the “Brokerage Act”); if the assets are securitized into trust beneficiary interests, they are treated as “deemed securities” and fall under the scope of the FIEA.

Finally, specific regulatory laws apply depending on the chosen structure:

• J-REITs and Private REITs: The Investment Trusts and Investment Corporations Act
• TMK: The Act on the Securitization of Assets; and
• GK-TK: The Commercial Code and the Companies Act.

No statutory cap on leverage ratio applies to any of the investment structures introduced in #1.

There is no single, across-the-board Japanese rule requiring all real estate fund vehicles to report NOI, cap rates and occupancy rates in a uniform format; the position depends on the vehicle. Some listed J-REITs voluntarily disclose property-level performance metrics. By contrast, for private GK-TK or TMK funds, as well as non-listed J-REITs, reporting of property-level KPIs is typically driven more by the fund documents and market practice than by a single statutory reporting template.

In the case of listed REITs, if an asset manager decides to acquire or dispose of properties, the REIT must disclose this fact in a timely manner in accordance with the rules of the Japan Exchange Group (the “JPX Rules”). In addition, listed REITs are obliged to disclose an outline of their assets held at the end of each financial period as part of ongoing disclosure under the FIEA.

As to timely disclosure regarding the acquisition / disposal of properties under the JPX Rules, it is standard practice to disclose both the acquisition / disposal price and the appraised value. In addition, as to ongoing disclosure of assets held under the FIEA, the acquisition price, book value and appraised value are generally disclosed for each property held.

Private REITs are not subject to disclosure obligations under the JPX Rules or the FIEA. However, in line with listed REITs, it is common practice to issue press releases on investor login sites.

It should be noted that, in addition to the above, listed and private REITs are also required to disclose documents such as asset management plans in accordance with the ITICA, as well as disclosures based on the rules established by the self-regulatory organizations to which their asset managers belong (the “Self-Regulatory Organizations Rules”).

With regard to private funds, while press releases may be issued voluntarily regarding the acquisition or sale of properties, in principle there is no obligation to disclose such information publicly.

The valuation of the underlying assets is performed by an independent real estate appraiser (i.e., a person holding a national qualification in real estate appraisal with no conflict of interest). The ITICA requires that REITs obtain an appraisal by a real estate appraiser for any real estate acquisition. For funds other than REITs, it is also customary to obtain an appraisal report from a real estate appraiser.

The valuation of the real estate fund itself is carried out by the asset manager. In the case of TMKs and REITs, the appointment of an accounting auditor is legally required, and external audits are carried out.

Japanese statutes do not prescribe a valuation frequency universally applicable to real estate funds, nor do they provide any closed-ended versus open-ended distinction. However, even though the book value of real estate on the balance sheet does not need to be re-evaluated periodically in general, it is worth noting that according to disclosure rules, the market value of assets held by J-REITs needs to be reviewed at least semi-annually. Besides, it is often the case that the market value needs to be updated periodically pursuant to covenants under finance documents.

For an open-ended private (non-listed) REIT, the manager would typically be expected to use a combination of cash management and redemption control tools. In practice, the articles of incorporation and internal policies usually impose limits on the timing and scope of redemptions, such as requiring advance notice, imposing a retention or deduction amount upon redemption depending on the investor’s holding period, and permitting redemptions only up to a specified percentage of the total issued investment units during a given period. It is also common for offering materials to state that, in order to fund redemptions, the REIT may arrange borrowings or sell assets.

Private REITs are typical open-ended real estate funds. The requirements and procedures for redemptions in private REITs are specified in detail by the private REITs’ articles of association and bylaws, as well as the ITICA and Self-Regulatory Organizations Rules.

In principle, private REITs, open-ended real estate funds, must comply with requests from their unitholders for the redemption of units; however, they may refuse redemption if the circumstances fall under the grounds specified in the ITICA or their articles of association.

However, the articles of association of private REITs do not generally provide for restrictions on redemption at their asset manager’s discretion. Therefore, it is generally not permitted for an asset manager to restrict redemptions in private REITs.

Structures such as J-REITs (listed REITs) and real estate STOs, which have recently been introduced in Japan, are designed to create liquidity in real estate assets.

In addition, in the case of funds that are affiliated with creditworthy sponsors (such as major real estate companies), illiquidity risk can be seen as being mitigated through mechanisms such as the creation of exit opportunities whereby the sponsor acquires the underlying properties.

Japanese law does not impose statutory diversification or leverage ratios by default. Rather, in practice, a fund’s own documents often clearly articulate its purposes, asset classes, assessment and redemption methods, and financing tools, and subject managers to a tailored framework for the fund, including, for example, independent appraisal rules, as well as governance and disclosure provisions.

