Investment Risk

Risk Factors

　This section lists the primary matters that could be risk factors when investing in these investment securities. However, the list is not comprehensive and there are some risks that have not been described.

　ADR intends to avoid the occurrence of these risks as much as possible and to counter them in the event that they do occur. There is, however, no guarantee that avoidance and countering of the risks shall be adequate in the end. It is foreseen that the realization of the risks described below would result in the market price of these investment securities falling to a value below the issuance price and consequently cause investors to suffer a loss. There is also the possibility that the fall in the net asset value of ADR or some other deterioration of financial conditions would decrease dividends.

　Each investor must under his or her own responsibility carefully consider the matters described in this document and prudently make his or her investment decision.

1. Risks concerning commercial viability of these securities

   (1)

   Risk concerning changes in the market price of these investment securities These investment securities are closed-end securities, meaning that the investment units are not refunded at the demand of investors. Therefore, investors can only convert these investment securities into cash by selling them to a third party. The market price of these investment securities is impacted by the supply/demand balance on the stock exchange. There is the possibility that the price will drop dramatically if a massive volume of investment units is placed on sale within a set period. The market price also fluctuates due to the influence of various factors including interest rates, economic conditions, real estate market conditions and other market related factors. Therefore, there is the possibility that the investor cannot sell these investment securities at the acquired price and thus the investor may suffer losses.

   (2)

   Risk concerning the dividends ADR plans to pay monetary dividends to investors based on its dividend policy but the payment and size of a dividend is not guaranteed. Profits and losses during fiscal periods fluctuate and dividends to investors vary in accordance with the rental conditions, profits and losses from sales, losses from tenants moving due to rebuilding and the like related to real estate and assets backed by real estate that ADR has acquired.

   (3)

   Risk concerning fluctuations in income and expenditures The income of ADR is primarily dependent on rental income from real estate. There is the possibility that rental income related to real estate will greatly decreases due to a drop in occupancy of the real estate. In addition, there is the possibility that rents will decrease following negotiations with the tenants or demands from the tenants and that rents will not be able to be hiked in accordance with the contract. Furthermore, past income and expenditures and total rents of the existing portfolio and assets added in the future are not necessarily a forecast or guarantee about future income, expenditures and total rents of the portfolio. It is also not a guarantee that the rents based on rental contracts concluded regarding the concerned real estate will be at an appropriate level compared to ordinary rent levels. On the other hand, a reduction in income is not the only risk. There is also the possibility that cash flows will decrease due to a number of factors including the refunding of deposits and guarantees on deposit from tenants who are moving out, expenditures needed for major repairs and maintenance, enormous capital expenditures, expenses necessary to acquire real estate and greater expenditures related to other real estate. Therefore, there is the possibility that income from real estate will decrease and the expenditures related to real estate will increase. When one or both of these two occurs, there maybe cases where dividend amounts to investors will decrease and market prices of investment securities drop.

   (4)

   Risk concerning dilution of the value per unit upon follow-on offerings ADR plans to issue follow-on offerings as necessary and such follow-on offerings will reduce the investment unit share owned by existing investors. In addition, there is the chance that existing investors will be negatively impacted compared to if no follow-on offering had been conducted in the event that the recently issued investment units will be paid the same monetary dividend as previously existing investment units. There is also the possibility that the follow-on offering will impact the value per investment unit of ADR and the supply and demand balance of the investment units in the market.

   
   
2. Risks concerning the management policy of ADR

   (1)

   Risk that properties being acquired based on a memorandum concerning preferential negotiation rights cannot be acquired as assumed ADR and its asset manager have concluded memorandums of understanding concerning preferred negotiating rights with ITOCHU support line companies, Nippon Tochi-Tatemono support line companies, partner support line companies and property information sourcing line companies. However, these companies have no more than granted preferred negotiation rights for certain real estate to ADR and the asset manager. These companies are not obliged to sell said real estate at a price desired by ADR. These memorandums also do not completely eliminate the possibility that these companies will compete with ADR to acquire properties. In other words, these memorandums of understanding concerning preferred negotiation rights do not guarantee that ADR shall acquire real estate at a price that it considers to be appropriate. Therefore, potentially ADR will be unable to construct an optimal asset portfolio for improving the return, stabilizing earnings, etc. of ADR.

   (2)

   Risk concerning regional biases The policy of ADR is to invest at least 40-60% of its portfolio based on acquisition price in real estate located in the central seven wards of Tokyo. Consequently, a regional bias will emerge in the real estate to be invested in making it possible that the earnings of ADR will suffer a material negative impact due to changes in the regional economy and real estate market; earthquakes, typhoons and other natural disasters; changes in population and other unique phenomena occurring in the central seven wards of Tokyo.

   (3)

   Risk that real estate cannot be acquired or sold Since each piece of real estate is quite unique and cannot be "replaced" and generally has low liquidity, there is a possibility that a property that is desired cannot be acquired or sold at the desired time. In addition, presently investment in real estate is climbing amongst real estate investment trusts, other funds and investors and there is no guarantee that ADR will be able to acquire the real estate, etc. that it desires to acquire or the securities backed by real estate that it desires. Even if the acquisition were possible, there is the possibility that other factors such as the desired price, timing and other terms won't be met from the perspective of the investment's profitability. Moreover, if ADR decides to sell real estate or securities backed by real estate after acquiring them, there is a possibility that the transaction will not occur at the desired price, timing or other terms from the perspective of the investment's profitability. As a result of the above, there is the possibility that ADR will not be able to construct an asset portfolio that is optimum for improving the yield of it or stabilizing earnings and there is also the possibility that the portfolio will not be able to be remolded (properties bought and sold) at the appropriate time.

