Japan Hotel

Investment Guide
February 2023
Introduction
After various announcements What is the impact of these
that other parts of the global challenges on Japan’s
world were easing their tourism recovery? With
travel restrictions and social the weakened Yen, there is
distancing measures in late rising interest in Japan from
2021, Japan followed the tourists, hotel operators and
movement in early 2022 by investors alike.
lifting the State of Emergency
amidst higher vaccination As the country does not
rates and lower daily cases. restrict foreign ownership or
This major step forward in management of hotels, foreign
the country’s reopening investors can explore a number
unleashed strong domestic of investment structures to
tourism demand: the first best suit their profiles and
half of 2022 marked the time goals. However, selecting
when residents of Japan were the appropriate investment
encouraged to travel without structure is crucial for them.
restrictions since the Go-To-
Travel Campaign in late 2020. JLL’s Hotels & Hospitality
Japan’s leisure destinations, Group and Baker McKenzie
such as Okinawa and Kyoto, have extensive experience
saw tourists swarm back in and knowledge of Japan’s
the summer months. From 11 hospitality market and
October, Japan fully opened its structures preferred by
borders to international visitors, foreign investors. We hope
satisfying the strong demand this 2023 Guide will provide
from foreign tourists to visit the a basic introduction to the
Land of the Rising Sun. market and insight into the
investment structures typically
Whilst Japan’s recovery started used to acquire Japanese
strongly in H2 2022, geopolitical hospitality assets.
challenges and economic
headwinds dampened tourism
flow in other parts of the world
and the region.

Japan Hotel Investment Guide 2 Japan Hotel Investment Guide 3

1
“
Japan also ranked as the No.1 country in
the world in the latest Travel and Tourism
Development Index 2021
- World Economic Forum, May 2022

Japan Market Overview

Between 2010 and 2019, Japan welcomed 183 International tourist arrivals in Japan
million international tourists, translating to an
average annual growth rate of 14% and ranking 35,000
Number of tourists in '000

third in Asia Pacific and 12th globally in 2019. 30,000

25,000
Japan also ranked as the No.1 country in 20,000
the world in the latest Travel and Tourism 15,000
Development Index 2021, released by the World
10,000
Economic Forum in May 2022. This ranking was
5,000
driven by a multitude of factors, including Japan’s
0
wealth of cultural resources, as well as strong
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

infrastructure development, health and hygiene,

safety and security. Source: JNTO

Footer
Japantext
Hotel Investment Guide 44 Japan Hotel Investment Guide 5
Resilience of Japan’s tourism The Japanese government relaunched a new travel subsidy programme in time for the autumn tourism
season of 2022 and extended the programme into January 2023:

industry driven by domestic demand National Travel

Discount Programme 2022
National Travel
Discount Programme 2023

Whilst Japan’s international visitor growth has been remarkable, domestic tourists in Japan still
represented 81% of total nights in 2019, the second highest proportion in Asia after China. This high share Start Date 11 October 2022 10 January 2023
creates a strong base for recovery after almost three years of the border closure. Like other destinations
in the world, staycations have been driving the hotel business during the pandemic, not only allowing
Japanese hotels to survive but also allowing Japanese tourists to discover or re-discover parts of the End Date 28 December 2022 Until subsidy reserves run out in each prefecture
country, encouraged by government incentives such as ‘Go-To-Travel’. With current macroeconomic
challenges and global airlift issues, domestic tourists in Japan are expected to continue leading the
demand in the near to medium term. Maximum Discount 40% on transport and accommodation 20% on transport and accommodation

Domestic & International share of total nights in 2019 JPY5,000 per person for transport and
Daily Maximum JPY8,000 for package tours including public
accommodation, JPY3,000 per person
Discount per traveler transport, JPY5,000 for accommodation only
100% for transport only

