Frontier Real Estate Investment Corporation

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Rules Concerning Conflicts of Interest

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FRI's Rules Concerning Conflicts of Interest

FRI's asset management company, Mitsui Fudosan Frontier REIT Management Inc. (“the Asset Management Company”), amended its Rules Concerning Conflicts of Interest on December 1, 2014. The revised Rules Concerning Conflicts of Interest regarding transactions with parties that the Asset Management Company has determined to be related are as follows.

Ⅰ. Related Parties

The following are related parties.

a. Related parties of the Asset Management Company as defined by the Investment
Trust and Investment Corporation Act of Japan (hereinafter, the “Investment Trust Act”)
b. Other Related Parties
Other related parties are as defined below.
  1. The shareholder of the Asset Management Company and the subsidiaries and affiliated companies of said shareholder laid out in the Regulation for Terminology, Forms, and Preparation of Consolidated Financial Statements (Ministry of Finance Ordinance No. 28 of 1976, including subsequent amendments, hereinafter the “Consolidated Accounting Standards”).
  2. Special purpose companies (including specified purpose companies, special limited liability companies, corporations and others as laid out in the Law on Securitization of Assets; hereinafter “SPCs”) that meet certain conditions. Specifically, if the Asset Management Company's shareholder and said shareholder's subsidiaries and affiliated companies (as defined in the Consolidated Accounting Standards) have invested a total of 15% or more of an SPC's invested capital (including investments made by silent partnership and preferred equity investments), the SPC in question is a related party.

Ⅱ. Deliberation of Transaction Details

a. The details of transactions laid out below in 1. through 9. with related parties (transactions related to the operation of FRI's assets, excluding transactions made in the course of fund procurement) must be approved in accordance with FRI's internal rules as set out below before said transaction can be executed.
  1. Acquisition of real estate, leasehold rights to real estate or surface rights, as well as trust beneficiary interests in real estate, leasehold rights to real estate or surface rights (hereinafter “real estate, etc.,” including the underlying assets of trust beneficiary interests).
  2. Sale of real estate, etc.
  3. Leasing of real estate, etc.
  4. Acquisition or sale of securities (excluding transactions covered by 1. or 2., above).
  5. Leasing of securities (excluding transactions covered by 3., above).
  6. Formation or amendment of property management consignment agreements related to real estate, etc.
  7. Formation or amendment of brokerage contracts related to the purchase, sale or leasing of real estate, etc.
  8. One-time transactions of ¥10 million or more per deal or ongoing transactions of ¥10 million or more per year other than those specified in 1. through 7., above.
  9. One-time transactions of ¥1 million to less than ¥10 million per deal or ongoing transactions of ¥1 million to less than ¥10 million per year other than those specified in 1. through 7., above.
b. Transactions specified in a. 1 through 5., above, are proposed by the Investment
Division and pre-screened by the Compliance Division General Manager.
 The Compliance Division General Manager examines whether there are any issues related to compliance in light of law and regulation, and submits the proposal to the Management Committee for deliberation. If the Management Committee passes the proposal, it moves on to the Compliance Committee.
 Proposals deliberated by the Compliance Committee must be approved unanimously. If approved, proposals are taken up by FRI's Board of Directors for consideration and approval (this approval constitutes permission from FRI. The same applies throughout II.). Proposals approved by FRI's Board of Directors are then taken up by the Asset Management Company's Board of Directors for consideration and approval (however, transactions specified in a. 3. through 5., above, that fall under the transactions laid out in Article 245-2 of the Enforcement Order for the Investment Trust Act do not require the approval of FRI's Board of Directors, and are referred directly to the Asset Management Company's Board of Directors). In accordance with the rules of the Board of Directors, the Board makes the final decision to approve or reject the proposal. If a proposal is rejected at any step of this process, it is immediately sent back to the department that proposed it.
c. Transactions specified in a. 6. through 8., above, are proposed by the Investment
Division and pre-screened by the Compliance Division General Manager.
 The Compliance Division General Manager examines whether there are any issues related to compliance in light of law and regulation, and submits the proposal to the Management Committee for deliberation. If the Management Committee passes the proposal, it moves on to the Compliance Committee.
 Proposals deliberated by the Compliance Committee must be approved unanimously. If approved, proposals are taken up by the Asset Management Company's Board of Directors for consideration and approval. In accordance with the rules of the Board of Directors, the Board makes the final decision to approve or reject the proposal. If a proposal is rejected at any step of this process, it is immediately sent back to the department that proposed it.
d. Transactions specified in a. 9., above, are proposed by the Investment Division and pre-screened by the Compliance Division General Manager.
 The Compliance Division General Manager examines whether there are any issues related to compliance in light of law and regulation, and submits the proposal to the Compliance Committee.
 Proposals deliberated by the Compliance Committee must be approved unanimously. If approved, proposals are taken up by the Management Committee, which considers the proposal and makes the final decision to approve or reject it. If a proposal is rejected at any step of this process, it is immediately sent back to the department that proposed it.

