41 ASIAN LEGAL BUSINESS – DECEMBER 2023 WWW.LEGALBUSINESSONLINE.COM REAL ESTATE look at TMK structures from certain jurisdictions that take advantage of reduced tax rates applicable under tax treaties between Japan and such jurisdictions,” he adds. Rothstein adds that most clients are taken aback by the complexities of deal structuring when navigating the country’s laws and availing incentives. “The reaction I usually get when a client undertakes its first deal in Japan and is presented with a structure chart depicting the recommended ownership and investment structure both onshore and offshore from Japan, is why is this chart so complicated?” explains Rothstein. Rothstein explains that there are three crucial aspects of real-estate dealmaking that are the source of complexity: First, tax planning; second, regulatory licensing requirements; and finally, lender requirements for non-recourse financing. “We always advise cross-border investor clients to fully develop the optimal ownership and investment structure before commencing the transaction. Closing in the wrong investment structure would be a costly mistake. Substantial costs and adverse tax consequences could result if a deal is restructured postclosing,” Rothstein adds. While foreigners face no restrictions in purchasing Japanese real estate, Hattori says that there are certain new laws that have added certain limitations, which are important from a compliance perspective before making an investment. “Japan adopted the Act on the Review and Regulations of the Use of Real Estate Surrounding Important Facilities and Remote Territorial Islands in 2021. This Act designates specific areas close to defence facilities, nuclear power plants, etc., as monitored areas and requires specific disclosures to the government. This might impact foreign investors, and it’s necessary to take care of the area designation in the due diligence process,” says Hattori. The Japanese real estate market also places a higher burden of diligence on the buyer, with little or no commitments on the buyer. “The current market practice is that real estate assets are transferred on an ‘as-is’ basis with sellers giving minimal or no representations and warranties regarding the real estate. Purchasers will need to rely on their due diligence process, with the assistance of their counsel, advisors and other professionals, to get comfortable with the risks associated with the property. Although not widely used, W&I insurance is available in the market to cover such risks, says Fujii. Another large challenge arises from the domestic nature of Japan’s real estate market, making it difficult to purchase land without experts fluent in the Japanese language. “Japan’s real estate market predominantly operates on a local scale, where language barriers could pose significant hurdles. Engaging bilingual professionals capable of offering insights into both domestic and international market disparities is crucial,” says Usami. Using professional real estate agents is also necessary to obtain and comb through necessary government registration documents, which are in Japanese, adds Hattori. “For foreign investors, it’s quite important to check registered information by the Japanese government database written in Japanese. Then, it’s important to register your transaction to the government to secure your transaction. If you do not do it, other people might purchase the property with priority higher than yours,” explains Hattori. ON THE GROUND Due to this domestic-focused market and language and cultural barriers, legal experts advise clients to have a local presence to deal with Japan’s unique regulatory challenges. “Foreign investors frequently opt to engage local bilingual professionals, including lawyers and real estate agents. Establishing joint ventures (JVs) with local market participants, such as developers, is a popular approach to mitigate the associated risks,” says Usami. “While Japan has for quite a long time been stable and a good bet for foreign investment, it is especially important to have legal counsel who have experience of working through the various real estate cycles,” Usami adds. Rothstein agrees, adding that he generally advises clients to have a dedicated on-ground team or local co-investor in Japan to source and close the right deals. “In a competitive market where there is more capital available to be deployed than there are deals to invest in, some investors eager to do deals may end up overpaying for properties. Rigorous due diligence and underwriting of properties remains of paramount importance.” “Consequently, they likely are better able to value and assess investments. Moreover, some of the best opportunities are off-market opportunities. These opportunities generally are best discovered through relationships and contacts that may only really be cultivated by having a presence in Japan,” Rothstein adds. “The Japan investment market is benefiting from the reallocation of Asia investment capital away from other markets. As the China market has faced headwinds, global real estate funds and asset managers have been reallocating resources that previously would have gone to China to markets like Japan and Australia, and in the case of more developing markets, to Vietnam.” — Joel Rothstein, Greenberg Traurig
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