Asset Manager: An asset manager for REITs must be registered as an investment management business (Toushi Unyou gyou) under the FIEA, and must obtain a license under the Brokerage Act and authorization for discretionary trading agency. An asset manager of private funds is required to be registered as an investment management business or investment advisory business (Toushi Jogen gyo) under the FIEA if the fund manages trust beneficial interest in real estate. Should the fund utilise a scheme under the Real Estate JV Act involving physical real estate, a permit under the Real Estate JV Act will be required. Furthermore, as asset managers of private funds frequently act as intermediaries or agents in the sale, exchange or letting of real estate, they are almost always required to hold a license under the Brokerage Act. It should also be noted that further licenses or registrations may be required depending on the specific activities undertaken by the asset manager.

Asset managers are subject to supervision by the FSA if they are registered under the FIEA and by the Ministry of Land, Infrastructure, Transport and Tourism if they hold a license under the Brokerage Act or the Real Estate JV Act. It is also imperative that they adhere to applicable Self-Regulatory Organizations Rules.

Real Estate Funds: For REITs, registration under the ITICA is mandatory. Furthermore, although no license is required, REITs are deemed to be real estate brokers as defined by the Brokerage Act. With regard to private funds, given the difficulty of obtaining a license under the FIEA or the Real Estate JV Act for an SPC, it is common practice to structure the fund such that it does not require a license by outsourcing operations to a licensed asset manager. However, certain professional-oriented funds may, provided they meet specific requirements, conduct investment management activities by themselves by filing a notification with the relevant governmental authority under the FIEA. Funds that have filed such a notification as well as REITs and TMKs, are subject to supervision by the FSA.

In principle, there is no tiered, size-based variation in the regulatory framework. Rather, the type of regulation is primarily determined by factors such as the nature of the investment assets (physical real estate or real estate trust beneficial interests), the fund structure, and the category of investors (professional investors or non-professional investors).

With respect to asset managers, capital requirements are imposed as part of the licensing requirements under the FIEA as follows:

• Investment Management Business (directly managing fund assets): minimum capital of JPY 50 million (or JPY 10 million where the clients are limited to professional investors only);
• Investment Advisory and Agency Business (providing advice only to funds): no minimum capital requirement; however, a security deposit of JPY 5 million is required; and
• Type II Financial Instruments Business (soliciting fund interests): minimum capital of JPY 10 million.

As explained in #15 above, an asset manager needs to be licensed under the FIEA or the Brokerage Act, depending upon the type of investment structures. On the other hand, no license is required of a property manager in principle, unless it engages in real estate brokerage.

In Japan, real estate fund SPCs typically outsource virtually all material functions. For J-REITs and TMKs, the applicable statutes require the appointment of external service providers, including an asset management company, an asset custody company, and an administrative agent for back-office functions. Although a GK-TK structure is not subject to the same statutory framework, it generally follows a similar outsourcing model in practice. Other key service providers typically include an independent real estate appraiser for asset acquisitions and disposals, a property manager and building manager for the maintenance, operation and leasing of the relevant properties, a financial instruments business operator (such as a securities firm) for the offering or private placement of equity interests, and legal, accounting and tax advisers.

As listed or private REITs are established under the ITICA, they must be based in Japan. In the case of private funds, a Japanese legal entity is usually set up. On the other hand, it is possible for foreign-based real estate funds or investment corporations to acquire Japanese property.

Furthermore, it is possible for Japan-based real estate funds to acquire overseas property. Should certain conditions be met, listed or private REITs may also include overseas property in their portfolios.

With regard to asset managers, the FIEA stipulates that a domestic business office and a representative are required for a person to register the investment management business. As asset managers for REITs and asset managers who are entrusted with investment decisions for private real estate funds require an investment management business registration, they must have a local business office and a representative. Asset managers engaged in investment advisory services may be registered as an investment advisory and agency business even if they are based overseas, but this is not a common arrangement. For further details on the rules applied to foreign managers, see #20.

Under the FIEA, foreign managers and advisors must register for the following licenses if they engage in the management of Japanese funds, in the same manner as their Japanese managers and advisors:

• Investment Management Business (directly managing fund assets):
  Required where a foreign manager directly assumes discretionary investment authority from a Japanese fund under an investment management agreement and makes investment decisions;
• Investment Advisory and Agency Business (providing advice only to funds):
  Required where a foreign advisor provides investment advice to a Japanese fund without having discretionary investment authority; and
• Type II Financial Instruments Business (soliciting fund interests):
  Required where a foreign manager itself directly solicits Japanese investors to acquire interests in a Japanese fund.

