Orrick, Herrington & Sutcliffe LLP has advised Prudential Mortgage Asset Holdings 1 Japan LPS (Prudential Mortgage), an affiliate of Prudential Mortgage Capital Company, as the lender in relation to a JPY 3 billion debt financing to a property trust formed by a J-REIT. Mizuho Trust & Banking Co., Ltd. is acting as trustee to the property trust. The transaction was completed on November 30, 2010.
A team of Japan- and U.S.-qualified real estate lawyers from Orrick’s Tokyo office, led by partner Asahi Yamashita, advised on the transaction.
The property trust lending structure in this J-REIT financing is particularly innovative.
Mr. Yamashita explained: “We worked closely with our client to structure a very creative lending scheme to the J-REIT which involved a property trust (shintaku-nai kariire) as a special purpose borrower entity. This alternative approach to J-REIT lending has the benefit of being more ‘bankruptcy remote’ than a straight mortgage loan made to a J-REIT. As such, it is one of the first few deals that has used this pioneering structure in Japan.”
Although J-REITs are traditionally regarded as low risk investments because they are prohibited under Japanese law from doing non-real estate business and hiring employees, the financial crisis has led banks in Japan to look for alternative lending methods to J-REITs.
“For example, in the United States, financial institutions typically lend to U.S.-based REITs through a special purpose corporation formed by a U.S.-based REIT,” Mr. Yamashita continued. “To date, a special purpose corporation formed by a J-REIT has never been used in Japan, partly because of high taxes. In this new lending scheme, a property trust created under a trust agreement operates in a similar way to a special purpose company, the remote bankruptcy structure that is often used in U.S.-based REIT lending transactions. In this case, our innovative property trust structure allowed our client to lend to the J-REIT with the benefits of reduced risk exposure and very few tax concerns.”
While the transaction is governed under Japanese law, Orrick’s team needed to draw on their deep knowledge and experience of structuring complex, cross-border real estate debt financing transactions (in this case, a knowledge of U.S. market practices was required) in order to successfully complete the transaction. The team’s additional long-standing experience in acting as lender’s counsel in relation to J-REITs also strongly positioned them to be able to successfully work on this unique transaction.
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