90% JPY3,000 weekday, JPY1,000 JPY2,000 weekday, JPY1,000

Vouchers
weekends and holidays weekends and holidays
80%

70%

60%

50%

40%

30%

20%

10%

0%
Asia China Japan Indonesia India Australia South Korea Singapore

Domestic International
Source: UNWTO, Tourism Economics

Japan Hotel Investment Guide 6 Japan Hotel Investment Guide 7

 Opportunity to capture previous When will Chinese tourists return
Japanese outbound tourists whilst to pre-COVID levels?
the Yen is weak China dropped quarantine measures for overseas
arrivals and shifted away from the zero-COVID
This is not required by several other Asian
countries popular with Japanese travellers
strategy in early January 2023. This has driven including Thailand, Cambodia, Indonesia and
The prolonged absence of Chinese tourists has The year also counted over 20 million Japanese hopes of a strong surge in Chinese tourists over Hong Kong. In response to these entry restrictions,
significantly impacted markets in the region which outbound tourists, with an average length of stay the Lunar New Year period and a fast recovery China has maintained its ban on group tours to
are strongly reliant on China. Although China was abroad of 5.5 nights, leading to an estimated total back to pre-COVID levels. Japan, whilst lifting it for most other countries.
the main international source market for Japan in of 110 million overseas nights. In other words, if
2019, Chinese tourists generated only 6% of total 25% of Japanese outbound tourists travel However, there are several factors that may slow Until these restrictions are lifted and flight
room nights in the country. domestically in 2023, it would cover the absence the recovery of Chinese tourists to Japan including capacity is increased, the return of Chinese
of Chinese tourists in terms of occupancy, whilst tightened border restrictions imposed on Chinese tourists will be slowed and thus the strength of
China inbound tourism recovers. arrivals, restricted flight capacity and Beijing’s ban Japan’s domestic traveler base will be required
Japan outbound vs China inbound on outbound package tours. to fill the gap.

25,000,000 Data from Cirium showed that international flight In the meantime, visitor arrivals from many other
capacity to and from China for January 2023 countries across the world showed strong growth
Number of tourists in '000

20,000,000 was only 11% of 2019 levels but is expected to in December, following the re-opening of the
hit 25% by April. Japanese border. South Korea gained the position
15,000,000 of number one source market with an estimated
Chinese travel to Japan will also be hit by the 456,100 arrivals according to the preliminary
10,000,000 requirement for a negative PCR test on arrival. estimates from JNTO. This represents a growth of
84% over December 2019, whilst no other country
5,000,000 managed to reach 2019 levels.

0
2015 2016 2017 2018 2019 2020 Japan Top 10 Source Markets (November - December 2022)
Japan Outbound China Inbound 800,000
Source: JNTO
No. of arrivals 600,000

400,000

200,000

-
South Taiwan Hong USA Thailand Singapore Vietnam Phillipines Malaysia Indonesia
Korea Kong
Source: JNTO preliminary estimates

Japan Hotel Investment Guide 8 Japan Hotel Investment Guide 9

Weakened Yen will boost tourism
With the Bank of Japan maintaining ultralow The increased cost of overseas travel for Japanese
interest rates whilst the Federal Reserve continued citizens whilst the Yen remains weak will further
to hike rates, the Yen plunged to a 32-year low drive domestic demand. In addition, Japan has
against the dollar in October 2022. Although the a relatively low rate of vaccination (68.0%* with
Yen has regained some ground against the dollar third booster jabs) vs other APAC countries, which
since October, Japan still represents exceptional will reduce the ability to travel internationally in
value for overseas tourists looking at the real the near future.
effective exchange rate.
*Source: Cabinet Public Affairs Office, Cabinet Secretariat, data as of
25 January 2023

Change in exchange rate, effective real (2022Q4 vs 2020Q4)

Japan
South Korea
Turkey
Thailand
China
Philippines
Malaysia
Taiwan
Germany
Canada
United Kingdom
Hong Kong, China
Australia
Singapore
United States
-30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20%

Source: Oxford Economics

Japan Hotel Investment Guide 10 Japan Hotel Investment Guide 11

Supply and pipeline Resort destinations have
With increased demand from overseas tourists Whilst the significant supply pipeline added over outperformed
and domestic travel over the years, Japan’s hotel the past five years will take time to be absorbed,
and ryokan supply has increased by a compound the new supply pipeline in Japan appears to be RevPAR recovery relative to 2019
annual growth rate of 1.0%, totalling more than one of the lowest among major destinations in
140%
1.7 million rooms by the end of 2021. Asia Pacific. Rapidly increasing construction costs
120%
across Japan and the growth of the multifamily 2019 level
100%
However, the supply growth has been disparate residential asset class will likely restrict hotel
across the country. The larger cities with supply in the medium term. 80%
international tourism demand have seen notable 60%
supply increases; Tokyo (+3.3% CAGR), Osaka 40%
(+5.4% CAGR), and Kyoto (+5.2% CAGR), whilst 20%
rural areas saw a slight decline between 2011 and 0%

Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
Oct-20
Nov-20
Dec-20
Jan-21
Feb-21
Mar-21
Apr-21
May-21
Jun-21
Jul-21
Aug-21
Sep-21
Oct-21
Nov-21
Dec-21
Jan-22
Feb-22
Mar-22
Apr-22
May-22
Jun-22
Jul-22
Aug-22
Sep-22
Oct-22
Nov-22
Dec-22
2018, balancing the national supply growth rate.

