What Are the Key Steps and Documents in Closing a Japanese Real Estate Fund Transaction?

Japanese Attorney at Law - Bengoshi L.L.

• 5 min read

The closing of a real estate fund transaction in Japan, known as the kessai (決済) or simply kurōjingu (クロージング), is a meticulously choreographed process. Far from a simple exchange of keys and documents, it is a synchronized sequence of legal and financial actions involving the asset manager, lawyers, lenders, the trustee, and a uniquely Japanese legal professional—the judicial scrivener.

For foreign investors and their counsel, understanding this closing-day symphony is crucial. Each step is designed to ensure that the transfer of title, the payment of funds, and the perfection of the lender’s security interests occur in a precise order, providing maximum legal certainty for all parties. This article provides a step-by-step guide to navigating the closing process for a typical real estate fund acquisition structured through a Trust Beneficiary Interest (TBI).

The Pre-Closing Phase: Setting the Stage for Success

The success of the closing day is determined weeks in advance. The Asset Manager (AM), acting as the conductor of the transaction, is responsible for ensuring all foundational elements are in place before the kessai-bi (closing date) arrives.

1. Finalizing the Document Suite

In the lead-up to the closing, legal counsel for the buyer, seller, and lender finalize the extensive suite of transaction documents. This includes the Purchase and Sale Agreement (PSA) for the TBI, the Loan Agreement, the full security package (pledge agreements, etc.), the Asset Management Agreement, and the underlying Trust Agreement. To ensure a smooth process on the closing day itself, it is common practice for all parties to pre-sign these documents, which are then held in escrow by their respective legal counsel pending the flow of funds.

2. Satisfying Conditions Precedent (CPs)

The single most critical pre-closing task is the satisfaction of all Conditions Precedent (kashitsuke jikko zentei joken) stipulated in the Loan Agreement. The lender will not release a single yen until its counsel has confirmed that every item on this comprehensive checklist has been fulfilled. The AM is responsible for gathering and presenting evidence of satisfaction for dozens of items, which typically include:

  • Legal & Structural CPs: Fully executed transaction agreements; legal opinions from the buyer's and seller's counsel confirming the structure's validity and enforceability; and corporate documents (articles of incorporation, registration certificates) proving the valid establishment of the SPC and its parent General Incorporated Association (ISH).
  • Due Diligence CPs: Final, satisfactory versions of the Engineering Report (ER) and Real Estate Appraisal Report, with no material adverse findings.
  • Financial & Insurance CPs: Evidence that the required property and casualty insurance policies are in place and that the lender is named as a loss payee.
  • The Equity Funding CP: Proof that the investors’ equity contribution has been fully funded into the SPC’s bank account.

3. The First Flow of Money: Equity Funding

The equity funding is a crucial first step that must occur before the closing day, typically one or two business days prior. Investors, having executed their Tokumei Kumiai (TK) Agreements, wire their capital contributions to the SPC's bank account. This action demonstrates the investors' firm commitment and is a non-negotiable CP for the lender, who will not fund their debt portion until the equity portion is confirmed to be in place.

The Closing Day (Kessai-bi): A Chronological Walkthrough

The closing day itself is a highly coordinated series of events, often managed from a closing center at the lead lender's headquarters. The process follows a precise and logical sequence.

Step 1: The "All Clear" – Final CP Confirmation

The morning begins with a formal confirmation call between the legal counsel for the borrower (SPC) and the lender. The lender's counsel reviews the final CP checklist and, upon satisfaction, gives the "all clear" to proceed with funding.

Step 2: The Debt Drawdown – The Lender Funds

Immediately following the CP confirmation, the lender executes the loan drawdown, wiring the full loan amount to the SPC’s designated bank account. At this point, the SPC is fully capitalized with both equity and debt, ready to complete the acquisition.

Step 3: The Purchase Price Payment and Financial Settlements (Seisan)

With the SPC's account funded, the AM instructs the bank to wire the purchase price to the seller's account. This is not a single number but a net amount calculated after a series of prorations and adjustments (seisan). The key settlement items include:

  • Proration of Taxes: In Japan, the owner of a property as of January 1st is legally liable for the entire year’s Fixed Asset Tax (Kotei Shisan Zei) and City Planning Tax (Toshi Keikaku Zei). The PSA will contractually prorate this liability, so the buyer reimburses the seller for the portion of the year from the closing date onward.
  • Proration of Income and Expenses: Adjustments are made for items like rent paid in advance by tenants or utilities paid in arrears by the seller.
  • Transfer of Tenant Security Deposits (Shikikin): The buyer must take over the seller’s obligation to return tenant security deposits at the end of their leases. This is handled by having the seller transfer the total deposit amount to the buyer, usually by crediting it against the purchase price.

Step 4: The Trigger – Confirmation of Funds (Chakkin Kakunin)

This is the pivotal moment of the closing. The seller’s team continuously monitors their bank account. The instant the funds arrive, they issue a Confirmation of Receipt of Funds (Chakkin Kakunin). This confirmation is the trigger that unlocks all subsequent legal and administrative actions.

Step 5: The Registration Filing – The Role of the Shiho Shoshi

Upon receiving the chakkin kakunin, the transaction’s Judicial Scrivener (Shiho Shoshi) springs into action. The shiho shoshi is a licensed legal specialist in Japan responsible for all property and corporate registration matters. They are not merely a filing agent but a professional who takes responsibility for the accuracy of the documents and the successful registration.

Holding the pre-signed closing package, the shiho shoshi immediately travels to the local Legal Affairs Bureau (Hōmu-kyoku) and submits the application to register the change of the TBI's beneficiary in the official trust ledger (shintaku mokuroku). The receipt from the bureau confirming the acceptance of the application is evidence that the transfer is in the process of being officially recorded.

Step 6: The Perfection of Security – The Kakutei Hizuke

Simultaneous with the registration filing, another team (usually from the lender's law firm) proceeds to a Notary Public's office. Their task is to obtain a fixed-date stamp (kakutei hizuke) on the TBI pledge agreement and the trustee’s consent to the pledge. Under Japan's Civil Code, this notarial act is the required step to "perfect" the lender’s pledge, making it legally enforceable against any other third party who might later claim an interest in the TBI. This step is critical for securing the lender’s collateral priority.

Post-Closing Administration: Finalizing the Structure

Once the registration filing is complete and security is perfected, the closing day concludes with a final set of fund transfers directed by the AM:

  • Payment of Transaction Costs: The SPC pays all outstanding fees from the closing proceeds—to the real estate brokers, lawyers, accountants, appraisers, and the AM's own acquisition fee.
  • Funding of Reserves: The remaining funds are allocated to their proper accounts. For example, the amount received from the seller for security deposits is transferred to a reserve account, and funds for future capital expenditures are set aside in a CAPEX reserve, often held within the trust account.

Conclusion

The closing of a Japanese real estate fund transaction is a testament to procedural precision. It is a highly structured, sequential process designed to mitigate risk at every step. Through the careful coordination of the Asset Manager, the diligence of legal counsel, and the pivotal role of the shiho shoshi, the process ensures that the transfer of funds, the registration of ownership, and the perfection of security occur in a legally sound and virtually simultaneous manner. For foreign investors, while the process may seem complex, its methodical nature provides a high degree of security and finality, bringing the acquisition to a successful and well-documented conclusion.