History of Real Estate Securitization by uss51713


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									                                 cHaPter 2: Overview Of real estate securitizatiOn

    The solutions that securitization offers can be divided           securitization vehicles primarily to acquire real estate
    into two patterns: 1) Using securitization vehicles               exposure.
    primarily to dispose of real estate, and 2) Using

Ⅴ    History of real estate securitization

    The following is an overview of the history of real estate     [ 2 ] Small Lot Real Estate Investment
securitization in Japan.                                           Products
                                                                       The small lot real estate investment products that
[ 1 ] The Budding of Real Estate                                   appeared in 1987 were basically real estate divided into
Securitization                                                     small ownership units and sold in units small enough
                                                                   for retail investors to purchase. The small units were
    Some people trace the start of present day real estate
                                                                   developed because the generally large investment size
securitization back to mortgage securities that appeared in
                                                                   required for real estate and its low liquidity made it difficult
1931 or the housing loan debt trusts of 1973, but generally
                                                                   for retail investors to invest. These investments differed
securitization, in its present form, started in 1987 with the
                                                                   from traditional, direct real estate investment because the
formation of small lot real estate beneficiary interest in trust
                                                                   operator controlled the equity of each investor so that it was
and the real estate conversion loans of JNR Settlement
                                                                   effectively a collective investment structure for real estate.
Corporation in 1990.                                               However, it lacked any measures to protect the interests
    Either way, the history of real estate securitization          of the investors and so many investors suffered large losses
follows the first attempts to transform real estate from           after the collapse of the bubble. As a result of these losses
being an expensive real asset with a fixed location into           there were calls for a legal system to be established to
small assets that can be easily traded on the securitization       protect investors, and the “Real Estate Syndication Act”
markets as they exist today.                                       (see Chapter 4 I.) was enacted in April 1995 with this aim

                         Figure 2-11 applicatiOn needS and SOlutiOnS FOr real eState SecuritizatiOn

          Real estate              Development of
        risk measures               fee business                                               Solutions
        Transferring                Arrangement fee
        real estate                 Management fee
        ownership risk              Securing of
        Outsourcing of              brokering fee, etc.                    Disposing type                      Acquiring type
        real estate
        Withdrawal from                                                 Realize continual use             Acquire the asset off
        real estate business                                            simultaneous to moving it         balance sheet and use it
        and reorganization                                              off balance sheet                 yourself
                                                                           Sale and leaseback               Buy and lease type
                                                                           type                             (The vehicle buys the
                                                                           (Sell the asset to the           asset and then leases
                     Application needs                                     vehicle and then lease           it)
                                   Accounting and                          it from the vehicle)
     Fund procurement            settlement measures                                                      Expand business
                                                                        Securitize to separate            opportunities without
        Execution of asset          Off-balance sheet                   ownership and                     increasing assets
        financing                    (streamlining                       management type                     Fee business type (The
        Application of              balance sheet)                        Fee Business type                  vehicle buys the asset
        non-recourse loan           Realization of latent                 (Sell the asset to the             and outsources
        Application of              profits/losses                         vehicle and contract               services)
        leverage                    Handling of                           for services with it)
                                    impairment                                                            Acquire asset or develop
                                    accounting (2006)                   Securitize to make the            with a smaller investment
                                                                        property easier to sell             Asset procurement
                                                                          Asset procurement                 type

  Prepared by ARES

                                                                                                    Real Estate Securitization Handbook 2008-2009   31
                                    Figure 2-12 chrOnOlOgy OF the develOpMent OF real eState SecuritizatiOn

                                   Laws, Markets and Rules                                                                      Cases and Business Entry

                                                                                                     March 1987    Supplying of small investment trust real estate products began
                                                                                                     April 1989    Supplying of NK small lot real estate products began
     September 1990 Council of Real Estate Syndication (CRES) founded                                February 1990 Supplying of JNR Settlement Corporation small lot real estate products
                                                                                                     December 1990 Real estate conversion loan of the JNR Settlement Corporation
     June 1993        Enactment of the Law Concerning Regulations for Businesses Involving
                      Specific Credit Obligations (Specific Credit Obligations Law)
     April 1995       Real Estate Syndication Act enforced (hereafter, Syndication Act)              May 1995      First "lease" product under real estate syndication
                                                                                                     December 1995 First TK product under real estate syndication
                                                                                                     December 1996 First NK product under real estate syndication
     May 1997       Syndication Act revised
                    Minimum investment unit lowered from 100 million yen to 10 million yen
                    Deregulation of businesses targeting professional investors                      April 1998    Securitization of Daiwa Seimei Building and Daikyo rental condominiums
     September 1998 Law concerning Securitization of Specific Assets by TMK enforced                 November 1998 First product under the SPC Law, "Takanawa Apartment TMK"