Total supply (hotel and ryokan) Tokyo Luxury Tokyo Midscale & Limited Service
Osaka Full Service Osaka Limited Service
1,800,000
1,750,000
Kyoto Upscale Okinawa Resort
%
CAGR: +1.0
1,700,000 Source: STR, JLL
1,650,000
Rooms

1,600,000 Since the beginning of 2022, all markets in Opening borders to international tourists in
1,550,000
Japan recorded significant growth in trading October 2022 clearly impacted the trading
1,500,000
1,450,000 performance, in line with the easing of performance of all markets. RevPAR for the six
1,400,000 inter-prefectural travel. More specifically, the markets tracked in the above graph achieved an
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Okinawa Resort market stands out as the average 116% of 2019 RevPAR in December 2022.
Source: Japan Tourism Agency
destination to experience the fastest recovery
driven by pent-up domestic travel demand.
Proportion of future supply over total existing supply
45%
40%
35%
30% 7% 4% 4% 3%
25%
20%
15%
6,084
7,750

4,136
6,271
1,372
1,146
1,201

10%
791

5%
0%
Manila

Osaka

Jakarta

Okinawa
Hanoi

Shanghai

Bali

Seoul

Kyoto

Tokyo
Melbourne

Singapore
Phuket

Sydney

Bangkok

Minh City

Hong Kong

Beijing
SAR
Lumpur

Incheon &
Ho Chi
Kuala

Source: STR

Japan Hotel Investment Guide 12 Japan Hotel Investment Guide 13

A two to three-year recovery
With Japan’s borders now open to overseas However, Osaka will host the World Expo in
travellers, luxury and full-service markets with 2025, generating huge demand in the build-up
a higher proportion of overseas visitors should and during the event, pushing performance
benefit from strong pent-up demand and the above 2019 levels.
The current economic headwinds in Europe, the The lifting of quarantine measures in China is
weak Yen. This should be the case for Tokyo,
USA and Australia are expected to continue to positive news for global travel, however restricted
Osaka, and Kyoto. The Kyoto Upscale Market As Japan’s most popular resort destination, we
be felt in Asia Pacific during 2023. This should flight capacity and high fares will likely create a
has maintained a strong ADR throughout the expect Okinawa to benefit from strong pent-up
slow the region’s general pace of recovery to a bottleneck for China outbound travel in the first
pandemic. As a popular destination for both leisure demand from Japanese tourists over the
certain extent. half of 2023. In Japan, the weak Yen and
international and domestic travellers, we expect next two years. Although ADR exceeded 2019
pent-up domestic demand (which has already
growth in occupancy to drive RevPAR above 2019 levels in 2022, to drive occupancy, Okinawa will
been witnessed in many countries across the
levels in 2024. need to rely on the return of tour groups which
world) will provide a stimulus for the recovery.
generate lower ADRs than the current transient
RevPAR forecast against 2019 The midscale and limited-service segments in travellers. Even with a slight drop in ADR, Okinawa
Tokyo and Osaka have a higher reliance on China. RevPAR should exceed 2019 levels in 2023 and
140%
Therefore, we forecast that these markets will take continue to grow further.
until 2025 to fully recover to 2019 RevPAR levels.

120%
Both the Osaka Full Service and Limited Service
Markets have experienced significant additional
supply over the past five years, which will impact
100%
the recovery speed.

80%

60%

40%

20%
2022 2023 2024 2025
Tokyo Luxury Tokyo Midscale & Ltd Service Kyoto Upscale
Osaka Full Service Osaka Ltd Service Okinawa Resort
2019 level

Source: JLL

Japan Hotel Investment Guide 14 Japan Hotel Investment Guide 15

Historical transaction volumes and We expect volumes in 2023 to be driven by
transactions in the limited-service segment, where
Assets with strong domestic leisure demand, such
as resorts benefiting from the Yen depreciation,
the ownership base is more fragmented, and are expected to be sought after, and we expect