However, obtaining this registration imposes very heavy costs and burdens on foreign fund managers. It requires establishing a business office or other base of operations (or appointing an agent) in Japan, maintaining minimum capital (see #16), securing specialized personnel, and building a strict compliance system. Therefore, it is standard for foreign managers to mitigate this regulatory burden by utilizing the exemptions and special provisions under the FIEA as follows:

• Special Provision for Management/Advisory Services to Domestic Investment Managers (Article 61 of the FIEA): A person engaged in investment advisory or investment management business outside Japan may conduct such business without registration, provided that the counterparty investor is a registered financial instruments business operator or a registered financial institution conducting investment management business;
• Qualified Institutional Investor (QII) Exemption (Article 63 of the FIEA):
  Where a foreign manager acting as the general partner or operator of a Japanese fund conducts solicitation or management of a fund comprising at least one QII and no more than 49 non-QII investors (eligible investors under the exemption), the fund may be managed and self-offered upon filing a prior notification with the authority. Where the filing entity is a foreign corporation, it must appoint a representative (agent) in Japan.

In addition, in 2021, two new regulatory categories were introduced allowing fund management for foreign capital to be conducted based on a notification (rather than full registration). Details are introduced on the Financial Services Agency (FSA) website.

• Specially Permitted Business for Foreign Investors, etc. (Article 63-8 and 63-9 of the FIEA): A general partner managing a partnership-type fund primarily invested in by foreign professional investors (such as foreign corporations or certain high-net worth non-resident individuals) may conduct investment management (so-called self-management) in Japan without registration by filing a prior notification with the relevant authorities. By submitting additional required information, such general partner may also conduct self-offering without registration for Type II Financial Instruments Business.
• Specially Permitted Business during Transition Period (Article 3-3(1), (5) of the Supplementary Provisions of the FIEA): A foreign investment manager licensed by a foreign authority (with at least three years’ operational track record) may conduct certain activities at its business office in Japan without registration, provided that a prior notification is filed. This is a time-limited measure that will be in effect until November 21, 2026 and the notification made pursuant to this measure must be made by that date. Furthermore, such transitional business may be conducted for a maximum period of five years from the date of notification.

In regard to private real estate investment funds, it is not possible to determine a standard management fee level as the management fees vary by fund to fund and contract to contract. As for the listed J-REITs, the asset management fees typically consist of multiple elements. For instance, basic management fees are usually calculated by multiplying the total asset amount or net asset amount by a certain rate typically in the range of 0.1% to 0.5% per annum. Performance-liked management fees are also often adopted and calculated in conjunction with performance indicators such as NOI (rental business profit), net income, and distributions. When trust beneficiary interests in real estate are acquired, the acquisition fee is charged in an amount calculated by multiplying the acquisition price by a certain rate usually in the rage of 0.5% to 1.0%. Further, when real estate is sold, the disposition fee is charged and calculated by multiplying the disposition price by a certain rate such as 0.5%.

In Japan, as in private real estate funds generally, carried interest is typically a contractual sponsor/manager promote, rather than a statutory concept. The waterfall usually provides for return of capital first, then payment of any preferred return or hurdle, followed by a sponsor/manager catch-up (if applicable), and thereafter a residual profit split between investors and the sponsor/manager. The precise hurdle, catch-up and split are highly negotiated and depend on the strategy, investor base and bargaining position of the parties. Property-level metrics such as NOI, occupancy and exit value are commercially important, but carry is more commonly tied to the agreed distribution waterfall or return test than to any single property-specific benchmark.

Typical management fees include acquisition fees, ongoing management fees and disposition fees. In many cases, acquisition and disposition fees are calculated by applying a fixed rate to the transaction price.

The method of determining ongoing management fees varies depending on the real estate fund. The calculation method of the management fees for listed REITs is disclosed. According to the disclosure documents for such listed REITs, there are instances where ongoing management fees are calculated by summing the figures obtained by applying a fixed rate to certain indicators such as total assets under management (AUM), net operating income (NOI) and/or net profit for the period. Ongoing management fees for private REITs tend to align with those for listed REITs.

Ongoing management fees for private funds are more flexible. In some cases, they are calculated by applying a fixed rate to the acquisition price, whilst in others, a specific amount is agreed upon. Performance-based incentive fees can also be set.

Items that Japanese investors are likely to request via side letters include detailed reporting and the provision of data aligned with each investor’s internal policies, provisions for the exclusion of anti-social forces, and ESG-related reporting, policies, and commitments. Compared to the United States and Europe, Japan exhibits a tendency toward a higher frequency of tailor-made separate accounts structured to meet the specific needs of individual investors. Consequently, in many cases, these matters are directly incorporated into the primary fund documents rather than being stipulated in a side letter.

