What is a multi-party real estate investment?

A multi-party or joint venture real estate project is a deal between several parties who combine resources to develop, acquire or manage a property. Most large commercial projects are financed this way. Real estate developers or operators (often referred to as the operating member) frequently work with capital providers (capital member) to realise projects. However, individuals can also use this structure, not just corporations. 

“Joint venture deals are quite common among foreigners, but not as much among the Japanese. Normally, those deals would be between foreigners who are already acquainted and do not have an issue nominating one of the parties as a spokesperson and decision maker,” explains Ziv Nakajima Magen, Partner & Executive Manager of Asia-Pacific Nippon Tradings International (NTI). Common cases include, for example, siblings, unmarried couples, divorced couples, friends or business partners acquiring, owning and managing a property together. According to Nakajima Magen, non-acquainted partners do exist, but in the vast majority of cases they would be purchasing via a fund or company structure who would be the single official owner.

Therefore, to avoid disputes over management and the distribution of gains from the property, you should familiarise yourself with the different legal structures, also called vehicles. Below we describe which frameworks are commonly used in Japan along with their advantages and disadvantages.

The legal structure of joint venture properties in Japan

Legally binding contract

“As far as settlement and ownership go, the process is very simple. Each owner receives a mutually agreed–upon percentage of ownership, and the title deeds and ownership are split according to the agreement, which all parties are required to sign, providing their agreement to the split, equal or otherwise,” Nakajima Magen tell us.

Nini kumiai

Besides setting up a simple contract of ownership, another option is to form a nini kumiai (voluntary partnership in Japanese) defined by the Minpou (Civil Code), explains Yutaka Kumada, Representative Director of Daiwa Real Estate Advisory Services. The regulation applied to this type of vehicle is the Fudosan Tokukei Kyodo Jigyouhou (Real Estate Specified Joint Enterprise Act). This structure can be used by private parties, but is also the commonly used framework for structures where real estate developers sell partial ownership in commercial real estate projects to individuals, often starting as low as a million yen (around USD $10,000), details Kumada.

Corporate entity

Another option is to set up a corporate entity. As Nakajima Magen explains: “If there are more than four or five individual owners, the legal fees involved become higher, particularly for smaller and cheaper properties. In those cases, it may be advisable and more profitable to set up a corporate entity which would purchase the property or properties as a single entity and owner, with the investors being partners in the company itself.” He adds that corporate tax is capped and not progressive unlike individual tax. Therefore, it would be best to consult with an experienced accountant to evaluate all related costs involved in the acquisition, including annual maintenance, taxes, and potential sale scenarios in the future, before making a decision on the best possible structure. 

Risks and benefits

While joint ownership is fairly common with spouses buying their own home, or with parents and children when they inherit property, it is a less common arrangement for friends or strangers, according to Zoe Ward, CEO of Japan Property Central. “The biggest risk is that you cannot sell a property without all owners agreeing to the sale. You can sell your share of the property but you might have a very difficult time finding a buyer wanting to take over your share,” explains Ward.
 
Further, when it comes to disputes, matters can vary significantly if one or more of the owners are native Japanese, as local courts and other legal authorities can be extremely biased in favour of the Japanese parties, warns Nakajima Magen. “On the one hand, native Japanese are less likely to resort to legal proceedings, as they tend to avoid conflict. However, if the case does reach the court, it is highly likely the ruling will be in favour of the Japanese partners in these cases — so it is in all parties’ best interests to prevent the dispute from escalating.”
 
For those considering partnering with unknown parties, Nakajima Magen advises to appoint an agreed-upon professional company, similar to a fund manager, which can regulate decisions and manage the portfolio on a regular basis, with only major decisions brought up to investors to vote upon. “There is nothing worse than having an investment fail because partners cannot reach an agreement on basic and simple management decisions — it’s best to leave this to mutually agreed–upon expert managers, and be a passive earner,” concludes Nakajima Magen.
 
Finally, another option for passive real estate investment to consider is various funds, including REITs, who invest in property on behalf of their members. It's a low-investment option for those who cannot afford to go it alone. However, investors have no say in the properties the fund chooses to invest in, let alone in management and resale decisions.

By Mareike Dornhege 

Similar to this: 

Top 4 tips for investing in the Tokyo real estate market

Finding the ideal investment in Tokyo

Old versus new properties in Japan: Which to choose?