2023 forecast owners can accept market-level pricing, given

a slower recovery period and supply pressures
further transaction volume in this segment. In
2023, Japan is expected to record JPY417 billion
from pre-COVID. of hotel transactions, a 4% growth year-on-year.
As of December 2022, Japan has recorded more Presently, the biggest driver of offshore
than JPY 400 billion of completed deals, mostly investment in Japan hotels is the yield spread
Transaction volume
led by portfolio transactions such as the over borrowing cost compared to other key
Kanpo-no-Yado portfolio of 32 hotels, the Hotel markets across APAC. By far, Japan offers the most 600
559
Trusty portfolio of 6 hotels, and most notably, attractive prospect for investors looking to utilise
the Seibu portfolio. This landmark transaction debt financing, with markets like Tokyo and Osaka
of 31 assets, the largest hotel deal in Japan since offering a spread of c.2.5-3%. 500
2007, was signed in June 2022 and acquired
417
by Singapore’s GIC, subject to a management 400
400
agreement with Prince Hotels. 368
335 336
Hotel yield spread over borrowing cost
300 287 282
Assumptions 273
Hong Kong 252
• Operated under HMA or 242
Seoul Franchise contract
200
Sydney • Prime or good
secondary location
Singapore
• Yield based on 2019 or 100
Bangkok stabilised projections
40 46 41
Tokyo • Non-recourse
0
Kyoto • 50-60% LTV 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
-4% -3% -2% -1% 0% 1% 2% 3% 4% Note: JLL’s estimates are based on the
latest transactions and market intel. Transaction volume Forecast
Source: JLL Source: JLL

Japan Hotel Investment Guide 16 Japan Hotel Investment Guide 17

2
Japan Hotel Investment Structures
A threshold question to consider in planning
any hotel investment in Japan is what structure
or vehicle the investor ought to use in order to
acquire or develop the real estate.

A number of different structures can be used in

Japan for investment in hotel real estate. Investors
can acquire the real estate individually, through an
offshore entity or a Japanese entity or Japanese
The structures most widely used by inbound
investors to invest in hotel real estate in Japan are
the TMK and the GK-TK structures.

TMKs and GK-TKs are used in a variety of real

estate investments and are suitable for non- or
limited-recourse financing and securitization
transactions as bankruptcy remote features can
be implemented.
partnership structure. Available forms of entities
in Japan include the kabushiki kaisha, commonly Both structures offer tax benefits that are not
referred to as the KK, the godo kaisha, commonly available to ordinary business entities such as
referred to as the GK, and the tokutei mokuteki the KK or GK if certain conditions are satisfied.
kaisha, commonly referred to as the TMK, and the In addition, holding the real estate in trust (see
toushi hojin / toushi shintaku, commonly referred commentary below) may provide some additional
to as a J-REIT (if it invests real estate assets). In tax benefits. However, the tax advantages of these
addition, the tokumei kumiai, commonly referred structures and the use of trusts must be carefully
to as the TK, is also frequently used for real weighed against other considerations such as the
estate investment in combination with the GK as cost of establishment and administration, as well
explained below. as licensing and filing requirements.

The following pages of this Guide provide an

overview of the GK-TK and TMK Structures.

