Structure
The following information is predominantly based on pages 71-72 of the CKT Initial Public Offering Product Disclosure Statement (PDS). Further information on the investment structure is contained in Section 11 of the PDS.
Challenger Listed Investments Limited (CLIL) is the Responsible Entity of CKT. Challenger Management Services Limited (CMSL) is the Manager of CKT.
Japan HeadCo is owned 51% by a wholly-owned subsidiary of Challenger Limited (Challenger) and 49% by Kenedix, Inc (Kenedix). Japan HeadCo has established the Master TK Operator and is its sole managing member.
CKT has made its investment in a portfolio of properties through a series of TK structures.
- CKT has applied the proceeds of the IPO, after expenses, to make a TK investment in the business of the Master TK Operator under a Tokumei Kumiai agreement (Master TK Agreement); and
- the Master TK Operator has in turn made a TK investment in the business of the Sub TK Operator under another TK agreement (Sub TK Agreement). The Sub TK Operator has used the contributed equity and debt to acquire the Trust Beneficiary Interests of the initial properties.
In connection with these investments, Kenedix has entered into the Japan Investment Management Agreement with the Master TK Operator. Kenedix Advisors, Inc., a wholly-owned subsidiary of Kenedix, has entered into the Japan Asset Management Agreement with the Sub TK Operator and the Japan Property Management Agreements with the Sub TK Operator and the Trust Bank for some or all of the initial properties.
Description of Japanese elements of the investment structure
Under Japanese Commercial Code a TK ('Tokumei Kumiai') is not a legal entity but a contractual relationship between an investor and the TK operator.
In a TK arrangement, an investor provides capital to a business which is defined by the contractual agreement (TK business) and is to be conducted by a TK operator, which carries on such business entirely in its own name and under its sole control in accordance with the terms of a TK agreement. The TK operator is responsible for the management of the TK business.
An investor in a TK does not own any equity capital in the TK operator and has no voting rights in relation to the TK operator or the business of the TK. Instead, there is only a contractual relationship between the TK operator and the investor. The investor is generally entitled to a proportional share (based on its equity contribution to the TK) of the profits and losses of the business of the TK operator. Depending on the express terms of the TK agreement, the liability of the investor can be limited to the amount of its initial investment or the investor can be subject to additional capital calls.
The net effect of these contractual arrangements under Japanese tax law is that the investor is taxed in Japan on its share of TK income (by the TK operator withholding Japanese tax from the TK profit distributions to the investor) even though the business is conducted and relevant assets are held in the name of the TK operator. The TK operator reports the amount of profits to which the investor is entitled as a deduction in computing its taxable income.
CKT investment structure
The Master TK Operator is owned by Japan HeadCo.
The Master TK Operator (a godo Kaisha or a Japanese limited liability company) has been established specifically for the purpose of operating the business defined by the Master TK Agreement (TK Business) and its activities for that purpose will include to acquire, hold and dispose of the Sub TK Interests and to acquire, hold and dispose of interests in other special purpose companies, the business of which is similar to the TK Business.
The parties to the TK Agreement are the Responsible Entity on behalf of CKT and the Master TK Operator. Under the TK Agreement, in exchange for making a TK investment of 97% of the initial capital required for the TK Business, CKT is entitled to 97% of the profits and losses of the TK Business and 97% of any surplus upon winding up the TK Business. The remaining 3% of the initial capital in the TK Business has been supplied by the Master TK Operator. There is no obligation on CKT to make additional TK investments, however, the Master TK Operator may make calls on CKT and CKT may decide in its sole discretion whether to make an additional TK investment.
The Master TK Operator is entitled to 3% of the profits and losses of the TK Business and 3% of any surplus upon winding up of the TK Business.
CKT does not own any of the equity capital of the Master TK Operator and does not have any voting rights in relation to the Master TK Operator or the TK Business. Instead, CKT has a contractual claim against the Master TK Operator. It is possible CKT may undertake additional investments in one or more other TK arrangements. It is also possible that the initial TK arrangement will serve as the vehicle for future property investments by CKT. Further details of the TK Agreements are contained in Section 11 of the Initial Public Offering Product Disclosure Statement.
The Master TK Operator will enter into the Sub TK Agreement with the Sub TK Operator under which the Master TK Operator contributes capital to the Sub TK Operator for use in the Sub TK Business. The Master TK Operator will contribute 100% of the initial capital required for the Sub TK Business in exchange for an entitlement to 99.9% of the profits and losses of the Sub TK Business.
The Sub TK Operator will invest in the Trust Beneficiary Interests, as described below.
Trust bank(s) and Trust Beneficiary Interests
For those initial properties which will be held through the TK structure at the date of listing of CKT, the Sub TK Operator will hold the beneficial interest (Trust Beneficiary Interest) in those initial properties. It is common practice in Japan for a TK operator to hold its investments in property through Trust Beneficiary Interests.
The Sub TK Operator, as the holder of the Trust Beneficiary Interest in the initial properties and therefore the beneficiary of the trusts, effectively has substantially the same economic rights and obligations as if it were the legal owner of the property which is the subject of the trust.