Explanation of risks

Real estate trust beneficial interests and interests in income from Tokumei Kumiai (anonymous associations) are subject to the risk of reduced dividends or even a drop in the value of principal, due to fluctuations in the real estate market or social conditions. The following information explains the risk factors that affect real estate trust beneficial interests and interests in income from Tokumei Kumiai .

Real estate trust beneficial interests

Risk of fluctuating value

Though the conditions differ slightly from the risk associated with direct investment in real estate, like any real estate-related investment, these interests are subject to the risk of declines in market value due to a variety of factors such as economic conditions, interest rates and the condition of the real estate market.

Risk of changes in real estate usage patterns

The interests are also subject to the risk of declining dividends or a drop in the value of the interests themselves, mainly as a result of one of the following:

1. Changes in occupancy ratios due to tenant turnover
   
2. Fluctuations in income due to changing tenant rents
   
3. Increases in costs from the leasing business (such as building maintenance, etc.)

Tenant-related risk

Investment real estate is subject to credit risk associated with tenants. Changes in tenant management conditions, financial conditions and tenant creditworthiness can create the risk of delayed rent payments or non-payment of rent. In addition, there is a risk that undesirable tenants, such as members of organized crime, may move into the building, or that problem tenants may engage in activities which have an adverse impact on earnings.

Risk of property defect

Real estate trust beneficial interests are subject to the risk of reduced dividends or a decline in value due to any damage or defect in the property, such as the building structure or fixtures, the foundation, or the land on which the building sits.

Liquidity (liquidation) risk

Real estate trust beneficial interests are not currently traded on any exchange. Therefore they generally suffer from low liquidity, meaning that when the owner decides they want to acquire or sell such interests, they may be unable to do so. For that reason, if the owner places priority on acquiring or selling the interests, there is a risk that they may not be able to receive a fair value.

Risk related to taxes on public charges

Real estate trust beneficial interests could be affected by changes in the tax code, which might raise tax rates on the acquisition, possession or sale of such interests. This might affect the price of the interests or the level of dividends.

Risk related to natural disasters

Real estate investments are at risk of damage or destruction due to unexpected and catastrophic events, such as natural disasters or terrorism, which could reduce the value of the interests or the level of dividends.

Exchange rate-related risk

When investments are made in overseas real estate, fluctuations in foreign exchange rates can cause changes in the value of investment principle, which is based on the purchase value of a property in local currency terms. This can cause the value, or the level of dividends, to decline in yen-denominated terms.

Settlement risk

There is a risk that, after payment is made to purchase a property, problems may arise due to non-fulfillment of the transaction, either because of system errors at a financial institution, terrorism, natural disaster, etc. This could reduce the value of the interests or the level of dividends.

Risk due to changes or elimination of real estate-related regulations

Future changes in trust law, trust business law, real estate-related regulations or Financial Instruments and Exchange Law could result in increased costs or other changes, which could reduce the value of the interests or the level of dividends

Interests in income from Tokumei Kumiai which invest in real estate trust beneficial interests

Risks related to real estate trust beneficial interests

Since Tokumei Kumiai in which a customer has an interest use their capital to invest in limited liability corporations that invest in real estate trust beneficial interests, all of the risk factors mentioned above, relating to real estate trust beneficial interests, are also applicable to interests in income from Tokumei Kumiai which invest in real estate trust beneficial interests.

Risk related to rising interest rates

1. . Risk related to market interest rate fluctuations
   If interest rates rise, interest expenses on loans from banks will also increase, elevating costs. This could have an impact on the level of dividends.
2. Risk related to changing interest rate spreads from the borrowing rate
   Generally speaking, loan interest rates are calculated by assigning an interest rate spread (on top of the base, market interest rate) based on the creditworthiness of the borrower. During periods of economic stagnation, or in cases where markets become averse to credit risk, these credit spreads can increase, and this can have the same impact as a rise in the market interest rate. This risk is particularly severe in cases where loans are taken out with a variable interest rate, and in cases of short-term loans.

Risk related to leverage (degree of dependence on bank loans)

As the percentage of total debt acquired from bank loans increases, it intensifies the effect that fluctuations in interest rates can have on dividend income. In other words, it greatly increases the risk of a drop in dividends due to rising interest rates. In addition, if the value of real estate trust beneficial interests should decline, lending institutions and other creditors may demand that some of the real estate trust beneficial interests be put up as collateral against the loan. This can reduce the value of the interests themselves, or the level of dividends.

Liquidity (liquidation) risk

Interests in income from Tokumei Kumiai are not currently traded on any exchange. Therefore they generally suffer from low liquidity, meaning that when the owner decides they want to acquire or sell such interests, they may be unable to do so. For that reason, if the owner places priority on acquiring or selling the interests, there is a risk that they may not be able to receive a fair value.

Risk related to revisions to or abolition of real estate-related regulations

There is a risk that future changes to real estate-related laws and regulations, as well as the laws and regulations governing financial instruments and exchange, could potentially have an impact on the value of the interests, or the level of dividends. Such legal changes might also make it difficult to continue operating the fund.

Risk related to investment conditions and associated individuals

Any factors that affect the contractors that are assigned responsibility for managing and handling real estate, asset management companies or property management companies, such as a deterioration in the company’s ability to conduct operations, bankruptcy or reorganization, could make it more difficult to manage properties smoothly. There is a risk that this could affect the value of the interests, or the level of dividends. Furthermore, if it does become difficult to manage properties smoothly, there is a risk that the building fixtures and structure could deteriorate, or losses and liabilities (damages) could be incurred due to improper management. This could adversely affect the value of the interests, or the level of dividends.

Risk related to transactions which create a conflict of interests

The contractors that are assigned responsibility for managing and handling real estate, asset management companies and property management companies contracted by Kenedix Advisors may already have other clients, or may plan to solicit other clients, who are involved in similar real estate investment businesses. Therefore, there is a risk that these contractors might conduct transactions which would have an adverse impact on customers investing via Kenedix Advisors, while benefitting either the contractor itself or a third party. There is a risk that this could adversely affect the value of the interests, or the level of dividends.

Risks relating to management structure or the individuals responsible for operations

Company employees play a very important role in managing operations and carrying out the various buying, selling and operating duties, in line with fund management policies and business strategy. Kenedix Advisors has established a management structure which seeks to limit the risk related to the performance of any one specific individual. However, if an employee should, for whatever reason, fail to perform his/her duties properly, there is a risk that this could interfere with smooth operations and thus could adversely affect the value of the interests, or the level of dividends.
　　　　　　　　　　　　　　　　　　　　　　　　

Regarding the fees that customers are required to pay

The company sets fees based on individual discussion with each customer. Although a specified percentage management fee is included in the asset management contract, the company does not generally disclose this percentage due to the confidentiality obligations implied in contracts with customers.