Japan Hotel Investment Guide 18 Japan Hotel Investment Guide 19

GK-TK structure overview
Finally, one further advantage that the GK-TK The structure chart is followed by a brief summary
structure has relative to the TMK is that it can be of the key tax, regulatory and other considerations
used to invest in multiple properties even if not applicable to the GK-TK structure.
identified at the outset.
A GK, sometimes referred to as a “limited liability The TK operator owns all of the assets of the
company”, is modelled on the limited liability TK business and the TK investor merely has
The GK-TK structure chart appearing below
company provided for under US law but without contractual rights and obligations under the TK
contemplates an investment by a TK operator that
the pass through tax attribute. A TK, sometimes agreement and is generally not liable for the debts
is not licensed under the Real Estate Syndication
referred to as a “silent partnership” is not an entity or other obligations of the TK business.
Act (Fudousan Tokutei Kyoudou Jigyou Hou) (see
like a KK, GK and TMK but is a type of limited
above regarding this requirement) and therefore
partnership as explained below. A key advantage of a TK is that certain
acquires a trust beneficiary interest (TBI) in the
distributions of profits by the TK operator to
hotel real estate.
The GK has become more commonly used in the TK investor pursuant to the TK agreement
real estate investment transactions by inbound can be treated as a deductible expense at the
investors in part because of its simpler governance TK operator level, and such distributions for GK-TK Structure Chart
structure. In addition, a lender will usually prefer inbound TK investors will be subject to a Japanese
a GK over a KK because unlike a KK, a GK is not withholding tax rate of 20.42%, or a lower tax
subject to statutory corporate reorganization treaty rate if applicable, which is much lower than
Offshore Investor
proceedings which can significantly limit a the Japanese corporate tax (local and national) at
lender’s right to enforce its remedies against the the standard effective rate of around 30% to 35%. Japan
100%
debtor’s assets. TK Investment TK Agreement GK Equity Bankruptcy
Unlike a TMK structure, unless the TK operator Remote Vehicle
A TK is formed with a “silent partnership” (tokumei is licensed under the Real Estate Syndication Act
Employees
kumiai) agreement, commonly referred to as a (Fudousan Tokutei Kyoudou Jigyou Hou), or is Non-Recourse Loan
FF&E Operating GK Lender
“TK agreement”, entered into by the “TK operator”, otherwise exempt from the licensing requirement Company (TK operator)
usually a GK, and a “TK investor”, sometimes under the Act, the real estate to be acquired and
TBI Trust
referred to as a “silent partner”, pursuant to held by the TK operator would generally need Agreement AM Agreement
ML
which the TK investor invests in the “TK business” to be entrusted with a trust bank, with the TK
Agreement Asset
operated by the TK operator. This structure is operator being the owner of the trust beneficiary Trust Bank Manager
commonly referred to as a “GK-TK” structure interest and the trust bank holding legal title to
(or sometimes the other way around, i.e., a the real estate.
Legal title
“TK-GK” structure).
However, as a TBI is deemed to be a kind of
An important feature of TK structures is that the TK “security” under the Financial Instruments and Hotel Real
operator is the only party permitted to participate Exchange Act (Kinyuu Shouhin Torihiki Hou), and Estate (Entrusted)
in the day-to-day management or administration as a TK is regarded as a “collective investment
of the TK business, similar to the general partner scheme”, unless it has an investment management
in a limited partnership in some common license (Toushi Unyo Gyo) or is qualified under Investment / Finance Contracts Instructions
law jurisdictions. Article 63 of the Act, the TK operator will need to
appoint an asset manager licensed under the Act
in order to manage the TBI assets.
Japan Hotel Investment Guide 20 Japan Hotel Investment Guide 21
GK-TK Key Considerations
TMK structure overview
A TMK is a special purpose limited liability Proceeds from the issuance of such preferred
Tax Regulation Incorporation company that can only be established and used shares, specified bonds and specified borrowings
in connection with the securitization of certain are not permitted to be used other than for the
• Distributions of profit by • The TK is a passive “silent • A TK operator in the form prescribed assets, including real estate and trust acquisition, development or management of the
the TK operator to the partner” investment of a GK can usually be beneficiary interests of trusts holding real estate. specified assets.
TK investor at the TK arrangement, under which established in two to three
operator level are treated the investor has no right weeks. The TK agreement Unlike the GK-TK structure, the TMK does not A TMK must comply with various regulatory
as a deductible expense, to control or manage with the silent partner/ require any license to acquire and manage requirements including the filing of a “Notification
i.e. are not subject to the TK business (real investor can also be either bare real estate or the trust beneficiary of Commencement of Business” (Gyoumu Kaishi
double taxation. estate investment). prepared and executed interests of trusts holding real estate so long as Todokedesho) together with an initial “Asset
within this timeframe. the management activities requiring the licenses Liquidation Plan” (Shisan Ryuudouka Keikaku),
• Profit allocable to a • If bare real estate is acquired
non-resident TK investor as opposed to a TBI, the TK are outsourced to a duly licensed company commonly referred to as the ALP, with the
is subject to withholding operator must be licensed or companies. For bare real estate, the asset applicable Local Finance Bureau of the Ministry of
tax at the rate of 20.42%, under the Real Estate management company must meet certain Finance. This needs to be completed in advance
subject to a lower tax treaty Syndication Act in order requirements under the Act on Securitization of before the TMK acquires any assets, issues any
rate, as applicable. to acquire bare real estate Assets (Shisan Ryuudouka Hou) as a “specified preferred shares or specified bonds, or undertakes
and to undertake real estate asset manager” (Tokutei Shisan Kanri Gyosha or any borrowings.
• There are no reduced rates Tokkan Gyosha), including being licensed under
business or otherwise be
with respect to real estate the Real Estate Brokerage Act (Takuchi Tatemomo If non-recourse financing (bond or bond and
exempt from the licensing
acquisition tax / registration Torihikigyou Hou) as a “real estate broker” loan) is contemplated, the bond purchaser/
requirement under the
and license tax, should the (Takuchi Tatemomo Torihiki Gyosha). lender usually requires the TMK to be set up as a
Act. However, TK operators
TK operator purchase the bankruptcy remote entity, typically with the TMK’s
usually acquire a TBI in order
underlying property. A TMK is authorized under the Act on specified/common equity owned by a “general
to avoid this requirement.
Securitization of Assets (Shisan Ryuudouka Hou), incorporated association” (ippan shadan houjin),
• In order to manage a TBI, a commonly referred to as the Asset Liquidation a Japan bankruptcy remote vehicle.
TK operator must generally Law, to purchase specified assets (tokutei
appoint an asset manager shisan), and to fund the purchase of such assets As preferred shares and specified bonds issued
licensed under the Financial through the issuance of preferred shares (yuusen by a TMK are regarded as a type of security (yuuka
Instruments Exchange shusshi) to investors, and/or by the issuance of shoken) under the Financial Instruments and
Act since a TBI is deemed specified bonds (tokutei shasai) to or specified Exchange Act, a licensed solicitation or private
a “security” and a TK is borrowings (tokutei kariire) from one or more placement agent is required to be retained
regarded as a “collective qualified institutional investors (QIIs), typically a by the TMK to issue the preferred shares or
investment scheme” licensed bank. specified bonds.
under the Act.

