Our prior blog post discussed an issue faced by investors who use the tokutei mokuteki kaisha (TMK) as the vehicle to own a data center in Japan. The primary issue the post explored was whether a TMK is required to entrust movable assets (including the data center fit-out) with a Japanese trustee.
A TMK is not required to entrust its movable assets under Japanese law if the movable assets (1) are attached to the immovable assets (the land or core and shell of the data center) such that they lose independence and are deemed to be part of the movable assets or (2) if the immovable assets are considered ancillary to the immovable assets.
Japan’s Financial Services Agency (FSA), the primary regulator of Japan’s financial sector (including J-REITs and TMKs), recently published a set of questions and answers (the Q&A) on whether data center fit-out is considered to be a part of the land and core and shell of a data center under J-REIT regulations. Under applicable laws and regulations, 50% or more of a J-REIT’s assets must be “specified assets” provided in the Act on Investment Trusts and Investment Corporations and its Enforcement Order. Real estate is listed as one of such specified assets. Where a J-REIT’s specified asset is a data center, whether the fit-out is considered a part of the real estate is an important issue since the high value of the fit-out may cause a J-REIT to breach this requirement if the fit-out is not considered a part of the real estate.
The analysis in the Q&A should apply to data centers owned by TMKs since the issue for a J-REIT is substantially similar to the issue under the TMK law on whether the fit-out is deemed to be real estate.
The Q&A states that the following four factors should be analyzed when determining whether the data center fit-out is considered to be a part of the data center real estate (including the core and shell):
- Whether physical damage would occur if the fit-out is separated from the real estate
- The costs necessary to separate the fit-out from the real estate
- The degree of impairment to the value of the data center if the fit-out is separated
- The degree of socioeconomic damage caused by separating the fit-out
The Q&A further includes an analysis of whether the following fit-out items are part of the real estate under the above criteria and concludes that generally such items may be considered part of the real estate under such criteria:
- Elevators
- Power transformation equipment
- Emergency power equipment
- Power storage equipment
- Air conditioning equipment
The Q&A states that whether other fit-out items are considered to be part of the real estate should be analyzed on a case-by-case basis.
While the FSA’s Q&A deals with data centers owned by J-REITs, it provides important guidance to data center investors who use the TMK as their ownership vehicle. Our Tokyo office will continue to monitor this issue and provide updates in this space.