   (4)

   Risk concerning fund procurement with regards to follow-on offerings, borrowings and investment corporation bonds The possibility and terms of the follow-on offerings, borrowing of capital and issuance of investment corporation bonds are impacted by the economic standing of ADR, interest situation and other factors. Therefore there is no guarantee that a follow-on offerings, borrowing of capital and issuance of investment corporation bonds can be done at the desired time and with the desired terms of ADR in the future. Therefore, there is the possibility that ADR will be unable to acquire assets it had planned to acquire, be forced to sell assets it hadn't planned to sell and experience shortness of capital. There is also the possibility that when ADR seeks to borrow funds or issue investment corporation bonds, it will be required to establish financial restrictions such as a limitation on monetary dividends to investors, be required to place managed assets as collateral and have changes to the Articles of Incorporation restricted for it to borrow the concerned funds or issue investment corporation bonds. There is the possibility that these restrictions will hinder the operations of this investment corporation, negatively impact monetary dividends to investors, etc. Further, the interest on loans and investment corporation bonds are impacted by market trends at the time of the loans or issuance of the investment corporation bonds. In the case of floating interest, these are impacted by market trends thereafter. The amount of interest to be paid by ADR will soar when the interest rate on loans and investment corporation bonds soars or when the amount of loans or issued bonds of ADR grows. This type of increase in the amount of interest paid may have a negative impact on the monetary dividends paid to investors.

   
   
3. Risks concerning interested parties and structures of this investment corporation

   (1)

   Risk concerning dependence and conflicts of interest with regards to ITOCHU Corporation ITOCHU Corporation owns 45.0% of the shares in the asset manager of ADR on the date this was written and is the primary provider of full-time directors and employees of the asset manager along with concurrently serving external directors of the asset manager. In addition, ADR and its asset manager have concluded a memorandum of understanding with ITOCHU concerning preferential negotiation rights. In other words, ADR and its asset manager have a close relationship with ITOCHU that has a significantly large impact on the securing of stable earnings and growth potential of ADR. Therefore, there is the possibility of a negative impact on ADR if a relationship equivalent to the present relationship is no longer able to be maintained, if ITOCHU neglects its duties or breaches its duties, if the abovementioned memorandum is dissolved, if ITOCHU loses the ability to continue work due to bankruptcy proceedings or other reasons, etc. Furthermore, in the event that ADR or its asset manager conducts a transaction with ITOCHU or one of the funds it manages via asset management activities or the like, there is the possibility that acts which conflict with the profit of investors in ADR will occur in order to secure the profit of ITOCHU or a fund it manages. In such a case, there is the possibility that interests of the investor in ADR will be damaged. In addition to the above, ADR and its asset manager have concluded memorandums of understanding for preferential negotiation rights with investors in the asset manager of ADR. The same risks as those with ITOCHU Corporation also apply to these investing companies.

   (2)

   Risk concerning dependence and conflicts of interest with regards to ITOCHU Urban Community ADR has centrally outsourced real estate master lease and property management work to ITOCHU Urban Community Co., Ltd. In other words, ADR and its asset manager have a close relationship with ITOCHU Urban Community and ITOCHU Urban has a relatively large impact on the stable earnings and growth potential of ADR. Therefore, there is the possibility of a negative impact on ADR if a relationship equivalent to the present relationship is no longer able to be maintained, if ITOCHU Urban neglects its duties or violates its duties in some other manner, if the above contract is cancelled, if ITOCHU Urban loses the ability to continue work due to bankruptcy proceedings or other reasons, etc.

   (3)

   Risk concerning dependence and conflicts of interest with regards to interested parties of ADR ADR makes important business decisions through its Board of Directors comprised of the executive director and supervising officers in accordance with the Investment Trusts and Investment Corporation Law (ITL). The management of assets is outsourced to an asset manager, the custodianship of assets to an asset custodian and administrative affairs to an administrator. ADR greatly depends on the capabilities, experience and know-how of these parties to smoothly execute its obligations. However, there is no guarantee that these parties can maintain the personnel and financial standing needed to execute these obligations. In addition, ITL designates obligations and responsibilities regarding executive directors and supervising officers of investment corporations and parties related to the investment corporations, but there is the possibility that the interests of investors will be damaged if the parties related to ADR violate the ITL or other laws and ordinances or no legal measures are taken. There is also the possibility of the continued existence, earnings or the like of ADR being negatively impacted and the interests of investors being damaged, if the asset manager, asset custodian and administrator fail to carry out their duties as a good manager, fail to carry out their duties with integrity for ADR or violate the duty to not hurt the interests of ADR when there is a conflict of interest situation. There are also property managers, building managers, companies that keep in trust the deposits and guarantees of tenants and the like who are outsourced duties by the asset manager, ADR and the company holding in trust the beneficiary interests in trust for the portfolio. The improvement of profitability and stability of earnings at ADR to a large extent depends on the capabilities, experience and know-how of these parties but there is no guarantee that these parties will necessarily be able to maintain the necessary people and financial foundation to execute their duties and no guarantee that the contracts with these parties will be maintained in the future. There is the possibility that the continued existence, earnings and the like of ADR will be negatively impacted if these parties neglect their duties, violate their obligations in some other manner, lose the ability to execute their duties or for the contract with them is terminated some other reason.

   (4)

   Risk concerning dependence on the executive director of ADR and the personnel of the asset manager The operations of ADR are greatly dependent on the executive director of ADR and on the personnel of its asset manager. There is the possibility that the operations of ADR will be negatively impacted when these personnel are lost.

   (5)

   Risk concerning the short history of ADR and the asset manager ADR and its asset manager were only just established on September 12, 2005 and February 2, 2005 respectively. They thus have a short period of performance and it is difficult to predict future management results based on an accurate evaluation of past performance.

   (6)

   Risk concerning the absence of regulations legally prohibiting insider trading As of the penning of this risk document, the investment securities issued by ADR are not subject to insider trading regulations designated in the Securities and Exchange Law (SEL) unlike ordinary listed shares. There is the possibility that some officers and staff of ADR and its asset manager own investment securities issued by ADR. The internal rules of ADR and its asset manager regulate that their officers and employees cannot conduct trades similar to insider trades as prohibited by the SEL and designate the procedure for acquiring or selling investment securities issued by ADR. However, if the officers or staff conduct in trades similar to insider trades without complying with the rules of ADR and its asset manager, there is the possibility that this will damage the general trust in these investment securities and consequently lead to a decrease in their market price, a drop in the liquidity of these investment securities and other negative consequences.

