Key of Securitization
In asset securitization, such as real estate, ships, and renewable energy facilities, a scheme commonly referred to as “GKTK schemes” is often used.
In the GKTK scheme, the original asset holder, so-called “Originator” typically establishes a special-purpose company (SPC), which is a corporation for purpose of securitizing the assets.
SPC stands for Special Purpose Company, which is called “Tokubetsu Mokuteki Gaisha” in Japanese.
We often receive questions about what SPC is. SPC is a company exclusively set up for some specific purpose, but not based on special laws or regulations.
In this regard, it differs from Vehicles which are based on actual laws, such as TMK (Specific Purpose Company) that is based on Act on the Securitization of Assets.
Nevertheless, Article 33(2) of the Cabinet Office Order on Financial Instruments Business, etc. defines SPC.
Under this paragraph, SPC is defined as “a specific purpose company prescribed in Article 2, paragraph 3 of the Act on Securitization of Assets (Act No. 105 of 1998) and an entity conducting the business equivalent thereto with a restriction on the change of business contents.”
In practice, there is a tendency to be stretched the interpretation of “entity that operates the same type of business as a special purpose company whose business content is restricted to be changed”. There is a precedent to the administrative interpretation that, LLC, which has limited the authority to amend the Articles of Incorporation to executives, qualifies as a SPC.
As a silent partnership operator, the SPC established in this way, receives investment from investors (silent partners) in the investment capital based on the silent partnership agreement.
The SPC uses the invested money to acquire assets subject to securitization, such as real estate, and distributes the proceeds from these assets to silent partners.
Types of SPC
In practice, SPCs often used for securitization are LLC (limited liability companies) .
This is because the scope of autonomy of the Articles of Incorporation of LLC is wider than that of joint-stock companies, allowing for flexible internal decision-making, and the establishment costs are cheaper (the public tax etc.. cost of establishing a joint-stock company exceeds JPY 200,000, while that of a limited liability company is just over JPY 60,000).
We are frequently asked how much the capital of the LLC should be, but there are not so many factors to consider.
For practical purposes, the capital of a nominal LLC is often set at JPY 0.1 million, which is a common standard.
In addition, due to the necessity of separate management under the Business Act, such as the Financial Instruments and Exchange Act, there are cases in which funds are paid in advance as capital for corporate-specific expenses that do not belong to the silent partnership account, such as corporate tax and tax filing expenses. In doing so, the specific expenses can be paid with capital during the lifetime of the SPC.
The LLC is commonly referred to as “GK.” and the silent partnership is referred to as TK. Therefore, asset-securitization schemes that combine these LLC and silent partnership are commonly referred to as “GKTK.”
GKTK scheme is typical used in real estate securitization.
Under the Real Estate Securities Scheme, TK’s investee businesses, which are structured with GK as the operator, will hold real estate trust beneficiary interests.
There are also SPC schemes aimed at real estate investment in kind under the Real Estate Specific Joint Enterprise Act and the Asset Liquidation Act, and the SPC can be also used under the so-called Real Estate Specific Joint Enterprise No. 3 permits, No. 4 permits, and the TMK scheme.
In practice, many securitizations are made in the GKTK form which is intended to acquire real estate trust beneficiary interests. This is partly due to the fact that, if a property ownership is not assumed as long-term, the origination burden of registration and license tax, etc., is smaller when the real estate trust beneficiary interest is the asset of acquisition.
Since trust beneficiary rights fall under the category of deemed securities, in order to manage this mainly investment asset as a fund, it is necessary to register as an investment management business, unless it falls under the category of a fund for small professionals (special business for qualified institutional investors, etc.).
Therefore, to manage real estate trust beneficiary interests, it is necessary to appoint an asset manager (AM) who is an investment manager.
Among such investments, real estate trust beneficial interest rights, or rights based on partnership contracts, silent partnership contracts, or investment limited partnership agreements, those in which the invested business mainly invests in real estate trust beneficial interest are subject to additional registration requirements.
While on the other hand, funds registered in the form of investments in foreign partnerships and LLCs for the purpose of acquiring overseas real estate, etc., and investment management services to manage these investments which are done in the form of a fund of funds (FoF), do not fall under the category of specified investment management business related to real estate, therefore additional such registration requirements do not apply directly.
In addition, private placement by the silent partnership, as well as investment activities, requires Type II financial instruments business.
As registered by a SPC is unfeasible, it is common to request Type II Financial Instruments Business Operator to handle private placement of silent partnerships on behalf of the investor.
In addition, GKTK scheme of securitizing real estate requires a number of administrative procedures, such as acquiring ER (engineering reports), real estate appraisals, appoint the dedicated PM (property manager) to entrust the management of properties, the legal firm responsible for documentation, and the dedicated accounting firm responsible for accounting.
Type II Financial Instruments Business
In contrast, in the securitization of ships, aircraft and renewable energy-related, these assets do not normally fall under the category of securities or derivative transactions. Hence, these scheme typically do not require the registration of an investment management business. In many cases, schemes can be structured only with the registration of Type II Financial Instruments Business.
Under GKTK scheme, GK’s parent corporation is now incorporated as a general incorporated association (which were used to be a Cayman Charitable Trust or an intermediate corporation of Japan), and many schemes adopt the so-called “bankruptcy remoteness” format.