     December 1998 Company investment trusts (securities investment trusts) become                   March 1999       Launched the supply of the Invest Fund series, a product under the
                    available through revision of the Securities Investment Trust Law                                 Syndication Act
     February 1999  Revision of the Syndication Act                                                  April 1999       Launched the supply of the SURF series, a product under the
                    Minimum investment unit lowered from 10 million yen to 5 million yen                              Syndication Act
                    Transfers to third parties now allowed
     February 1999  Special Measures Law on Credit Obligation Management and Recovery                November 1999 Securitization of the NEC head office building and the Shinjuku Sumitomo
                    Business (Servicer Law) enforced                                                               Building
     September 1999 Real Estate Syndication Act revised
                    Addition of contracts in which the subject real estate can be changed
     July 2000        5% was introduced by the Japanese Institute of Certified Public Accountants'   October 2000     First registered real estate investment consultant
                      "5% Rule"
                      Statement of sale treatment criteria for transferring parties, etc. in real
                      estate monetization utilizing the TMK method
     September 2000   Introduction of the Real Estate Investment Advisor Registration                March 2001       First issuance of securitization product backed by housing loan bond of
                      Regulations                                                                                     the Housing Loan Corporation
     November 2000    Revised and enforced the Investment Trusts and Investment Corporations         March 2001       Certification of investment trust managers began
                      Law (hereafter, ITIL)                                                          July 2001        Securitization by Leopalace 21 and issuance of preferred investment
                      Lifting of prohibition on real estate funds (investment corporation and                         securities for retail investors
                      investment trust types)                                                        September 2001   First two J-REITs launched on the Tokyo Stock Exchange: Nippon
     November 2000    Revised and enforced the Asset Monetization Law                                                 Building Fund and Japan Real Estate
                      Simplification of procedures for establishing TMKs, etc.                       September 2001   Securitization of the Landic Otemachi Building by the Resolution
     March 2001       Opened the J-REIT market on the Tokyo Stock Exchange                                            Collection Corporation
     July 2001        Elimination of the restriction on minimum investment units under the           September 2001   Securitization of the KDDI head office building and three other buildings:
                      Syndication Act                                                                                 the 190 billion yen securitization was the largest at the time
     June 2002        QUICK REIT Index developed                                                     February 2002    First issuer rating of J-REIT obtained (Japan Real Estate, S&P)
     August 2002      Announcement of "Impairment Accounting Standards for Fixed Assets"             September 2002   Launched sale of open monthly distribution type foreign investment trust
                      by Business Accounting Council                                                                  with Japanese real estate as its income source (Joint Corporation Group)
     December 2002    Association of Real Estate Securitization (ARES) established                   October 2002     Product with an investment principal of 2 million yen launched under the
     December 2002    General draft of tax revisions announced (REIT transfer tax and dividend                        Real Estate Syndication Act
                      tax set at 10%)
     April 2003       TSE REIT Index launched                                                        June 2003        Urban Redevelopment Fund Investment Corporation began operation
     July 2003        Opening of market to REIT fund of funds through change in Investment           September 2003   First urban redevelopment fund established by Development Bank of Japan
                      Trusts Association Rules                                                       December 2003    Listed J-REITs surpass 10
     December 2003    Osaka Securities Exchange launched J-REIT market                               March 2004       First housing-specific REIT, Nippon Residential Investment Corporation
     August 2004      Fukuoka Stock Exchange launched J-REIT market                                                   listed
     December 2004    Securities and Exchange Law revised and TK investments are designated          May 2004         First Osaka Securities Exchange REIT, TGR Investment Inc. listed
                      to be "deemed negotiable securities"
     December 2004    JASDAQ becomes a securities exchange and J-REIT market is launched             March 2005    Crescendo Investment Corporation listed as independent REIT on the
     December 2004    Trust Business Law is revised and the system for registering beneficiary                     Tokyo Stock Exchange
                      interest in trust sellers started                                              May 2005      First logistics-specific REIT, Japan Logistics Fund, Inc. listed
     April 2005       Compulsory application of impairment accounting for fixed assets is launched   June 2005     Listing of Fukuoka REIT Corporation, the first REIT on the Fukuoka Stock
     June 2005        Establishment of Company Law (implemented from May 1, 2006)                                  Exchange
                      Integration of KK and YK systems                                               July 2005     Listed J-REITs surpass 20
                      Establishment of limited liability partnership system, etc.                    November 2005 Listing of Starts Proceed Investment Corporation, the first REIT on
     August 2005      Implementation of the Limited Liability Partnership Law (LLP Law)                            JASDAQ
     September 2005   Japanese Institute of Certified Public Accountants issues the Q&A on
                      Auditing Precautions for Transactions Using SPCs, etc.                         February 2006    Listing of Japan Hotel and Resort Inc,, the first hotel-specific REIT
     April 2006       Revision to the enforcement rules for the Building Lots and Buildings          March 2006       Listed J-REITs surpass 30
                      Transaction Law
                      Added asbestos investigations and anti-earthquake diagnosis to the
                      important matters to be explained
     May 2006         Implementation of the Company Law
     June 2006        Ratification of the Financial Instruments and Exchange Law                     November 2006 Listed J-REITs surpass 40
     December 2006    Revision of the Trust Law                                                      October 2007  Industrial & Infrastructure Fund Investment Corporation, the first REIT
     September 2007   Implementation of Financial Instruments and Exchange Law (FIEL)                              specializing in industrial and infrastructure real estate, lists
                      Implementation of Trust Law

