The Real Estate Specified Joint Enterprise Act of Japan (Act No. 77 of 1994, as amended, the Act) regulates fund investments in real estate using partnerships and other vehicles. If a person or entity (i) receives investments through the use of partnerships (or certain other specified arrangements), (ii) acquires real estate using the proceeds of such investments and then (iii) distributes profits from the real estate investment to investors (a Real Estate Specified Joint Enterprise or fudosan-tokutei-kyodo-jigyo), such person or entity must be licensed as a Real Estate Specified Joint Enterprise operator under the Act. Requirements for this license are strict including a minimum capital of JPY100 million, minimum net assets equal to at least 90 percent of the capital of the enterprise and a license for selling building lots and buildings (Real Estate Broker) under the Building Lots and Buildings Transaction Business Act of Japan (Act No. 176 of 1952, as amended). As a consequence of these strict requirements, it is difficult for a special purpose company (SPC) established for real estate investment purposes to obtain a Real Estate Specified Joint Enterprise license. One way to avoid the need for this license has been to have SPCs acquire trust beneficial interests representing real estate rather than acquiring real estate itself, through the use of the so-called "tokumei-kumiai godo-kaisha" (TK-GK) structure. A TMK (Tokutei-mokuteki-kaisha) structure under the Act on Securitization of Assets of Japan (Act No. 105 of 1998, as amended) is also used to avoid the license requirement. After 2010, with a view to reduce increasing vacancy rates in Japan and to develop high quality real estate inventories in growth areas such as sightseeing and distribution, the Act was amended to make Real Estate Specified Joint Enterprises more "user-friendly". The most recent amendments are scheduled to come into force on 1 December 2017.
2013 Amendments (currently in force)
In 2013, the concept of a "Special Enterprise" (tokurei-jigyo) was introduced under the Act in order to permit an SPC to conduct a Real Estate Specified Joint Enterprise without the need for a Real Estate Specified Joint Enterprise license if certain requirements are met. These requirements are: (i) the person conducts no acts other than those related to the Real Estate Specified Joint Enterprise, (ii) the person entrusts all real estate-related transactions to a licensed operator (Item 3 Operator), (iii) the person entrusts solicitation of investments to a licensed operator (Item 4 Operator) and (iv) all investors are "Special Investors" (i.e., those persons specified in the ministerial ordinance as having professional knowledge and experience in relation to real estate investment, e.g., banks and joint stock companies with stated capital of JPY500 million or more, tokurei-toshika). Special Enterprise operators are deemed Real Estate Brokers by law and consequently owe the same legal obligations required of Real Estate Brokers. However, rather than full licensing as a Real Estate Specified Joint Enterprise operator, a Special Enterprise can make a more simplified regulatory filing.
In the years since its introduction, it has become apparent that the Special Enterprise has not enjoyed much use by those looking to make investments in real estate in Japan. The reasons behind the non-use of the Special Enterprise include (i) the fact that there are other methods to make investments in real estate, such as, using a TK-GK structure with trust beneficial interests of real estate or a TMK (as discussed above); (ii) the limitation that only Special Investors can invest in such entities and general investors may not be included; (iii) the requirement that a Special Enterprise operator is required to use a template investment agreement which has been approved by the competent authority when executing an investment agreement with investors; (iv) the fact that there are not many Item 3 or Item 4 Operators in existence which can be entrusted with real estate-related transactions or solicitations for investments; and (v) the narrow scope of activities permissible to a Special Enterprise operator. For example, such operators cannot conduct energy-related investment activities, (e.g., solar energy, wind energy or operations related to energy distribution).
2017 Amendments (to come into force on 1 December 2017)
There are four primary amendments to the Act scheduled for 2017:
- Introduction of the Small Real Estate Specified Joint Enterprise (shokibo-fudosantokutei- kyodo-jigyo)
- Funding activities through the internet similar to crowdfunding
- Regulations intended to relax the rules and requirements for Special Enterprises
- Introduction of the Enterprise for Qualified Special Investors (tekikaku-tokureitoshika- gentei-jigyo)
1. Small Real Estate Specified Joint Enterprise
To qualify as a "Small" Real Estate Specified Joint Enterprise: (i) the investment amount of each investor may not exceed JPY1 million and (ii) the total amount invested by all investors may not exceed JPY100 million. A Small Real Estate Specified Joint Enterprise operator is not required to be licensed as a Real Estate Specified Joint Enterprise operator. A registration filing must be made with the competent authority. Registration requirements include a minimum capital of JPY10 million, minimum net assets of at least 90 percent of the capital of the enterprise, and the operator must hold a Real Estate Broker license. In contrast, the requirements for a Real Estate Specified Joint Enterprise license include a minimum capital of JPY100 million, minimum net assets of at least 90 percent of the capital of the enterprise, and the operator must hold a Real Estate Broker license. The registration for a Small Real Estate Specified Joint Enterprise is renewed every five years.
2. Internet Procedures
Under the current Act, documents explaining the content of the investment agreement must be physically delivered to investors before and upon execution of the investment agreement. With the 2017 amendments, it is permissible to deliver such documents using the internet or other forms of digital communication. These amendments pave the way for crowdfunding real estate investments.
3. Relaxed Rules for Special Enterprises
Under the current Act, an investment agreement template which has been approved by the competent authority must be used when an investment agreement is executed. With the 2017 amendments, there is no requirement to use a pre-approved investment agreement; provided that: (i) all the investors are Special Investors and (ii) the investment agreements include a restriction prohibiting transfer of the investors' rights and obligations to a person other than a Special Investor.
Under the current Act, qualification as a Special Enterprise is contingent upon all investors qualifying as Special Investors. With the 2017 amendments, general investors who are not Special Investors may be included as long as the real estate-related transactions do not involve land development or certain types construction exceeding a certain amount (to be specified in the ministerial ordinance).
4. Enterprise for Qualified Special Investors
Under the current Act, a Real Estate Specified Joint Enterprise license is required to conduct a Real Estate Specified Joint Enterprise if it does not qualify as a Special Enterprise. With the 2017 amendments, even if the operator does not qualify as a Special Enterprise, the operator can make a notice filing (rather than a full license) if all of the investors involved are of a status specified in the ministerial ordinance as persons who especially have professional knowledge and experience in relation to real estate investment (referred to as "Qualified Special Investors" or tekikaku-tokurei-toshika). The scope of what is considered a Qualified Special Investor is narrower than that encompassed by the definition of Special Investors.
In principle, a Real Estate Broker license is required to conduct an Enterprise for Qualified Special Investors. This license can be avoided, however, by entrusting all the real estate related transactions to a Real Estate Broker.
The 2017 amendments cover many different technical areas of the Act. Investors may be interested in taking advantage of these eased regulations together with, or instead of, the structures which have been customarily used.