Japan Hotel Investment Guide 22 Japan Hotel Investment Guide 23

Similar to the GK-TK structure, a key advantage of • all loans to the TMK must be made by one TMK Structure Chart
a TMK is that certain distributions of profits by the or more QIIs; and
TMK to its preferred shareholders can be treated • the TMK must distribute more than 90% of
as a deductible expense at the TMK level, provided its profits for each fiscal year as calculated Offshore Investor
certain requirements prescribed by the Act on under the Act on Special Measures Concerning Japan 100%
Special Measures Concerning Taxation (Sozei Taxation (Sozei Tokubetsu Sochi Hou)
Tokubetsu Sochi Hou) are met. Such distributions KK or GK
to its specified/common share and/or 100% 49% 51%
for offshore TMK investors will be subject to Specified Equity Bankruptcy
preferred shareholders. Preferred Preferred Equity Remote Vehicle
Japanese withholding tax rate of 20.42%, or a Employees Equity
Another benefit of a TMK is that it is entitled FF&E
lower tax treaty rate if applicable, which is much Specified Loan/Bond
to reduced rates of real estate acquisition tax Operating Lender / Bond
lower than the Japanese corporate tax (local Holder (Qii)
(fudosan shutoku zei) and registration and Company
and national) at the standard effective rate of TMK
license tax (toroku menkyo zei) when real estate (Tokutei Mokuteki Kaisha)
around 30% to 35%.
is acquired (those taxes do not apply to the Trust AM Agreement
ML TBI
acquisition of the beneficiary interests of trusts Agreement
The key requirements under the Act on Special Agreement Asset
holding real estate). Trust Bank Manager
Measures Concerning Taxation include:

• a majority of the TMK’s preferred shares must Legal title

The TMK structure chart appearing to the right
be held by Japan taxpayers, e.g. Japanese
also contemplates the TMK acquiring a TBI and
entities or registered Japan branches of
is followed by a brief summary of the key tax,
offshore entities;
regulatory and other considerations applicable to Hotel Real
• in general, specified bonds must be issued Estate (Entrusted)
the TMK structure.
by the TMK, and in practice are issued
Investment / Finance Contracts Instructions
to one or more “Qualified Institutional
Investors” (QIIs); and

Japan Hotel Investment Guide 24 Japan Hotel Investment Guide 25

TMK Key Considerations
A word on trust beneficiary interests
or TBI
Tax Regulation Incorporation