Prepared by ARES

32    Real Estate Securitization Handbook 2008-2009
                                cHaPter 2: Overview Of real estate securitizatiOn

in mind. This was the foundation for real estate syndication     [ 4 ] Development of Securitization and the
products and led to the further development of asset             Financial System
                                                                    Here we will switch our view to the financial system and
                                                                 look at the development securitization has gone through.
[ 3 ] Asset Securitization
    Parallel to the development of small lot real estate            A. Round Table and Position Paper on Disputed Issues
products, studies were proceeding on asset monetization                regarding the Flow of New Financing
and securitization as part of the reforms to the Japanese           With the opportunity that was presented by the failure
financial system. The first changes came in June 1993               of the traditional indirect financial intermediary system
with enactment of the “Law Concerning Regulations for               which was principally focused on banks, a debate
Businesses Involving Specific Credit Obligations” which is          emerged on how to rebuild the Japanese financial
commonly known as the Specific Credit Obligations Law).             system. The Round Table on the New Financial Flows
The Specific Credit Obligations Law established restrictions        was established by the Financial System Research
on liquidity limited to specific debts such as lease debts and      Council after the financial big bang report. This Round
credit debts, and the subsequent revision of the Specific           Table published a Position Paper on Disputed Issues in
Credit Obligations Law in April 1996 made it possible to            June 1998 and this document was the result of studying
issue asset-backed securities (ABS) in Japan.                       frameworks for the new financing legal system and
    In 1998, the financial system reform laws were enacted          accompanying rules; the document indicated that it was
as part of the financial big bang. One of the laws enacted,         desirable to move from an indirect financing to a market
with great anticipation for its impact on the disposal of           based financing model.
non-performing loans, was the “Law on Securitization of
Specific Assets by TMKs” (commonly known as the former              Market financing is a new form of system for channeling
SPC Law). This law was the first law enacted to provide for         money from the providers of capital to the users of
comprehensive asset securitization in Japan and real estate         capital. In this system the providers of capital, in many
was specifically identified in the law as an asset that could       cases household savings, are introduced into the capital
be securitized (the law limited assets that may be securitized      market via financial products and financial service
to those specifically listed).                                      companies that transfer the capital to the securitization
    The fact that a legal framework had been established            vehicles and companies in need of capital.
for securitizing assets was very important, but the
procedures the law imposed were complex and reporting               B. Preceding Developments to the Enactment of the
and other obligations under the law were onerous for                   Financial Instruments and Exchange Law
the participants to meet. To rectify this complexity and            The Financial Services Agency (FSA) announced the
promote securitization, the law was revised and the new law         “Financial Reform Program – The Challenge to become
was called the “Act on Securitization of Assets” (commonly          a Leading Financial Services Country” in December
known as the Asset Monetization Law). This law was                  2004. This program stipulated the recognition that
enacted in November 2000 and remains in force today.                Japan has entered a new phase “Where execution
    The Securities Investment Trust Law was revised in              of the ‘Financial Revitalization Program’ and other
1998 to provide for “company” trusts (described later) and          measures helped the market overcome emergency
was named the “Law Concerning Securities Investment                 measures to handle non-performing loan issues and
Trusts and Securities Investment Corporations.” After a             enter a phase focused on the future where the aim is to
further revision of the law in November 2000 it was named           build a financial system that is desirable for the future.”
as the “Investment Trusts and Investment Corporation                In other words, “We are in the midst of shifting from
Law” and is commonly referred to as the Investment Trust            financial policy that emphasizes stability of the financial
Law. This law regulates the direct management of real               system to financial policy that emphasizes the vitality of
estate as an investment product.                                    the financial system.”
    Thus, basic laws for asset monetization and asset
management were firmly established by 2000 and the legal            The program lists “Expansion and enrichment of capital
framework was in place for creation and regulation of the           raising methods that are not overly dependent on real
system and structure of securitization conduits (vehicles) for      estate collateral and guarantees” as one of the “system
real estate securitization – TMKs, investment corporations          designs for providing diverse, strong financial products
and investment trusts.                                              and services.” This statement indirectly speaks to the
                                                                    great expectations for even further expansion of real
                                                                    estate securitization methods.

