[ 2 ] Small Lot Real Estate Investment Products. [ 1 ] The Budding of Real Estate Securitization. Ⅴ History of Real Estate Securitization.

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1 The solutions that securitization offers can be divided into two patterns: 1) Using securitization vehicles primarily to dispose of real estate, and 2) Using securitization vehicles primarily to acquire real estate exposure. Ⅴ History of Real Estate Securitization The following is an overview of the history of real estate securitization in Japan. [ 1 ] The Budding of Real Estate Securitization Some people trace the start of present day real estate securitization back to mortgage securities that appeared in 1931 or the housing loan debt trusts of 1973, but generally securitization, in its present form, started in 1987 with the formation of small lot real estate beneficiary interest in trust and the real estate conversion loans of JNR Settlement Corporation in Either way, the history of real estate securitization follows the first attempts to transform real estate from being an expensive real asset with a fixed location into small assets that can be easily traded on the securitization markets as they exist today. [ 2 ] Small Lot Real Estate Investment Products The small lot real estate investment products that appeared in 1987 were basically real estate divided into small ownership units and sold in units small enough for retail investors to purchase. The small units were developed because the generally large investment size required for real estate and its low liquidity made it difficult for retail investors to invest. These investments differed from traditional, direct real estate investment because the operator controlled the equity of each investor so that it was effectively a collective investment structure for real estate. However, it lacked any measures to protect the interests of the investors and so many investors suffered large losses after the collapse of the bubble. As a result of these losses there were calls for a legal system to be established to protect investors, and the Real Estate (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 risk measures Transferring real estate ownership risk Outsourcing of real estate management Withdrawal from real estate business and reorganization Fund procurement Execution of asset financing Application of non-recourse loan Application of leverage Application needs Development of fee business Arrangement fee Management fee Securing of brokering fee, etc. Accounting and settlement measures Off-balance sheet (streamlining balance sheet) Realization of latent profits/losses Handling of impairment accounting (2006) Disposing Realize continual use simultaneous to moving it off balance sheet Sale and leaseback (Sell the asset to the vehicle and then lease it from the vehicle) Securitize to separate ownership and management Fee Business (Sell the asset to the vehicle and contract for services with it) Securitize to make the property easier to sell Asset procurement Solutions Acquiring Acquire the asset off balance sheet and use it yourself Buy and lease (The vehicle buys the asset and then leases it) Expand business opportunities without increasing assets Fee business (The vehicle buys the asset and outsources services) Acquire asset or develop with a smaller investment Asset procurement Prepared by ARES Real Estate Securitization Handbook