   (7)

   Risk concerning changes to the investment policy of ADR Any change to basic matters regarding the subject, policy and such of asset management that are entered in the Articles of Incorporation of ADR requires the approval of the General Board of Investors, but it is possible to change the more detailed investment policy, portfolio building policy, management guidelines and the like that were designated by the Board of Directors of ADR or of its asset manager without obtaining the approval of the General Board of Investors. Therefore there is the possibility that these will be changed without reflecting the wishes of the investors in ADR.

   (8)

   Risk concerning the bankruptcy or cancellation of the registration of ADR There is the possibility that ADR will fall under the bankruptcy proceedings of the Bankruptcy Law (Law No. 75 of 2004 and ensuing revisions), the organization proceedings of the Civil Rehabilitation Law (Law No. 225 of 1999 and ensuing revisions) and special liquidation proceedings under ITL (Article 164 of ITL). ADR is registered as an investment corporation based on the ITL and its registration may be cancelled in accordance with the ITL in the occurrence of certain reasons (Article 216 of ITL). In that case, the listing of these investment securities will be abolished, ADR will be dissolved and liquidation proceedings will be commenced. In the event that ADR is liquidated, investors shall only be able to collect back their investment from distributions of the remaining property after all creditors have been repaid (including repayment of investment corporation bonds). Therefore, there is the possibility that investors shall not be able to collect back all or part of their investment amount.

   (9)

   Risk concerning deposits and guarantees ADR may use deposits or guarantees deposited at no or low interest by tenants of managed assets as a part of the obtained capital from managed assets. However, there is the possibility that the deposits and guarantees from the tenants will fall below the amount placed on deposit or have a shorter period in deposit than assumed by ADR due to rental market trends, negotiations with the tenant, etc. In this case, it will become necessary to procure the essential funds through loans or other means. There is also the case where in exchange for ADR being able to use deposits or guarantees ADR bears an obligation to repay the deposits or guarantees and it may have to procure the essential funds to cover said repayment obligations by taking out a loan or some other means. This may result in a negative impact on the earnings of ADR.

   
   
4. Risks concerning real estate and beneficiary interests in trust

   The primary managed assets of ADR are real estate and securities backed by real estate. Further, ADR intends to acquire real estate beneficiary interests in trust. Owners of real estate beneficiary interests in trust and other assets backed by real estate obtain basically the same profit conditions economically as if they directly owned the real estate that is the trust property or the real estate that backs the securities. Therefore, the risks concerning real estate that are described below are basically the same for real estate beneficiary interests in trust and assets backed by real estate.

   Further, risks unique to beneficiary interests in trust are covered later.

   (1)

   Risk concerning real estate defects Real estate may have defects and neglect regarding its rights, ground, soil quality, structure and such and such defects, neglect, etc. may not become evident until after acquisition. There are cases where ADR may, depending on the conditions, demand a declaration and guarantee concerning certain matters of the previous owner or make the previous owner liable for defects. However, even if it is found that the declarations and guarantees are not true and because of this liability for damages and responsibility for the defects is pursued, the period of the responsibility and liable amount are restricted to a certain limit ordinarily and there are cases where such can't be enforced because the previous owner has dissolved or has no capital. In these cases there is the possibility that the interests of investors will be damaged due to the purchaser, Advanced Residence, bearing unforeseen expenses needed to repair the defect, etc. in order to prevent a drop in asset value of said real estate according to the degree of concerned defects, etc. In addition, ADR is deemed to be a building lot and building broker under the Building Lots and Buildings Transaction Business Law (Law No. 176 in 1952 and ensuing revisions) when it sells real estate. Therefore, excluding when the counterparty in the sale is a real estate broker, there are restrictions on placing riders in the sale and purchase agreement for the real estate that would be disadvantageous to the buyer with regards to liability for covering defects. Therefore, there is the possibility in the sale of real estate by ADR that it will damage the interests of investors by being forced to cover unforeseen expenses regarding the repair of defects in the property that was sold, etc. There is also the possibility that the complexity of obligations regarding rights related to real estate will later lead to the revelation that the rights to the real estate belong to a third party, the rights are restricted by government law and regulations or that the property is violating the rights of a third party. This may lead to the interests and such of ADR being impacted negatively. There are also cases where the buyer may not obtain the rights to the real estate if the transaction is made based on trusting the records in the real estate registry alone. Further, there are times when not just the matters concerning rights but also the matters concerning real estate indicated within the registry of not match reality. As with the above, in this case, ADR would pursue the liability of the seller to the extent permitted by law and the contract, but there is no guarantee as to the effectiveness of such efforts.

   (2)