In many hotel purchase and sale transactions, the • the TBI holder will need to appoint an asset
• A TMK is permitted to deduct • A TMK must file a Notification • The incorporation of a TMK
hotel real estate offered for sale will be in the form manager with the requisite license under the
distributions to preferred of Commencement of usually takes about one
of a trust beneficiary interests (shintaku jueikken), FIEA in order to instruct the trustee in relation
equity holders as an expense Business and an Asset month and the preparation
commonly referred to as a “TBI” rather than the to administration of the real estate (for a
if it meets certain tax Liquidation Plan (ALP) and filing of an ALP about
actual hotel land and/or building, especially if the TMK, this is a practical requirement of the
requirements, including: together to the Local one week – after most of the
owner is a foreign investor intending to sell the trustee, and for a TK-GK structure, because
Finance Bureau, before it material terms of purchase
– issuing a majority hotel in several years. the TBI is deemed to be a security and a TK is
acquires any assets or issues and sale agreements have
of preferred equity to regarded as a “collective investment scheme”
any preferred equity or been finalized. It is also
Japan taxpayers; A TBI in real estate is created when the owner under the FIEA); and
undertakes any borrowing. permissible to amend the
– issuing specified bonds of the real estate entrusts the real estate to
ALP after the initial filing, • for regulatory and other reasons, trust
• A TMK must appoint a a trustee, usually a licensed trust bank. On
in the amount of at least 100 at the time of additional banks do not normally acquire and are not
“solicitation” or private entrustment of the real estate pursuant to a trust
million Japanese yen to one issuance of equity, involved in administering or operating the
placement agent, in order agreement between the owner and trustee, the
or more QIIs; and acquisition of assets and/or hotel FF&E, employees and other business
to issue preferred equity or trustee acquires the legal title to the real estate
financing, as necessary. assets of the hotel - these will be held by a
– distributing more specified bonds. and in return the former owner acquires a trust
than 90% of profits to its separate operating company, usually in the
• In order to manage bare beneficiary interest in the real estate.
preferred equity holders for form of a KK or GK.
real estate, a TMK must
each applicable fiscal year. Under the trust agreement, the trustee Why do developers and owners of hotel real estate
appoint a “specified asset
• Distributions made by a administers the real estate (but not the hotel often place the real estate in trust? There are
manager” (Tokutei Shisan
TMK are currently subject to business) for the benefit of the TBI holder in several advantages to the trust structure including:
Kanri Gyousha or Tokkan
withholding tax at a 20.42% Gyosha) that meets the consideration for a fee and the TBI holder receives • the transfer of a TBI is not subject to real estate
rate which may be reduced requirements under the Act periodic distributions of trust income after acquisition tax, and thus, depending on the
under the applicable on Securitzation of Assets. deduction of the costs of managing the real estate intended holding period and the trust related
income tax treaty. (including taxes and insurance). fees, it may be advantageous from a tax savings
standpoint to entrust the real estate;
• Reduced tax rates apply A couple of key points for overseas investors to
with respect to real estate note here include: • trust banks normally undertake their own
acquisition tax / registration due diligence review of the real estate before
• very few licensed trust banks will agree
and license tax, should accepting entrustment and will alert the buyer
to negotiate or document the terms of
the TMK acquire the to any material risks identified as a result of
the trust agreement other than in the
underlying real estate (as the review, and the lender and the market
Japanese language;
opposed to a TBI). often perceive entrusted property to be in
good condition at least from a building code
compliance perspective.

Japan Hotel Investment Guide 26 Japan Hotel Investment Guide 27

Conclusions Factsheet
Acquisition Costs
• The TMK and GK-TK structures are potentially • The TMK structure is potentially the more
Generally, building (and FF&E if applicable) purchase price x 10% (can be reclaimed
more tax-efficient structures for real attractive vehicle from a regulatory perspective Consumption Tax
post-acquisition, usually 2-3 months after making the requisite JCT filing)
estate investment but attract a range of because, in contrast to a GK-TK structure, the 1.5% of Tax Assessed Value of Land (Tax Rate of 1.5% will be effective until March 2024)
regulatory requirements. TMK itself does not need to obtain certain Real Estate Acquisition Tax
4% of Tax Assessed Value of Building
licenses (can be outsourced) for management 1.5% of Tax Assessed Value of Land (Tax Rate of 1.5% will be effective until March 2024)
• The GK-TK structure allows distributions to
purposes or to carry on real estate business. Real Estate Registration Tax 2% of Tax Assessed Value of Building
TK investors to be “tax deductible” to the TK
0.4% of the Value of the Mortgage
operator and distributions are generally subject • However, a TMK must file an Asset Liquidation
200,000 – 600,000 Yen per original copy of agreement (depending on purchase price
to the 20.42% withholding tax rate (or less, Plan (similar to a placement memorandum) Stamp Duty
listed on PSA)
depending on the applicable tax treaty) to and conduct its activities in accordance
Brokerage Fee 3% of Purchase Price + Consumption Tax (10%)
offshore TK investors. with the plan. In order to qualify for the
tax benefits outlined above, it must issue
• TK investors are not permitted to manage or
a specified bond and distribute at least Holding Costs
control the TK business.
90% of its profits, as calculated under the
Property Tax 1.4% of Tax Assessed Value of Land & Building p.a.
• The TMK structure is also an attractive vehicle Special Measures Concerning Taxation (Sozei
City Planning Tax
from a tax perspective because distributions Tokubetsu Sochi Hou). 0.3% of Tax Assessed Value of Land & Building p.a.
(Tokyo, Osaka, etc.)
to TMK preferred shareholders may qualify
Depreciable Asset Tax 1.4% of Depreciable Asset Book Value p.a.
to be tax deductible at the TMK level and
a withholding tax rate to offshore TMK Corporate Tax 30 – 35% of Taxable Income (depending on the corporation type)
shareholders of less than 20.42% may apply
Capital Gains Tax Same as Corporate Tax
depending on the applicable tax treaty.
20.42% of offshore distributions (Standard Withholding Tax Rate)
Withholding Tax on dividends Singapore Tax Treaty – 5%
Hong Kong Tax Treaty – 5%