2 Figure 2-12 Chronology of the Development of Real Estate Securitization Laws, Markets and Rules September 1990 Council of Real Estate Syndication (CRES) founded June 1993 April 1995 Enactment of the Law Concerning Regulations for Businesses Involving Specific Credit Obligations (Specific Credit Obligations Law) Real Estate enforced (hereafter, ) May 1997 revised Minimum investment unit lowered from 100 million yen to 10 million yen Deregulation of businesses targeting professional investors September 1998 Law concerning Securitization of Specific Assets by TMK enforced 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 February 1990 Supplying of JNR Settlement Corporation small lot real estate products began December 1990 Real estate conversion loan of the JNR Settlement Corporation 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 April 1998 Securitization of Daiwa Seimei Building and Daikyo rental condominiums November 1998 First product under the SPC Law, "Takanawa Apartment TMK" December 1998 Company investment trusts (securities investment trusts) become available through revision of the Securities Investment Trust Law February 1999 Revision of the Minimum investment unit lowered from 10 million yen to 5 million yen Transfers to third parties now allowed February 1999 Special Measures Law on Credit Obligation Management and Recovery Business (Servicer Law) enforced September 1999 Real Estate revised Addition of contracts in which the subject real estate can be changed (replaced) July % was introduced by the Japanese Institute of Certified Public Accountants' "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 Regulations November 2000 Revised and enforced the Investment Trusts and Investment Corporations Law (hereafter, ITIL) Lifting of prohibition on real estate funds (investment corporation and investment trust s) November 2000 Revised and enforced the Asset Monetization Law Simplification of procedures for establishing TMKs, etc. March 2001 Opened the J-REIT market on the Tokyo Stock Exchange July 2001 Elimination of the restriction on minimum investment units under the June 2002 QUICK REIT Index developed August 2002 Announcement of "Impairment Accounting Standards for Fixed Assets" by Business Accounting Council December 2002 Association of Real Estate Securitization (ARES) established December 2002 General draft of tax revisions announced (REIT transfer tax and dividend tax set at 10%) April 2003 TSE REIT Index launched July 2003 Opening of market to REIT fund of funds through change in Investment Trusts Association Rules December 2003 Osaka Securities Exchange launched J-REIT market August 2004 Fukuoka Stock Exchange launched J-REIT market December 2004 Securities and Exchange Law revised and TK investments are designated to be "deemed negotiable securities" December 2004 JASDAQ becomes a securities exchange and J-REIT market is launched December 2004 Trust Business Law is revised and the system for registering beneficiary interest in trust sellers started April 2005 Compulsory application of impairment accounting for fixed assets is launched June 2005 Establishment of Company Law (implemented from May 1, 2006) Integration of KK and YK systems Establishment of limited liability partnership system, etc. August 2005 Implementation of the Limited Liability Partnership Law (LLP Law) September 2005 Japanese Institute of Certified Public Accountants issues the Q&A on Auditing Precautions for Transactions Using SPCs, etc. April 2006 Revision to the enforcement rules for the Building Lots and Buildings 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 December 2006 Revision of the Trust Law September 2007 Implementation of Financial Instruments and Exchange Law (FIEL) Implementation of Trust Law March 1999 April 1999 Launched the supply of the Invest Fund series, a product under the Launched the supply of the SURF series, a product under the November 1999 Securitization of the NEC head office building and the Shinjuku Sumitomo Building October 2000 First registered real estate investment consultant March 2001 First issuance of securitization product backed by housing loan bond of the Housing Loan Corporation March 2001 Certification of investment trust managers began July 2001 Securitization by Leopalace 21 and issuance of preferred investment securities for retail investors September 2001 First two J-REITs launched on the Tokyo Stock Exchange: Nippon Building Fund and Japan Real Estate September 2001 Securitization of the Landic Otemachi Building by the Resolution Collection Corporation September 2001 Securitization of the KDDI head office building and three other buildings: the 190 billion yen securitization was the largest at the time February 2002 First issuer rating of J-REIT obtained (Japan Real Estate, S&P) September 2002 Launched sale of open monthly distribution foreign investment trust with Japanese real estate as its income source (Joint Corporation Group) October 2002 Product with an investment principal of 2 million yen launched under the Real Estate June 2003 Urban Redevelopment Fund Investment Corporation began operation September 2003 First urban redevelopment fund established by Development Bank of Japan December 2003 Listed J-REITs surpass 10 March 2004 First housing-specific REIT, Nippon Residential Investment Corporation listed May 2004 First Osaka Securities Exchange REIT, TGR Investment Inc. listed March 2005 Crescendo Investment Corporation listed as independent REIT on the Tokyo Stock Exchange May 2005 First logistics-specific REIT, Japan Logistics Fund, Inc. listed June 2005 Listing of Fukuoka REIT Corporation, the first REIT on the Fukuoka Stock Exchange July 2005 Listed J-REITs surpass 20 November 2005 Listing of Starts Proceed Investment Corporation, the first REIT on JASDAQ February 2006 Listing of Japan Hotel and Resort Inc,, the first hotel-specific REIT March 2006 Listed J-REITs surpass 30 November 2006 Listed J-REITs surpass 40 October 2007 Industrial & Infrastructure Fund Investment Corporation, the first REIT specializing in industrial and infrastructure real estate, lists Prepared by ARES 32 Real Estate Securitization Handbook