   Risk concerning rental contracts Risk that rental contracts are dissolved or not renewed When the renter reserves the right to terminate a rental contract, there is the possibility that the rental contract will be concluded during the contracted period or that the contract will not be renewed upon expiration of the rental contract period and this may lead to a drop in occupancy and a decrease in rental income related to the real estate. When the right to terminate a rental contract during the contract period is limited with termination prohibition articles, termination penalty articles and the like, there still remains the possibility that the court will reduce the termination penalty or reject the validity of the concerned article. Due to the above reasons, there is the possibility that the interests of the investors will be damaged due to a negative impact on earnings of ADR as a result of rental income decreasing. Rick concerning rent delinquency When the tenant's financial standing has worsened, it has filed for bankruptcy, it has filed for reorganization proceedings under the Civil Reorganization Law, it has filed for reorganization under the Corporate Rehabilitation Law (Law No. 154 in 2002 and ensuring revisions) or it has filed for other bankruptcy proceedings (hereafter, bankruptcy proceedings), there is the possibility that the tenant will become delinquent in the paying of rents based on the rental contract and there is the possibility that the investor will suffer damage to its interests if the delinquent rents surpass the range of the deposit and guarantee taken as collateral. Risk concerning rent revisions When the length of the rental contract with the tenant is relatively long, the content of the rental contract including the rent is often reviewed on a periodical basis. Therefore, there is no guarantee that the rents as of this writing will be maintained into the future. In the event rents are lowered due to the rent revisions, the earnings of this investment corporation may be negatively impacted and the interests of the investor damaged. In addition, even when the rent contract includes provisions to regularly raise the rents, this is no guarantee that the rents will increase as stipulated as this will depend on negotiations with the tenant. Risk concerning the right to demand rent reductions of the renter Excluding when the building renter establishes a rider that eliminates the right to demand a drop in rents based on Article 32 of the Land and House Lease Law (Law No. 90 of 1991 and ensuing revisions) in the Leasehold Building Rental contract, the renter can execute such demand based on this Law. If the demand is satisfied, the rental income from said real estate will fall and there is the possibility that this will negatively impact the earnings of ADR and damage the interests of the investors. Further, if the above rider is in place, the right to demand an increase is also given up. Therefore, there is the possibility that the rents will fall below general market prices due to unforeseen circumstances at the time of contracting and thus rental incomes may fall below general rental contract levels. Risk concerning non-refunding deposit rider In the case of rental contracts with non-refunding deposit riders, there is the possibility that all or part of the non-refunding deposit rider's validity will be rejected and that ADR will bear the obligation to refund a deposit greater than that originally succeeded from the previous owner if the ratio of the non-refunding deposit to the overall deposit is high.

   (3)

   Risk concerning damage, loss and deterioration of buildings due to disasters, etc. There is the possibility that the value of real estate will be impacted by the destruction, deterioration or damage to real estate caused by fires, earthquake, tsunami, rain storms, floods, lightning, tornadoes, war, disputes, confusion, terrorism and other circumstances (hereafter, "disasters"). There is the possibility that the interests of investors will be damaged in such an instance because the repair to locations that have been destroyed, deteriorated or damaged will make the building vacant for a certain period and thus reduce rental income and the value of said property. There is also the possibility that the interests of investors will be damaged due to the negative impact on the earnings, etc. of ADR caused by insurance policies not being concluded due to unique circumstances of the property, the occurrence of damages that exceed the payment ceiling established in the insurance policy, the occurrence of disasters not covered by the insurance policy, payments not being made by the insurer based on the insurance policy, payments being reduced or payments being delayed.

   (4)

   Risk concerning ownership responsibilities, repair and maintenance expenses, etc. related to real estate When the life, body, property or such of a third party is violated due to the real estate that is a managed asset, it is possible that an obligation for liability develops and unforeseen damages will be incurred by ADR in the end. In particular, there are cases where the owner of a structure on land bears absolute liability according to the Civil Code (Law No. 89 in 1896 and ensuing revisions). When an insurance policy hasn't been executed due to unique circumstances of the property, there is the possibility as with the above (3) that ADR will be negatively impacted. Also, when the real estate is destroyed, damaged, deteriorates or the like and repairs are necessary, there is the possibility that the repairs and countermeasures may require enormous expenses. Additionally, there are cases where toxic substances exist for what are considered natural reasons and the countering of these requires a significant amount of money. In the event said repairs or countermeasures are difficult or impossible, there is the possibility that the price of the real estate will drop because of a decrease in rental income obtainable from said real estate. Furthermore, the expenses to manage real estate may increase in certain economic conditions due to inflation, utility costs increasing, increases in real estate management, building management, management costs for goods and accessories and costs of various insurance premiums, increases in taxes and public dues and other reasons.

   (5)

   Risk concerning administrative laws, ordinances, etc. related to real estate As a rule, when the Building Standards Law, its orders and ordinances and the City Planning Law are revised; when a new law is passed; when regulations of accommodation, redevelopment, rezoning and such administrative acts are executed or applied; existing buildings (including those under construction) and their lots that do not satisfy these regulations are exempted from their application (so-called existing non-conformed). However, when these existing non-conformed buildings are to be rebuilt, the existing regulations shall be applied and so there is a need to make changes so that the present regulations are satisfied. Consequently there is a possibility of additional expenses needing to be covered and that buildings of the same size will not be able to be constructed. There is also the possibility that various administrative laws and regulations and local regulations will be applied to real estate. Examples of these include City Planning Laws, regulations of structures in preservation regulated by ordinances of local self-governing bodies, restrictions on the building of structures in river conservation areas under the River Law (Law No. 167 of 1964 and ensuing revisions), the obligation for excavation based on the Protection of Cultural Properties Law (Law No. 214 of 1950 and ensuing revisions), height restrictions on structures based on the Civil Aeronautics Law (Law No. 231 of 1952 and ensuing revisions), the obligation to attach a house up to a certain ratio, the obligation to position a parking lot, the obligation to install welfare-friendly facilities, the obligation to promote greenery and the obligation to install facilities that suppress the flow off of rainwater. When these types of obligations are in place, it is possible that disposal and rebuilding of the concerned real estate will in fact become difficult or that an additional expense burden will be incurred by the owner to comply with these obligations. Furthermore, when the managed asset is in an area that includes city planning aspects such as the building of roads, it is possible that building restrictions will be placed on areas covered by the city planning ordinance and that the building lot's area will be reduced and earnings will fall. There is also the possibility that a building of the same size as present won't be able to be rebuilt in the event of building rebuilding.

   (6)

   Risk concerning the establishment or changing of laws and ordinances There is the possibility that laws and ordinances with the objective of protecting the environment will be established and enforced in the future such as the Soil Contamination Countermeasures Law (Law No. 53 of 2002 and ensuing revisions) and that these laws will place investigatory, removal and compensatory obligations on the real estate regarding air, soil, subterranean water and other pollution regardless of any negligence. There is also the possibility that real estate management costs will increase due to the revision of the Fire Service Law and other related laws and ordinances that can impact real estate management. There is also the possibility that real estate rights will be restricted due to revisions to the Building Standards Law and City Planning Law, the passage of new laws, and administrative acts including expropriation, redevelopment and rezoning. There is the possibility that these laws, ordinances and administrative acts and their changes may negatively impact the earnings of ADR.

