Taxation Risks

Our failure to satisfy a complex series of requirements pursuant to Japanese tax regulations would disqualify us from certain taxation benefits and significantly reduce our distributions to our unitholders

We intend to take advantage of the favorable tax treatment available to J-REITs that comply with Japanese tax laws. Most importantly, we expect to be able to treat our distributions as a deductible expense from our taxable income, provided that we satisfy all the requirements for such treatment under Japanese tax regulations. If we are unable to meet such requirements, some of which are very complex or difficult to interpret or apply, or if the relevant governmental agencies fail to interpret certain tax laws and regulations in a manner consistent with our interpretation, we will not be able to take advantage of this favorable tax treatment. In such a case, we would not be able to deduct our distributions from our taxable income as expenses. Instead, we would have to pay distributions after our taxable income has been subject to Japanese corporate income tax at a rate of approximately 40%.

Some of the significant tax requirements, all of which must be met to qualify for this favorable tax treatment, and the associated risks are as follows:

• We must make distributions to our unitholders in each fiscal period in excess of 90% of our distributable income as defined in the Special Taxation Measures Law. Our articles of incorporation require that we make distributions for each fiscal period of approximately 100% of our retained earnings as of the end of such fiscal period. However, our distributable income, as defined in the Special Taxation Measures Law, may be higher than our retained earnings under Japanese GAAP, because some of our expenses are not deductible as expenses for the purpose of determining distributable income, as defined in the Special Taxation Measures Law, but are recognized as expenses for the purpose of determining our retained earnings as of the end of each fiscal period under Japanese GAAP. If our distributable income, as defined in the Special Taxation Measures Law, is significantly higher than our retained earnings for any fiscal period, we may not be able to pay distributions from retained earnings in excess of 90% of our distributable income, as defined in the Special Taxation Measures Law. Moreover, we may not be able to borrow funds or dispose of assets in order to generate the cash necessary to make up any such difference. In such a case, we may not be able to make distributions in an amount sufficient to maintain our favorable tax treatment.
• Our three largest unitholders and their affiliates must not collectively hold more than 50% of our outstanding units. Under the Investment Trust Law, we are not permitted to restrict the transfer of our units. Therefore, once we issue units, we will have no control over their trading and ownership. Hence, we will have no control over whether we satisfy this tax requirement. Furthermore, we may not be able to ascertain the identity of all of our unitholders or determine whether any of them are affiliates, rendering it difficult to determine accurately whether this tax requirement is being satisfied.
• Our borrowings must be from certain qualified institutional investors as specified by the tax laws. If the Japanese tax authorities determine that our tenant leasehold or security deposits are loans, we would fail to satisfy this requirement.
• Our units must be held only by qualified institutional investors or by 50 or more investors at the end of each fiscal period. As stated above, we will have no control over the trading and ownership of our units. Hence, we will have no control over whether we will satisfy this tax requirement.

If the Japanese tax authorities disagree with the interpretations we used to determine our taxable income for prior periods, we may be forced to pay additional taxes for those periods

The Japanese tax authorities may from time to time investigate the bases of the determinations we make to satisfy relevant Japanese tax laws and regulations. If the tax authorities audit us and order us to retroactively change items previously filed as deductible expenses to non-deductible expenses, then deductions claimed in prior periods may subsequently become taxable. In such a case, our tax burden would increase for the fiscal period in which we recognize this additional tax expense and force us to reduce the amounts of distributions to our unitholders for the fiscal period in which we recognize the additional tax expense or for subsequent periods.

We may not be able to benefit from reductions in certain real estate taxes enjoyed by qualified J-REITs

We may also benefit, when we acquire properties, from reductions in real estate registration taxes and real estate acquisition taxes, provided that we comply with an additional series of tax requirements. However, if we are unable to meet any of these additional tax requirements, some of which are very complex or difficult to interpret or apply, or if the relevant governmental agencies fail to interpret certain tax laws and regulations in a manner consistent with our interpretation, we will not be able to take advantage of this favorable tax treatment.

Changes in Japanese tax laws may significantly increase our tax burden

The history of J-REITs is relatively short, and the legal and regulatory framework governing J-REITs continues to evolve and be reviewed by lawmakers and regulators. Additionally, the Japanese taxation system is undergoing significant changes as part of reform measures designed to stimulate the overall economy in Japan. These and other factors could lead to unanticipated changes in the tax laws and regulations relating to J-REITs, which may significantly increase our tax burden for any fiscal period and, consequently, force us to reduce the amounts of distributions to our unitholders.