Yes, marketing to non-professional investors is permitted subject to certain regulatory requirements mainly set forth under the FIEA. The requirements depend on the vehicle and the scope of the offering.

1. J-REITs

Listed investment corporations are designed for broad retail participation through the issuance of J-REIT units, which fall under the definition of “Article 2(1) securities”. Public offerings and secondary distributions of such securities are subject to FIEA disclosure, including filing of securities registration statements and annual and quarterly securities reports, as well as to the ITICA regime governing investment corporations, which includes registration with the Prime Minister.

In addition to the disclosure requirements, marketing J-REIT units, when conducted by a placement agent on behalf of the issuing J-REIT, requires a Type I Financial Instruments Business license, an FIEA license with strict requirements.

2. TMK

TMKs raise funds by issuing asset-backed securities, referred to as “preferred equity,” which also constitute “Article 2(1) securities”. Marketing preferred equity issued by TMKs as a private placement agent requires the Type I Financial Instruments Business license just as J-REIT units do.

As TMKs are used for private securitizations, the issuance of TMK securities is arranged as a private placement in order to avoid the rigorous disclosure requirements under the FIEA. Among other things, this entails that an offering of TMK issued securities may only be made to fewer than 50 offerees and is subject to the requirements of the information provisions of the FIEA.

3. GK-TK

In the GK-TK structure, GKs fund themselves through TK contributions from TK investors. The TK interests held by TK investors are classified as “Article 2(2) securities” which is a category of securities with less liquidity compared to “Article 2(1) securities”. Regarding Article 2(2) securities, not only a placement agent but also an issuer of securities (i.e., GK in the typical GK-TK structure) is required to obtain the Type II Financial Instruments Business license. However, an issuer of securities may be exempted from the licensure requirements for marketing activities by outsourcing all marketing activities to a placement agent which itself holds the Type II Financial Instruments Business license.

Another exemption from the Type II Financial Instruments Business license requirement applicable to the issuer of Article 2(2) securities is called the Article 63 regime. Article 63 of the FIEA provides that an issuer may file a notification with the relevant governmental authority and engage in marketing Article 2(2) securities instead of obtaining the Type II Financial Instruments Business license. This is the case if and when investors subscribing to the marketed securities consist of at least one qualified institutional investor and up to 49 investors falling under certain categories of investor under the FIEA with the ability to make investment decisions.

Generally, no special marketing regime applies in Japan solely because the target investor is a government entity, sovereign wealth fund, pension fund or insurance company.

At the time of writing, no obligations have been imposed on real estate funds regarding sustainability due diligence or disclosure. With regard to ongoing sustainability compliance obligations, it is generally considered that there are no specific obligations applicable to real estate funds, apart from the reporting requirements outlined in #28 below and the rules of relevant local governments.

However, given the high level of interest among investors in ESG initiatives, there are numerous examples, particularly among listed REITs, of active disclosure of ESG initiatives on their websites on a voluntary basis, including GHG emission data. Furthermore, some asset managers for REITs have established sustainability committees to determine key sustainability issues and targets, formulate and review sustainability policies, and report on implementation progress.

Although not fund-specific requirements, owners or operators of real estate assets are subject to obligations such as the following:

• GHG reporting by “specified emitters”:
  Under the Act on Promotion of Global Warming Countermeasures, a business operator whose total annual energy consumption amounts (converted into crude oil equivalent) is 1,500 kL or more is classified as a “specified emitter” and is required to calculate its annual greenhouse gas (GHG) emissions for each business facility and report them to the competent minister. The emissions calculated by each business operator are aggregated by the government and published on the Ministry of the Environment’s website.

In the case of vehicles that own a large number of real estate assets, such as REITs, this reporting obligation may apply.

• Reporting of Energy Consumption by “Specified Business Operators” :
  Under the Act on Rationalization of Energy Use and Shift to Non-Fossil Energy, business operators whose total energy consumption for the entire company, including all business sites operated by the operator, reaches 1,500 kL or more per year (in crude oil equivalent) must submit a notification of such energy consumption to the government and obtain designation as a “Specified Business Operator.” In addition, if the energy consumption of an individual factory, workplace, or other business facility is 1,500 kL or more per year, each such facility is required to obtain designation as a “Designated Energy Management Factory or Workplace”. Specified Business Operators are required to submit annual reports and mid-to-long-term plans regarding energy conservation initiatives for both the business operator itself and its designated factories and business facilities.

Large-scale offices, retail facilities, logistics properties, and other commercial buildings may qualify as “business facilities” for this purpose. Accordingly, SPCs and REITs that own or operate such assets may be subject to ongoing reporting obligations.