   (7)

   Risk concerning the impact from bankruptcy, etc. of the seller If ADR acquires real estate from a seller recognized or suspected to be in substantive crisis due to excessive debt or other financial condition, there is the possibility that the creditors of the seller will cancel the sale and purchase of said real estate (cancel as fraudulent act). Also, if the seller commences bankruptcy proceedings after ADR acquires this real estate, the bankruptcy custodian, supervising member or custodian may reject the sale or purchase of this real estate. Also, when ADR acquires the real estate of a party that acquired real estate from a certain party (hereafter, purchaser in this article only), there is the possibility that the transaction between the seller and purchaser will be rejected and that the results of that be claimed concerning ADR also if ADR knows information that could lead to the sale and purchase of the real estate between the seller and purchaser being cancelled or rejected as a fraudulent act and said effect is claimed. ADR will carefully consider the various circumstances concerning the risk that the custodian will reject or cancel the sale and purchase and endeavor to remove any risk that the transaction will be rejected or cancelled by the custodian as much as is practically possible. However, it is difficult to completely eliminate this risk. There is also the possibility that the embodiment of the transaction will lead to the judgment that the real estate transaction between the seller and ADR is a collateral transaction and that the concerned real estate comprises a part of the bankrupt property of the bankrupt party or that it is a part of the property of the seller who is reorganizing under the law (the risk that it is not a true sale).

   (8)

   Risk concerning the master lease company In the case of certain real estate in the portfolio, the property manager has concluded a master lease with the trustee who is the owner of the real estate. This master lease company (property manager) then can sublet the space to end tenants. There is the case that this same form will continue to be used. In this case, there is a possibility when the master renter suffers a deterioration in financial condition that the rents paid by the end tenants to it may not be paid to the trustee who rents the property to the master renter. There is also the possibility that the bankruptcy of the master renter or the termination of the master rental contract at the maturation of the contract period will lead to a fall in occupancy of the property.

   (9)

   Risk concerning subletting When the right to sublet all or part of the property is given to the renter (including sub-renter), there is the possibility that ADR will lose the ability to select the tenant to enter the property at its own discretion and to have renter move out at its discretion. In addition, when the rent of the renter is linked to that of the sub-renter, the credit status of the sub-renter may negatively impact the earnings of ADR. Also, in the event of an agreed cancellation of the rental contract or the dissolution of the contract due to failure to meet debt obligations, the refunding obligation for deposits may be inherited by the lessor even when the rental contract stipulates that the lessor inherits the obligation to refund deposits to the sub-renter of the sub-lessor in the event the contract ends. In this case the cash for the deposit and such to be refunded may become the burden of the lessor and thus have a negative impact on the earnings of ADR.

   (10)

   Risk concerning real estate use conditions of tenants, etc. There is the possibility that the use or management condition of the real estate by the tenant will cause the asset value of said real estate to deteriorate or to negatively impact the earnings of ADR. There is also the possibility that the attributes of the sub-renter or the successor of the leasehold rights deteriorate the tenant attributes of the real estate that is a managed asset and as a result the rent levels of the overall building fall.

   (11)

   Risk concerning jointly owned properties When the managed asset is a property that is jointly owned with a third party, there are various risks that exist that don't exist when simply owned regarding its preservation, use, disposal, etc. First, with regards to the management of jointly owned items, Civil Code Article 252 states that management shall be done by the party with a majority of ownership unless there is a separate agreement between the co-owners. When ADR does not own the majority interest, there is the possibility that the intents and wishes of ADR will not be able to be reflected in the management and operation of said real estate. In addition, since the co-owner according to Civil Code Article 249 can use all of said jointly owned item in accordance with the ratio of ownership, the ownership or use of the concerned real estate of ADR may be hindered by the exercise of rights by other co-owners. Other risks that exist are that the co-owner may exercise the right to demand that the overall jointly owned item be subdivided (Civil Code Article 256), the possibility that the court may order an auction of the overall jointly owned item (Civil Code Article 258) or that the overall jointly owned item is disposed of by a co-owner going against the wishes of another co-owner and exercising the right to subdivide the property. Although a rider among co-owners that the right to demand subdivision will not be exercised is valid, it loses validity after five years. In addition, even when there is a rider prohibiting subdivision that is already registered, the custodian, in the event that one of the parties to the rider filed for bankruptcy, can demand subdivision for said ownership portion to secure the right to convert into cash. However, a co-owner can purchase the portion owned by a co-owner that has filed for bankruptcy at an equivalent price (Bankruptcy Law Article 52, Corporate Rehabilitation Law Article 60 and Civil Reorganization Law Article 48). When the co-ownership interest of other owners has a hypothec placed on it, it is believed that the subdivision of the jointly owned property will lead to effectiveness of said hypothec being applied to the overall property that had been jointly owned in accordance with the ratio of said co-owner's (party that placed hypothec) ownership interest. Therefore, even if a hypothec is not placed on the jointly owned interest of an asset under management, when a hypothec has been placed on the jointly owned portion of another co-owner then the division of said property will lead to the risk that said hypothec will remain in effect regarding the subdivided managed asset in accordance with the owned interest of other co-ownership parties. The general interpretation is that a co-ownership portion can be disposed of freely in the same manner as independently owned property, but there are cases where there is an obligation for a co-owner to provide other co-owners with a preferential right to purchase its share when selling the share to a third party. This is done by agreeing to a preferential purchase right (first option) for the co-ownership portion among co-owners. When a co-owner of real estate becomes a renter of a property, it is generally interpreted that the rent obligation becomes an indivisible credit and that the obligation to return deposits becomes an indivisible obligation. Therefore, the co-owner faces possibility of being impacted by the credit risk of the co-owner who is the renter. Since co-owned real estate faces the above restrictions and risks compared to independently owned real estate, more time and expenses are needed for their acquisition and sale and these restrictions and risks may increase factors for decreasing the price or value of the property.