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

4 The First Subcommittee of the Financial System Council continued to debate the establishment of an investment service law (provisional name) that was indicated in the sections on preparing and thoroughly implementing rules to protect users in line with financial conditions and enhancing market functions and improving market trust. The First Subcommittee of the Financial System Council announced the framework of the Investment Services Law on December 22, 2005 as In Preparation for the Investment Services Law (provisional name). The report outlined the aim and objective of the Investment Services Law in the following manner. 1. Dedicated Rules to Protect Users and Improvement of Use Convenience It is necessary for gaps that are not filled by present rules to protect users to be filled by preparing a framework for comprehensively and laterally protecting users with regard to broad financial products. It is also necessary to review the present vertical business law and to apply identical rules to financial products with the same financial functions. It is necessary to achieve a balance with the necessity to protect users by constructing a flexible regulatory structure such as deregulating regulations made with the ordinary investor in mind in situations where specific investors (professionals) are the customers. 2. Securing Market Functions to Prepare for the Shift From Savings to Investment There is an indispensable need for continuous measures to secure constant overall financial and capital market rules and to secure the ability to implement these so that market functions can be secured that are built around a fair and smooth price formation in preparation for the shift from savings to investment. 3. Appropriate Measures for the Internationalization of Financial and Capital Markets There is an urgent need to establish the infrastructure for further heightening the appeal of the Japanese market as an international market within the ever progressing globalization of financial and capital markets. 4. Need for the Investment Services Law (provisional name) The appropriate step is to rearrange the Securities and Exchange Law and establish the Investment Services Law with the objective of building a fair, efficient, transparent and rich financial system that can adequately demonstrate market functions based on the axis of fair and smooth price formation through appropriate protection of users and prevention of unfair transactions in the marketplace. 5. Basic Framework of the Investment Services Law There is a need to review the present vertical business law and to strive for a legal system for broad financial products. It is appropriate to position the Investment Services Law as a law with general characteristics governing the sale of financial products and the management of assets and its enforcement rules should be applied to financial products with the same economic functions regardless of the business. Laws with identical characteristics should be integrated as much as possible into the Investment Services Law including laws governing foreign securities companies, laws on regulations of investment advisors related to negotiable securities and the Financial Futures Trading Law. It is also advisable to review the content of the Law on Sales of Financial Products and integrate it into the Investment Services Law. C. Overview of the Financial Instruments and Exchange Law Later, the provisionally named Investment Services Law was formally named the Financial Instruments and Exchange Law (FIEL). The Act on the Partial Revision of the Securities and Exchange Act and the Law on Various Legal Steps Related to Enforcement of the Act on the Partial Revision of the Securities and Exchange Act were ratified during the 164th ordinary session of the Diet on June 7, 2006 and had the name changed to FIEL when promulgated on June 14. The law was enforced at on September 30, The FIEL newly regulates the fund investment management business among the managers of collective investment schemes. As a result, SPEs, which accept funds from investors and manage them and to date were almost entirely unregulated, are now the subject of regulations. However, business requirements and activity regulations for managers of products for professionals were deregulated and regulations for exceptional businesses which operate funds from qualified institutional investors were established. These businesses can manage funds just by reporting such activities rather than registering with the government. In this way, the FIEL has also taken steps to prevent itself from blocking financial innovation. The FIEL also newly stipulates general beneficiary interests in trust as deemed securities. As a result, the advice and such given by the asset manager to an SPE in a single layer structured fund like the LLP (YK) TK structure for the purchase or sale of real estate that had been 34 Real Estate Securitization Handbook

5 transformed into beneficiary interests in trust is now subject to regulations. In addition, the registered investment advisors and certified (discretionary) investment advisors who were traditionally under the Act on Regulation, etc. on Investment Advisory Business Pertaining to Securities (hereafter, Investment Advisors Act) are now covered by investment advisors and investment managers regulations in the FIEL as the Investment Advisors Act has been abolished. In the same manner, the investment trust consignment managers governed by the Investment Trusts Law are now covered under investment consignment managers within the FIEL. However, the business requirements and activity regulations placed on the investment trust consignment managers and asset managers, which were classified as asset managers under the Investment Trusts Law, are now regulated under the FIEL as investment consignment managers but other investment corporation and such structures have been left under the governance of the Investment Trusts Law. Further, the beneficiary interest in trust dealers under the Trust Business Law has been transferred to the FIEL and classified as a 2 financial products dealer. Initially many voiced the opinion that the Real Estate should be folded into the FIEL, but it was decided to leave it as an extraordinary law as it contains many investor protection regulations that consider the uniqueness of real estate. However, in order to ensure it maintains consistency with the FIEL, regulations were added that comply with the rules on prohibiting the covering of losses and the principle of conformity. Chapter 3 Financial Instruments and Exchange Law and Real Estate Securitization provides details on the FIEL. Ⅵ Overview of Market Size Figure 2-13 and Figure 2-14 present the results of the Fact-Finding Study on Real Estate Securitization issued annually by the Ministry of Land, Infrastructure and Transport that has been conducted annually since They are graphical presentations of the results published 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) 9,000 8,000 1,582 8, ,642 8,439.5 Cases 1,800 1,600 7,000 6,000 5,000 4,000 Refinance or resale of non-j-reit assets Non-J-REIT J-REIT Cases 3, , ,119 1,110 6, ,170 3,990 1,910 4,330 1,524 2,470 4,290 1,400 1,200 1, ,000 2,000 1, , , ,330 2,170 1, , , , ,240 1,770 1, 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