Laws and Regulations Concerning Investment Corporations

Overview

Under the Investment Trust Law, investment corporations must primarily make investments that are specifically prescribed by law. Real estate was not among the prescribed investments until November 2000. Permitted real estate investments are not limited to physical real estate, but also include investments in specifically prescribed real estate-related rights, such as trust beneficiary interests in real estate. Investment corporations that invest primarily in real estate have come to be known as J-REITs.

The Investment Trust Law provides for two different types of investment vehicles—investment trusts and investment corporations. To date, all J-REITs with units listed on the Tokyo Stock Exchange, including us, have been formed as investment corporations.

Investment corporations issue units similar to shares in ordinary corporations. Holders of units are called unitholders. A board of directors oversees investment corporations. Unitholders at a general meeting of unitholders must make certain decisions of the investment corporation.

Open-end J-REITs and Closed-end J-REITs

Under the Investment Trust Law, J-REITs may be either open-end or closed-end. Unitholders of an open-end J-REIT are able to require that their existing units be redeemed at a pre-determined price at fixed intervals. Unitholders of a closed-end J-REIT cannot require that their existing units be redeemed. We are a closed-end J-REIT.

Investment Trusts Association Rules

Listed J-REITs must comply with the rules of The Investment Trusts Association, Japan, or the association, which is a self regulatory organization of qualified asset managers. These rules in part, as applied to investment corporations, are as follows:

• J-REITs must be formed with the objective of investing, directly or indirectly through investment vehicles, more than 50% of their total assets in real estate or real estate-related rights;
• J-REITs must comply with the accounting requirements of the association, as well as legally prescribed corporate accounting procedures;
• J-REITs may only use the valuation methods prescribed in the rules of the association, which emphasize market price valuation;
• publicly listed, closed-end J-REITs must calculate and announce the net asset value per unit at the end of each fiscal period and interim fiscal period;
• closed-end J-REITs may distribute up to 60% of their depreciation expense in excess of net income as a return of capital; and
• the company to which a J-REIT outsources the management of its assets must keep and disclose to its unitholders at its offices copies of asset management plans, which must include the prescribed information, as well as operating reports as required by law.

Investment Assets

A J-REIT must primarily invest in specified assets, as defined in the Investment Trust Law. Specified assets include, but are not limited to, securities, real property, leaseholds of real property and surface rights, as well as trust beneficiary interests in real property, leaseholds of real property or surface rights.

A J-REIT that lists its units on the Tokyo Stock Exchange must invest substantially all of its assets in those investments permitted by the J-REIT listing rules of the Tokyo Stock Exchange. Permitted investments include real estate, real estate-related assets, and liquid assets. Further, such J-REIT must invest at least 70% of its assets in real estate. Real estate in this context includes, but is not limited to, real property in Japan, leaseholds of real property and surface rights of land in Japan, as well as trust beneficiary interests in such assets.

The rules of the association also require that a listed J-REIT invest more than 50% of its assets in real property or asset-backed securities investing primarily in real estate, which includes, but is not limited to, real property, leaseholds of real property and surface rights, as well as trust beneficiary interests in real property, leaseholds of real property or surface rights.

Pursuant to the Investment Trust Law, investment corporations may not enter into transactions that obligate investment corporations to develop land for housing or to construct buildings.

Registration

Investment corporations must register with the director of the relevant local finance bureau of the Ministry of Finance prior to commencing their investment activities. We registered with the director of the Kanto Local Finance Bureau in April 2007.

Transfer of Units

The Investment Trust Law prohibits an investment corporation from placing any restrictions on the transfer of its units. This prohibition may have significant consequences in connection with our tax status as a J-REIT.

General Meeting of Unitholders

General meetings of unitholders are held in accordance with the Investment Trust Law and our articles of incorporation. We must give public notice two months prior to the meeting date, and we must notify each unitholder of the purpose of the meeting two weeks prior to the meeting date. In the case of unitholders residing outside of Japan, we must send this notice to their standing proxy or mailing address in Japan.

Corporate Governance

The corporate governance of J-REITs requires at least one executive director and two supervisory directors to constitute the board of directors. With respect to auditing of financial statements and certain rights of unitholders such as voting rights and derivative suits, J-REITs are structurally similar to joint stock corporations incorporated under the Company Law of Japan.