   (12)

   Risk concerning buildings with sectional ownership A sectionally owned building is a building that falls under the application of the Law concerning Sectional-Ownership, etc. of a Building Law (Law No. 69 of 1962 and its ensuing revisions) and it is comprised of the exclusive area (residence, etc.) that is subject to independent ownership, the common area that is co-owned (entrance, etc.) and the lot area of the building. Under the Sectional-Ownership, etc. of a Building Law, the managing method of sectionally owned buildings is designated by the legal management method and management bylaws (when there are such). In the event of attempting to pass a resolution to rebuild, a vote must be held on the resolution and at least 4/5 of the sectional owners and voting rights (the ratio of the exclusive area to the floor area unless the management bylaws stipulate otherwise) must pass the resolution (Sectional-Ownership, etc. of a Building Law Article 62). Thus there are management restrictions unlike independently owned properties that don't fall under the Sectional-Ownership, etc. of a Building Law. Although the exclusively owned area of a sectionally owned building can be freely disposed of, it is no different from a co-owned property in that there are cases where sectional owners agree to preferential purchasing rights among themselves. The following risks exist regarding the relationship between sectionally owned buildings and their lots. The rights concerning the lot owned by a sectional owner to own an exclusive area of a sectionally owned building are known as land use rights. With regard to sectionally owned buildings, the separation of the exclusive area and its related land use rights and disposal of them is as a rule legally prohibited to maintain a sense of unity between the exclusive area and the lot use rights (Sectional-ownership, etc. of a Building Law Article 22). However, when the land use rights haven't been registered, it is impossible to combat a third party with good faith about the prohibition of their separation and disposal and their subdivided disposal becomes feasible (Sectional-ownership, etc. of a Building Law Article 23). When the lot of a sectionally owned building is divided into several parts and when the sectional owners respectively own one or several parts of the land independently as fee simple or land use rights in the form of leasehold rights (land use rights in the form of partial ownership), it is considered that the lot can be separated and sold. In the event of a separate disposal of the exclusive area and related land use rights, there is the possibility that sectional owners that don't own land use rights will appear. When the land use rights are either use rent rights or a similar right and said lot is sold, auctioned or in some other form transferred to a third party, the sectional owner may not be able to combat against the concerned third party regarding existing land use rights. In the case of sectionally owned buildings that reflect the relationship between sectionally owned buildings and lots as is this case, significant time and expenses are needed to acquire or sell such and this may lead to increased factors for lowering the price.

   (13)

   Risk concerning leasehold properties There are unique risks in the case of leasehold land and the buildings on said land compared to buildings on land that you own. Leasehold is not a permanent right to use the land unlike fee simple ownership and naturally the contract terminates upon expiration of the leasehold period (fixed term leasehold right) or terminates when the leaseholder upon expiration of the term refuses to extend the leasehold agreement and has an appropriate reason for doing so (ordinary leasehold right). A leasehold right may also terminate when a party fails to pay land rents, terminates for another reason, etc. When the leasehold rights end, excluding cases where the building owner can demand purchase of the building at market price (Land and House Lease Law Article 13, Land Lease Law (Law No. 49 of 1921 and ensuing revisions) Article 4), the land must be returned after tearing down the building on the leasehold land. In the case of an ordinary leasehold right, it is impossible for ADR to accurately forecast whether or not the leaseholder will reject an extension at the end of the leasehold period for a proper reason. Therefore, even when there is a right to demand acquisition of the building, there is no guarantee that the price will be equal to or greater than the acquisition price desired by ADR. There is also the possibility that the ownership of the land for which ADR has leasehold rights will be sold to another party or will be transferred to a third party due to the execution of a hypothec, etc. on the land that existed at the time the leasehold rights were set. In this case, when no requirements are in place for the third party in accordance with the laws and ordinances applicable to leasehold rights, ADR cannot oppose the new owner and ADR may obliged to hand over said land. Additionally, if the leasehold rights are lease rights, as a rule the approval of the leaseholder is necessary when transferring the leasehold rights. When transferring the ownership of the building on the leased land, the leasehold right for said land will also be transferred. As a general rule it is then necessary to obtain the approval of the leaseholder at that time. In regards to this approval, there are cases where the payment of approval fees to the leaseholder are set in advance and also cases where the leaseholder invoices for such as a business customer (it must be noted that the right of the leaseholder to demand an approval fee is not guaranteed under the law). In addition, there is the possibility that the deterioration of financial conditions, bankruptcy and such of the leaseholder will result in all or part of the deposits, guarantees and such paid to the leaseholder not being refunded. Traditionally there is no collateral set or guarantee for the right to demand a refund of the deposit, guarantee or like from the leaseholder. Compared to when the land and building are owned by the same party, the case of leasehold land and a building built on the leasehold land has the above restrictions and risks. Therefore, it may require more time and expenses to acquire or sell such property or may increase factors for lowering the price of the property.

   (14)

   Risk concerning leasehold structures There are cases where ADR sublets buildings (co-ownership and sectional ownership included) that it has leased from a third party or to the trustee, either independently or together with a building it owns, directly or through a trustee to tenants. In this case, as was the case with the above (13), there is the possibility that the financial deterioration, bankruptcy or such of the building renter may result in all or part of the deposits or guarantees paid to the building renter not being refunded. In addition, under the Civil Code, when a rental contract concluded by ADR directly or through the trustee with a third party terminates for any reason, there is the potential that compensation will be sought by the tenant upon termination of the subrental contract since ADR or the trustee must also then end the subrental contract with the tenant.

   (15)

   Risk concerning development properties ADR may conclude a sale and purchase agreement at the development stage to acquire properties after they are completed in accordance with the investment policy designated in the Articles of Incorporation. In such a case, unlike when acquiring already completed properties after concluding sale and purchase agreements, there are a variety of reasons why the property may not be handed over according to the sale and purchase agreement as a result of delays, changes or suspension of development. As a result, there is a possibility that the earnings from the development property will fall far below the forecast and also that earnings are not gained at the scheduled time, earnings are not gained at all or that unanticipated costs, damages or losses are incurred that ADR must bear or suffer. As a result, there is a possibility that the earnings of ADR may suffer a negative impact.

