ARES is working to facilitate the healthy development of the real estate securitization market.

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  There are two categories for real estate securitization as a collective investment structure (Figure 1-6).

  The first is commonly referred to as “monetization” and involves the owner of the real estate (originator) transferring the real estate to a securitization vehicle from its balance sheet (moving the asset off balance sheet) and procuring capital by using the future cash flow from the real estate asset to service the investment of third party investors. This is known as asset monetization real estate securitization and the securitization is built around the real estate itself.

  The other category is known as asset management real estate securitization. In this securitization, the assets of investors are gathered to form a fund and these funds are then invested into real estate by the fund manager (asset manager) and the earnings from the assets purchased are distributed to investors. In contrast to asset monetization securitization, fund securitization is built around capital.

  These patterns of real estate securitization differ not only in their objectives but also in the relevant laws and securitization vehicles. Since different laws apply, depending on the securitization vehicle used, the securitized asset either can or cannot be switched (i.e., sold and replaced with a different asset). Therefore, the choice of the securitization vehicle should be made only after giving sufficient consideration to the objective of the securitization.

  Securitization vehicles are the basic element of real estate securitization and there are two forms: contract and company based vehicles.

  The contract vehicle involves the use of tokumei kumiai (TK, silent partnership) under the Commercial Code and nin'i kumiai (NK, voluntary association) and trusts under the Civil Code. In contract vehicles, the business of the real estate securitization is based on a contract between the parties (association investors, operator, trust settlor, trustee, etc.). The laws that govern contract vehicles are the Real Estate Syndication Act for TKs and NKs, the Asset Monetization Law for special purpose trusts (SPT) and the Investment Trust Law for investment trusts.

  In company vehicles the real estate securitization is achieved by establishing a company for conducting the business objective. The vehicles used are special purpose companies (SPCs) provided for in the Asset Monetization Law and investment corporations under the Investment Trust Law, but for practical reasons both YKs and KKs are used regularly.

  The securities issued as part of the process for real estate securitization can be split into two broad groups: debt and equity.

  Debt obligations require the issuer to pay principal and interest, much like a loan or corporate bond, from the revenue of the asset being securitized. For the investor this is a pledge from the borrower to receive fixed interest and principal payments on set dates designated in advance.

  Equity is the remaining capital after debts are subtracted from the total assets of the securitization vehicle. This capital is most commonly comprised of shares and Equity investors can only receive dividends after all equity-like securities (investment securities issued by investment corporations, specific investments and preferred equity securities of SPCs, etc.) issued by the securitization vehicle, investments from TKs and NKs and other investments that take the first loss if anything negative occurs.

Note) On the balance sheet of a TK investor the investment is shown on the “Asset” side of the balance sheet but the balance sheet of the operator itself is limited by the amount indicated as paid-in capital in the commercial registry. Therefore, the investment of a TK member is ordinarily indicated as a “long-term deposit” or, when the amount is not material, the account category of “other liabilities” is used. (Excerpt from page 89 of “Monetization and Securitization Accounting and Taxation, Second Edition” published by Chuokeizai-sha).

  Equity investors can only receive dividends after all debt obligations have been met and so they receive dividends from the property remaining after the principal is repaid to the debt holders at the time of settlement. Thus the debt holder has preference over the equity investors.

  While the debt investor has the right to receive only the principal and interest agreed to in advance, distribution to the equity investor is greatly impacted by the success or failure of the business. While the equity investor may obtain a very high return, the equity investor may receive less absolute distribution than the debt investor; this increases the risk but equally the returns, if successful, are high.

  Financial institutions that provide loans to a securitization vehicle are the debt investors. Financial institutions often take a different approach that involves pooling a diverse range of credits from real estate backed loans, placing these in an SPE as an asset, and then issuing ABS backed by these loan credits. These ABS securities are known as mortgage-backed securities (MBS) and can be subdivided further into commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS); both of these have been issued continually since 2001 by the Japanese Government Housing Loan Corporation.