I built a library with no collateral and no guarantees. As far as I know, this is the story of the first project in Japan to truly securitize a public facility.

In last week's note, I wrote about stepping down as president of Ogal Plaza Inc. and how I had designed the SPC vehicle so that it would not be dependent on any specific individual. This time, I would like to delve one step deeper into the story of that vehicle, from a financial perspective.

This is because I believe the Ogal Plaza project was a groundbreaking case study in finance. As far as I am aware, Ogal Plaza was the first real estate development in Japan to truly securitize a public facility.

When you say 'securitization,' it might sound like a difficult topic for financial experts only. However, its essence is extremely simple. You place the cash flow generated by a business itself at the center of credit. You do not take land or buildings as collateral, nor do you take personal joint guarantees from the business owner; instead, you lend against the business's cash flow itself. This is the core of securitization and the philosophy of project finance.

And I obtained that financing with no collateral and no guarantees.

Most PFIs are nothing more than 'pseudo-securitizations'

There is one thing I must state clearly here.

There will surely be counterarguments saying, 'There are plenty of cases of securitized public facilities under PFI.' It is true that Japan has a system called PFI, and there are many cases where the private sector has built and operated public facilities using methods like BOT or BTO. The Shiwa Town Hall building itself was built as one of the largest PFI projects (BTO method) in Japan for a wooden structure.

However, I believe that from a financial perspective, most PFIs are nothing more than 'pseudo-securitizations.' Why? Because the source of repayment for those projects is, in the end, the payment of service fees from the government.

The government pays a fixed amount to the private sector every year. Banks lend money with peace of mind, backed by those payments. This is no different from the source of repayment being tax money. The source of credit relies on the fiscal strength of the local government itself. Whether the business makes money or not, the government pays. Loans collateralized by that cannot be called loans that truly bet on the business's cash flow.

That was not what Ogal Plaza challenged.

Co-locating 100% private-risk commercial tenants with a library

Ogal Plaza is a piece of real estate that houses a full-fledged public facility, the Shiwa Town Library, alongside commercial tenants with 100% private risk, such as a local produce market, a clinic, restaurants, and a cram school, all within the same building.

How unusual this is.

Public facilities are a world supported by government taxes. Commercial tenants are a world of exposed markets where they must withdraw immediately if they cannot make a profit. We organized these two things, which are like oil and water, under the same roof as a single piece of real estate, and held the whole thing in one SPC—Ogal Plaza Inc. We did not rely on a public facility protected by a government safety net, but instead placed the rent from commercial tenants standing in the middle of the market as the backbone of the business.

To minimize the burden on the public sector, we set up a mechanism where the town would purchase the floor space of the Information Exchange Center (the library and child-rearing support center) after completion, and 277 million yen in town development grants were allocated for that. However, for the commercial portion, we did not put in a single yen of subsidies. We intentionally chose not to.

If you include subsidies, business estimates will inevitably become lax. No one will seriously question profitability. Most of the paths to failure followed by third-sector organizations across the country started right here. That is precisely why we chose to expose the commercial portion to the strict scrutiny of private finance with zero subsidies. If it is not a business that a bank can judge as 'lendable,' we would not build it in the first place. This determination was the starting point of Ogal Plaza's credit.

Preferred shares from the Private Finance Initiative Promotion Corporation of Japan pushed the banks to act