   (16)

   Risk concerning harmful substances There is the possibility that industrial waste and other harmful substances will be buried on land when ADR acquires land, land leasehold rights, surface rights and beneficiary interests with these in trust, and there is a possibility that the value of said land will plummet if toxic substances are buried on it. There is also the possibility of unforeseen costs and time being needed in the event that the soil must be replaced or washed to remove said harmful substances. There is also the possibility that a third party may suffer damages due to the harmful substances and that ADR will be obligated to compensate for said damages either directly or indirectly through the trustee. According to the Soil Contamination Countermeasures Law, there are cases where the land owner, manager or occupier are ordered to investigate and report findings to the prefectural governor about land contamination by specific toxic substances including lead, arsenic and trichloroethylene. When the pollution from the specific harmful substances for land cause injury to the health of people or may potentially do so, the prefectural governor may order pollution removal and other measures to be taken to prevent injuries and damages. In this instance there is a possibility of an enormous financial burden being placed on ADR and there is no guarantee that the party that was the cause or other parties will always compensate ADR for the expenses it was forced to incur. In addition, when ADR acquires a building or beneficiary interests in trust where a building is placed in trust, there is the possibility that the price of the building will plummet if the construction materials of the building are found to contain asbestos or construction materials with some other harmful substance or that the building is storing PCB waste. In addition, when it becomes necessary to replace all or part of the construction materials to remove the concerned harmful substances or when it is necessary to dispose of or store said harmful substances, this may make it necessary to incur unforeseen costs and time. In the event that a third party suffered damages from said harmful substances, there is the possibility that ADR will be obligated to compensate for those damages directly or indirectly through the trustee. There is also the possibility in the future that laws and ordinances will be established and enforced to protect the environment and that the responsibility to investigate, remove and compensate for damages regardless of cause will be incurred as it relates to real estate air, soil, subterranean water and other pollution.

   (17)

   Risk that is unique to owning real estate as beneficiary interests in trust ADR shall primarily obtain real estate in the form of beneficiary interests in trust. The trustee owns and manages the real estate, real estate leasehold rights or surface rights as trust property for the beneficiary interest holder and all of the economic profit and loss in the end imputes to the beneficiary interest holder. Therefore, ADR in owning beneficiary interests in trust will bear in effect the same risks via the trustee as when the managed asset is in effect real estate. When attempting to transfer beneficiary interests in trust under a trust agreement, it is common for the approval of the trustee to be demanded. Further, beneficiary interests in trust that have real estate, real estate leasehold rights and surface rights placed in trust do not have the same character as investment securities and do not have the liquidity of investment securities as they are transferred in the same method as the transfer of debt. Under the Trust Law, when a trustee becomes subject to bankruptcy proceedings to counter bankruptcy custodians and other third parties with the position that the real estate that is the subject of the beneficiary interests in trust is a trust property it is essential to have registered the trust with the real estate placed in trust. If, for example, this registration has not been completed, ADR may not be able to argue to the third party that said real estate is the subject of the beneficiary interests in trust. Also, in the event that the trustee of the trust property disposes of the trust property contrary to the trust objective or incurred some sort of debt with the real estate that is the trust property as the allowance, ADR, who would be the owner of the beneficiary interests in trust of the real estate placed in trust, may suffer immeasurable damages. Also when the initial settlor bears a certain degree of defect liability for defects regarding the trustee of the trust property in relation to defects of trust property that already existed at the commencement of the trust and based on the trust agreement, there is the possibility that ADR will suffer immeasurable damages and harm the interests of investors because the trustee of the trust property fails to appropriately pursue the defect liability or cannot pursue such liability appropriately.

   
   
5. Risk concerning the tax system

   (1)

   Risk concerning conduit requirements Under the Tax Code, a special regulation regarding taxation of investment corporations stipulates that investment corporations that met certain requirements (hereafter, conduit requirements) shall be exempted from double taxation between the investment corporation and investor and thus investment corporations are allowed to record profit dividends, etc. as expenses. ADR intends to take steps to satisfy the conduit requirements but there is a possibility that the conduit requirements may not be able to be satisfied in the future due to a change in investors, restrictions on underlying capital to pay dividends, a lack of such capital, opacity concerning definitions of borrowings, differences in accounting and tax treatment, differences in the perspectives of tax offices and ADR, revisions to laws and other factors. If ADR is unable to satisfy the conduit requirements, it will be unable to record profit dividends, etc. as an expense and the tax burden of ADR will increase. This would have a negative impact on dividends paid to investors and impact the market price of ADR's securities. In addition, there is the possibility that if ADR becomes unable to satisfy conduit requirements, the paid dividends will not be able to be recorded as expenses under taxable income for corporation taxes and an immense gap will open up between the profit shown in accounting and the taxable income under taxes. There are cases where this type of large gap between accounting profits and tax-related taxable income in a single business year will impact payable dividend requirements in the following business years. In other words, since ADR would be liable for taxes it will become hard for it to satisfy payment dividend requirements in the following year and after and so it will receive the same corporation taxation and other taxes as an ordinary corporation. Consequently, there is the possibility that dividends to investors and net assets will decrease.

   (2)

   Risk that conduit requirements will not be able to be fulfilled ex post facto due to corrective measures after tax audits, etc. There is the possibility that conduit requirements in previous business years will be deemed to have not been met ex post facto in the event that a tax audit is conducted and a difference in interpretation between ADR and the tax authorities regarding the treatment of conduit requirements leads to corrective measures including denial of tax returns filed. In this case, the denial of tax returns filed for dividends recorded as expenses in previous business years may lead to an increased tax burden for ADR and have a negative impact on dividends paid to investors.