Ⅲ. Disclosure of Transactions with Related Parties

In the event that a decision is made to conduct a transaction with a related party that falls under the below sections IV. to X., disclosure is to be conducted based on separately determined information disclosure rules.

Ⅳ. Acquisition of Investment Assets from Related Parties

a. In the event that real estate, etc. is acquired from a related party, the acquisition price must not exceed the appraisal value as determined by a real estate appraiser that is not a related party (including entities; hereinafter, the same). This appraisal value is the price of the property itself, and does not include taxes, sales expenses, trust establishment expenses, trust account deposits, trust proceeds, or current expenses such as payment of pro-rata property taxes for the remainder of the tax year.
b. In the event that expenses (company establishment expenses, due diligence expenses, etc.) arise from the temporary formation of an SPC or other vehicle as a prerequisite for the transfer from a related party to FRI, notwithstanding IV. a., above, the acquisition can be conducted with the concerned expenses added to the appraisal value.
c. In the event that other specified assets are acquired from a related party, the market value is used as the transfer price for those assets whose market values can be determined, and the transfer price for other assets is determined in accordance with the above items IV. a. and b.

Ⅴ. Transfer of Investment Assets to Related Parties

a. In the event that real estate, etc. is transferred to a related party, the transfer price must be no less than the appraisal value determined by a real estate appraiser that is not a related party. This appraisal value is the price of the property itself, and does not include taxes, sales expenses, trust establishment expenses, trust account deposits, trust proceeds, or current expenses such as payment of pro-rata property taxes for the remainder of the tax year.
b. In the event that other specified assets are transferred to a related party, the market value is used as the transfer price for those assets whose market values can be determined, and the transfer price for other assets is determined in accordance with V. a., above.

Ⅵ. Leasing of Investment Assets to Related Parties

In the event that a property is leased to a related party, it is to be leased after an assessment of market prices in general and in the surrounding area, and according to terms judged to be reasonable based on the written opinion, etc. of a third party that is not a related party.

Ⅶ. Acquisition, Transfer and Leasing of Securities to or from Related Parties

In the event of the acquisition, transfer or leasing of securities to or from related parties (excluding transactions covered by IV. through VI., above), such transactions shall be made in accordance with IV. through VI., above.

Ⅷ. Consignment of Property Management Work to Related Parties

a. In the event that property management work is consigned to a related party, this determination must follow an assessment of the related party's track record, creditworthiness and similar factors, and remuneration shall be determined by taking into consideration such factors as the current market, the particulars of the services to be provided and the total amount of work to be performed.
b. In the event that a related party is already conducting property management work for a property to be acquired, property management work shall, in principle, be consigned to the concerned related party after the acquisition, and the consignment fee shall be determined in accordance with VIII. a., above.

Ⅸ. Consignment to Related Parties of the Brokerage of the Purchase, Sale or Leasing of Investment Assets

a. In the event that the brokerage of a purchase or sale of real estate, etc. is consigned to a related party, remuneration shall be within the scope stipulated by the Building Lots and Buildings Transaction Business Law, while taking into consideration such factors as the relative value of the trade and relative difficulty of the brokerage.
b. In the event that the brokerage of leasing of real estate, etc. is consigned to a related party, remuneration shall be within the scope stipulated by the Building Lots and Buildings Transaction Business Law, while taking into consideration such factors as the relative rent and the relative difficulty of the brokerage.

Ⅹ. Contracting of Construction Work to Related Parties

In the event that construction work is contracted to a related party, the construction work is to be contracted according to terms judged to be reasonable after comparing and examining the estimated price and details of a third-party bid. However, if emergency work (such as repair construction work due to property damage resulting from an earthquake, fire or other calamity) is required, the manager of the Investment Management Department determines the contracting of the work. In this case, retroactive approval of the contents, contract price and other details of such construction work must be obtained separately in accordance with this section, X., as well as the above section II.

Compliance System Example

(When Acquiring an Asset from an Interested Party, etc.)
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