                                                                                            Real Estate Securitization Handbook 2008-2009   33
    The First Subcommittee of the Financial System Council         appropriate protection of users and prevention of
continued to debate the “establishment of an investment            unfair transactions in the marketplace.
service law (provisional name)” that was indicated in the
sections on “preparing and thoroughly implementing               5. Basic Framework of the Investment Services Law
rules to protect users in line with financial conditions” and    • There is a need to review the present vertical business
“enhancing market functions and improving market trust.”            law and to strive for a legal system for broad financial
     The First Subcommittee of the Financial System Council      • It is appropriate to position the Investment Services
     announced the framework of the Investment Services             Law as a law with general characteristics governing
     Law on December 22, 2005 as “In Preparation for the            the sale of financial products and the management of
     Investment Services Law (provisional name).” The               assets and its enforcement rules should be applied to
     report outlined the aim and objective of the Investment        financial products with the same economic functions
     Services Law in the following manner.                          regardless of the business type.
                                                                 • Laws with identical characteristics should be
     1. Dedicated Rules to Protect Users and Improvement            integrated as much as possible into the Investment
        of Use Convenience                                          Services Law including laws governing foreign
     • It is necessary for gaps that are not filled by present      securities companies, laws on regulations of
       rules to protect users to be filled by preparing             investment advisors related to negotiable securities
       a framework for comprehensively and laterally                and the Financial Futures Trading Law.
       protecting users with regard to broad financial           • It is also advisable to review the content of the Law
       products. It is also necessary to review the present         on Sales of Financial Products and integrate it into
       vertical business law and to apply identical rules to        the Investment Services Law.
       financial products with the same financial functions.
     • It is necessary to achieve a balance with the necessity   C. Overview of the Financial Instruments and Exchange
       to protect users by constructing a flexible regulatory        Law
       structure such as deregulating regulations made with      Later, the provisionally named Investment Services
       the ordinary investor in mind in situations where         Law was formally named the Financial Instruments
       specific investors (professionals) are the customers.     and Exchange Law (FIEL). The “Act on the Partial
                                                                 Revision of the Securities and Exchange Act” and the
     2. Securing Market Functions to Prepare for the Shift       “Law on Various Legal Steps Related to Enforcement
        “From Savings to Investment”                             of the Act on the Partial Revision of the Securities and
     • There is an indispensable need for continuous             Exchange Act” were ratified during the 164th ordinary
        measures to secure constant overall financial and        session of the Diet on June 7, 2006 and had the name
        capital market rules and to secure the ability to        changed to FIEL when promulgated on June 14. The
        implement these so that market functions can be          law was enforced at on September 30, 2007.
        secured that are built around a fair and smooth price
        formation in preparation for the shift from savings to   The FIEL newly regulates the fund investment manage-
        investment.                                              ment business among the managers of collective
                                                                 investment schemes. As a result, SPEs, which accept
     3. Appropriate Measures for the Internationalization of     funds from investors and manage them and to date
        Financial and Capital Markets                            were almost entirely unregulated, are now the subject
     • There is an urgent need to establish the infrastructure   of regulations. However, business requirements
        for further heightening the appeal of the Japanese       and activity regulations for managers of products
        market as an international market within the ever        for professionals were deregulated and regulations
        progressing globalization of financial and capital       for exceptional businesses which operate funds from
        markets.                                                 qualified institutional investors were established. These
                                                                 businesses can manage funds just by reporting such
     4. Need for the Investment Services Law (provisional        activities rather than registering with the government.
        name)                                                    In this way, the FIEL has also taken steps to prevent
     • The appropriate step is to rearrange the Securities       itself from blocking financial innovation. The FIEL
        and Exchange Law and establish the Investment            also newly stipulates general beneficiary interests in
        Services Law with the objective of building a fair,      trust as “deemed securities.” As a result, the advice and
        efficient, transparent and rich financial system that    such given by the asset manager to an SPE in a single
        can adequately demonstrate market functions based        layer structured fund like the LLP (YK) – TK structure
        on the axis of fair and smooth price formation through   for the purchase or sale of real estate that had been