Mandatory Outsourcing of Operations

Under the Investment Trust Law, an investment corporation is required to delegate to external entities the functions pertaining to:

• the management of its assets;
• the custody of its assets; and
• other administrative functions.

An investment corporation must delegate the management of its assets to a third-party asset management company registered under the Financial Instruments and Exchange Law, or the FIEL. The first such delegation is made to an asset management company, as set forth in the investment corporation's articles of incorporation at the time of formation. Any subsequent delegation must be approved at a general meeting of unitholders. To obtain such registration, an asset management company must show that it is sufficiently capitalized and that it has the requisite knowledge and experience. An investment corporation must delegate the custody of its assets to third parties with the qualifications set forth in the Investment Trust Law.

An investment corporation must delegate to third parties certain administrative matters, including:

• the offering of units or bonds;
• preparation and maintenance of the register of holders of units or bonds and other administrative function relating to the register of holders of units or bonds;
• issuance of certificates representing units or bonds;
• administration of its organization;
• accounting matters; and
• other matters, as provided in applicable regulations.

Conflicts of Interest

Certain conflicts of interest may arise with respect to transactions between two or more investment corporations managed by the same asset management company or in transactions between an investment corporation and the asset management company that manages such investment corporations. In addition to us, our asset manager also manages Japan Retail Fund and may manage other investment corporations in the future.

The FIEL provides that the asset management company to which an investment corporation outsources the management of its assets assumes a fiduciary duty of loyalty and must exercise its duties in good faith. In the event of damage to the investment corporation as a result of a breach of these duties, the asset management company is liable for damages. The FIEL specifically prohibits certain transactions, including the following:

• transactions between investment corporations managed by the same asset management company, except in certain specified circumstances;
• transactions under terms that differ from ordinary transactions on an arm's length basis that are contrary to the interests of the investment corporation;
• transactions by the asset management company for the benefit of third parties that are contrary to the interests of the investment corporation; and
• transactions by the asset management company for the benefit of certain interested parties that control, or are controlled by, the asset management company in a way that is harmful to the investment corporation.

In addition, the asset management company must promptly report to the investment corporation any matters that may potentially give rise to a conflict of interest.

Investment Restrictions and Policy

Investment corporations are only permitted to make investments that are specifically permitted by the Investment Trust Law, and related laws and regulations. They are also subject to certain restrictions, such as a prohibition of the purchase or acceptance of its own units as security, with certain exceptions, as provided by the Investment Trust Law. An investment corporation's articles of incorporation may also provide additional investment policies.

Capital of Investment Corporation

Investment corporations are required to maintain a minimum amount of net assets at all times. Each investment corporation's articles of incorporation set forth this amount, which must be equal to 50 million yen or more. Investment corporations are required to promptly notify the director of the relevant local finance bureau of the Ministry of Finance if their net assets are likely to fall below 100 million yen. If the investment corporation's net assets fall below 50 million yen and do not recover within a certain period not less than three months after a notice from the director of the relevant local finance bureau of the Ministry of Finance, the director must revoke the investment corporation's registration.

An investment corporation is not permitted to make distributions if it will cause its net assets to fall below 100 million yen.

An investment corporation is required to establish unitholders' capital surplus if:

• the unitholders' capital and capital surplus used for any redemption exceeds the total redemption amount for the units; or
• the assumed assets of the non-surviving investment corporation upon a merger exceed the amount specified in accordance with the Accounting Rules for Investment Corporations.

Finance

With the approval of its board of directors, an investment corporation may, from time to time, issue additional units to increase its capital, up to the maximum number of units specified in its articles of incorporation. The issue price of the units must be a fair price in view of the assets held by the investment corporation. Unitholders have no pre-emptive rights in relation to an offering of new units.

By resolution of its board of directors, an investment corporation may issue bonds in accordance with the Investment Trust Law, up to the amount specified in its articles of incorporation.

An investment corporation may borrow money, up to the amount specified in its articles of incorporation. In order for us to enjoy the favorable tax treatment available to J-REITs, we may only borrow from certain qualified institutional investors as specified by the tax laws.

Merger

Investment corporations may merge with other investment corporations with the approval of at least two-thirds of the voting rights represented at a general meeting of unitholders. The quorum of the general meeting is a majority of the total number of issued units. Any unitholder which expressed its opinion against the merger in writing prior to the general meeting of unitholders and voted against the approval of such merger at the meeting is entitled to request the investment corporation to purchase its units at fair value.