Trust Fee c.1 – 2m Yen upfront fee plus c.600,000 – 1m Yen p.a.

Property Management Fee c.1 – 3m Yen p.a. (depending on scope and asset size)

Asset Management Fee c.0.3 – 0.5% of Purchase Price (depending on scope and asset size)

The factsheet above has been prepared for guidance purposes only as at the date of this paper. The tax rates and
commercial terms may depend on the specific circumstances and latest legislation, therefore the reader should seek further
professional advice.

Japan Hotel Investment Guide 28 Japan Hotel Investment Guide 29

Glossary
Key terms – abbreviations Key players

ADR Average Daily Rate

A TMK must outsource management and retain Asset Manager, Property Manager, etc. A TBI holder
that is not licensed as an investment advisor or asset manager in Japan will need to appoint a third
Asset Liquidation Plan (shisan ryuudouka keikaku), a document analogous to a placement memorandum Asset Manager
party asset manager with the requisite FIEA license in order to instruct the trustee in relation to
ALP which a TMK must file before it issues any preferred equity and specified bonds, undertakes any specified
administration of the real estate as the TBI is deemed to be a security under the FIEA.
borrowing or purchases any real estate.

CAGR Compound Annual Growth Rate Solicitation / Private A TMK will need to appoint a licensed securities broker as a placement agent in order to issue
Placement Agent preferred equity or specified bonds as those are deemed securities under the FIEA.

FIEA Financial Instruments and Exchange Act (Kin’yu Shouhin Torihiki Hou), Law No. 25 of 1948, as amended.
A special financial institution licensed to undertake trust business under the Law Concerning
Trust Bank Concurrent Undertaking of Trust Business by Financial Institutions (Law No. 43 of 1943). The
GK Godo Kaisha, a type of limited liability company modelled on the US LLC. See page 20 for details.
underlying real estate of a TBI is usually owned and administered by a Trust Bank.

HMA Hotel Management Agreement

Kabushiki Kaisha, sometimes referred to as “joint stock corporation”, a type of limited liability company
KK
widely used to carry on business in Japan. See page 18 for details.

LTV Loan to Value

Qualified Institutional Investor (Tekikaku Kikan Toushika), a buyer of securities deemed sophisticated by
QII
Cabinet Order under the FIEA, such as banks and insurance companies licensed in Japan.

RevPAR Revenue per available room

Trust Beneficiary Interest (Shintaku Juekiken), the interest that a trust beneficiary holds in property entrusted
TBI to and administered by a trustee under a trust agreement. A TBI is treated as a security under the FIEA. See
page 27 for details.

Tokumei Kumiai, a type of limited partnership commonly used for purposes of real estate investment. See
TK
page 20 for details.

Tokutei Mokuteki Kaisha, a special purpose company commonly used for purposes of real estate investment.
TMK
See page 23 for details.

Japan Hotel Investment Guide 30 Japan Hotel Investment Guide 31

Contributors
JLL
James Yukio Abe Charlie Macildowie
Managing Director Executive Vice President
Head of Japan, Investment Sales charlie.macildowie@jll.com
james.abe@jll.com

Naoki Kogure Hisao Uenishi

Senior Vice President Senior Vice President
naoki.kogure@jll.com hisao.uenishi@jll.com

Marina Bracciani Amelia Chia

Vice President Associate
marina.bracciani@jll.com amelia.chia@jll.com

Baker McKenzie
Real Estate
Chris Hodgens Akiko Hosokawa
Senior Counsel Partner
chris.hodgens@bakermckenzie.com akiko.hosokawa@bakermckenzie.com

Seishi Ikeda Taijiro Suzuki

Partner Partner
seishi.ikeda@bakermckenzie.com taijiro.suzuki@bakermckenzie.com

Tax
Akihiro Kawasaki Ryutaro Oka
Senior Associate Partner
akihiro.kawasaki@bakermckenzie.com ryutaro.oka@bakermckenzie.com

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