34   Real Estate Securitization Handbook 2008-2009
                                               cHaPter 2: Overview Of real estate securitizatiOn

    transformed into beneficiary interests in trust is now                                                investment corporation and such structures have been
    subject to regulations.                                                                               left under the governance of the Investment Trusts Law.
                                                                                                          Further, the beneficiary interest in trust dealers under
    In addition, the registered investment advisors and                                                   the Trust Business Law has been transferred to the
    certified (discretionary) investment advisors who were                                                FIEL and classified as a type 2 financial products dealer.
    traditionally under the “Act on Regulation, etc. on
    Investment Advisory Business Pertaining to Securities”                                                Initially many voiced the opinion that the Real Estate
    (hereafter, Investment Advisors Act) are now covered                                                  Syndication Act should be folded into the FIEL, but
    by investment advisors and investment managers                                                        it was decided to leave it as an extraordinary law as
    regulations in the FIEL as the Investment Advisors Act                                                it contains many investor protection regulations that
    has been abolished. In the same manner, the investment                                                consider the uniqueness of real estate. However, in
    trust consignment managers governed by the Investment                                                 order to ensure it maintains consistency with the FIEL,
    Trusts Law are now covered under investment                                                           regulations were added that comply with the rules on
    consignment managers within the FIEL. However, the                                                    prohibiting the covering of losses and the principle of
    business requirements and activity regulations placed                                                 conformity.
    on the investment trust consignment managers and asset
    managers, which were classified as asset managers under                                            Chapter 3 Financial Instruments and Exchange Law and
    the Investment Trusts Law, are now regulated under the                                          Real Estate Securitization provides details on the FIEL.
    FIEL as investment consignment managers but other

Ⅵ    Overview of Market size

   Figure 2-13 and Figure 2-14 present the results of the                                           Transport that has been conducted annually since 1997.
Fact-Finding Study on Real Estate Securitization issued                                             They are graphical presentations of the results published
annually by the Ministry of Land, Infrastructure and                                                in the “Annual Report on Land Trends” (the “Land White

                                     Figure 2-13 hiStOry OF real eState SecuritizatiOn By aSSet and Quantity

Asset Value (billion yen)                                                                                                                                                       Cases
9,000                                                                                                                                                                           1,800
                                                                                                                                                     8,272.7        8,439.5
8,000                                                                                                                                                 1,642                     1,600
                                      Re nance or resale of non-J-REIT assets                                                         6,930.1         1,910
7,000                                                                                                                                                                           1,400
                                      Non-J-REIT                                                                                                                     2,470
6,000                                                                                                               5,335.0                                                     1,200
                                      J-REIT                                                                     1,119
5,000                                 Cases
                                                                                                                         1,110                        4,330
4,000                                                                                                                                                                           800
                                                                                                         420                          3,990                          4,290

3,000                                                                   2,777.7                                                                                                 600
                                                                                        2,540.9          620
2,000                                                    1,867.0                         343                                                                                    400
                                          1,167.0                                                       2,890
                                                           161                                                                                        2,030
1,000                                                                                   2,240                                         1,770                          1,680      200
                           315.5                                                                                         900
         61.6 9                                                           610                            680
                               26                                                        300                                                                                    0
           FY1997         FY1998         FY1999         FY2000          FY2001         FY2002         FY2003          FY2004         FY2005          FY2006         FY2007

        Note 1: This figure covers not only those for which securities were issued (narrow definition of securitization) but also those for which funds were procured through
                 borrowing, etc. (broad definition of securitization) from the viewpoint of grasping the overall volume of real estate securitization.
        Note 2: “Refinance or resale of non-J-REIT assets” refers to the asset value of properties reported to be refinanced or resale of those beneficiary trust interests that
                 were securitized in non-J-REIT vehicles. Therefore, the actual value may be larger than presented here. Further, this category has not been researched in
                 fiscal 2002 or earlier.
        Note 3: As for J-REITs, an investment corporation is treated as one case.
        Note 4: The breakdowns have been rounded and so their sum total does not match the grand total.
        Note 5: The values for Fiscal 2007 are unofficial figures.

        Source: Fact-finding Study of Real Estate Securitizations by the Ministry of Land, Infrastructure and Transport

                                                                                                                                              Real Estate Securitization Handbook 2008-2009   35

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