   (3)

   Risk that tax mitigation measures related to real estate acquisition cannot be applied The investment policy in the Articles of Incorporation of ADR stipulates that the portfolio will be managed so that the value of qualified real estate (real estate, real estate lease rights, surface rights, or beneficiary interests in trust where real estate, land lease rights or surface rights are placed in trust) versus the total value of qualified assets owned by ADR will at least be 75/100 of all assets (Articles of Incorporation Attachment 1 Objects of Asset Management and Policy of Asset Management: Investment Stance" Item 5). The premise of ADR is that by satisfying the investment policy stipulated in the Articles of Incorporation and other tax requirements it will receive tax mitigation measures for the real estate circulation taxes (registration and licensing tax and real estate acquisition tax) when it directly acquires real estate. However, there is the possibility that ADR will not be able to receive the tax mitigation benefits if it doesn't meet the tax mitigation requirements or the mitigation requirements are changed or abolished.

   (4)

   Risk that there are changes in the general tax system There is the possibility that taxes and public charges will increase and that this will have a negative impact on ADR if there are changes to the tax system regarding ADR and the interpretation, management and treatment of the tax system regarding real estate, real estate beneficiary interests in trusts and other assets of ADR. In addition, there is the possibility that the amount of net income of investors in the event of ownership or sale of ADR's investment units or the burden for tax filings and other tax procedures on the investors increases due to changes in the tax system concerning dividends paid on profits from investment securities, refunding of investments and the transfer of investments and changes to the interpretation, management and treatment of the related tax system.

   
   
6. Other risks

   (1)

   Risk that the asset to be acquired can't be incorporated into the portfolio ADR may state intent to acquire assets at same time. However, ADR may be unable to acquire assets it plans to acquire when suspensive conditions stipulated in the contract to sell and purchase beneficiary interests in trust are not fulfilled. In such a case, ADR does intend to take measures to acquire replacement assets but there is no guarantee that ADR will be able to do so by finding an investment grade property in a short period of time. There is the possibility that this, an inability to acquire a property in a short period of time or the inability to manage the concerned capital in an advantageous manner will damage the interests of investors.

   (2)

   Risk concerning responsibility accompanying the sale of real estate In the event ADR sells real estate, there is the possibility that it will bear a liability for defects or for declared guarantees when there are physical or legal defects to said real estate in accordance with legal regulations and regulations of the sale and purchase agreement. In particular, ADR is a deemed housing lot and building broker under the Building Lots and Building Transaction Business Law. Therefore, if the buyer is not a broker, the risk of liability for defects cannot be exempted from ADR.

   (3)

   Risk concerning specialist reports, etc. Valuations indicated in real estate appraisal reports and real estate pricing investigations are no more than opinions concerning evaluations at the time of the analysis that are based on the analysis of individual real estate appraisers, etc. and objectively do not automatically match the suitable real estate price. There is the possibility that appraisals, studies and the like of the same property could lead to different audit and study valuations depending on what appraiser conducted the appraisal, the valuation and study methods and the timing of such. In addition, the appraisal reports are not a guarantee or promise of the possibility of buying or selling said property at the valuation in the appraisal or study presently or in the future. Building engineering reports and earthquake PML valuation reports enter the results when a specialist at appraising buildings verifies design drawings, visually inspects present conditions, interviews facility managers and the like to determine present defects and forecast future defects, necessary repairs and renovations and calculates the cost for doing such, the replacement cost, the anti-seismic performance of the building and the risk of loss from earthquakes. However, it is not a guarantee or promise that there are no real estate defects, etc. In addition, the PML values calculated for properties are no more than forecasts based on the analyses of individual specialists. The PML values are indicated by the ratio of the foreseen damage recovery costs of the replacement cost (%) but there is the possibility that a future earthquake may result in recovery costs that are greater than foreseen.

Management structure for investment risk

ADR and its asset manager recognize that the above risks are investment risks and have prepared a risk management structure that ensures optimal response and handling of these types of risk.

However, the said risk management structure is not a guarantee that the effects will be adequate and there is the possibility that the interests of investors will be damaged if the risk management structure doesn't appropriately function.

(1)

ADR's structure Board of Directors ADR is committed to enabling the Board of Directors to adequately function as a body supervising decision making regarding operations and the executive director and will take steps to ensure that the executive director works with integrity for ADR. The regular Board of Directors meeting for ADR shall be held at least once every three months and the executive director shall report on operations at the asset manager, administrative agent and custodian at the regular meeting. In addition, the regular meeting of the Bard of Directors shall establish the basic policy for legal compliance and debate matters regularly concerning legal compliance. Checking the asset manager The asset management agreement executed between ADR and the asset manager stipulates that management guidelines will be established by the asset manager in accordance with the standards in the Articles of Incorporation and that asset management will be conducted in accordance with the ITL, Articles of Incorporation, management guidelines and internal corporate rules of the asset manager. In addition, ADR shall approve the asset management plan established by the asset manager and the management structure for investment risk of ADR is strengthened by placing a reporting obligation on the asset manager concerning ADR. Rules for managing insider trading ADR has established insider trading management rules and is committed to preventing trading similar to insider trading by directors. Further, these rules prohibit the executive director from selling or buying investment units.




(2)

Asset Manager's structure The asset manager is committed to sufficiently grasping the existence of risks like the above and their risk levels and has constructed the following means to avoid these risks. The asset manager conducts investment and management related to managed assets in strict accordance with these rules. Establishment of and compliance with management guidelines The asset manager shall establish management guidelines, investment policies, rules on transactions with interested parties, dividend policies, disclosure policies and other basic rules and thinking concerning investment management as the asset manager entrusted on a discretionary basis with the management of assets by ADR and shall do this in accordance with the Articles of Incorporation. The asset manager shall take steps to manage risks related to asset management by complying with the management guidelines. Organizational structure In regards to trades with interested parties and other certain material matters, the asset manager must follow a strict procedure that begins with the compliance officer reviewing the transaction, then the Compliance Committee and Investment Committee reviewing and voting on the transaction and finally obtaining the approval of the Board of Directors of ADR and the Board of Directors of the asset manager. The asset manager uses this procedure to sufficiently grasp the existence and level of risk. Rules on transactions with interested parties Transactions with interested parties shall only be conducted after they have passed through the compliance procedure of the asset manager to prevent potential conflicts of interest. Rules on managing insider trading The asset manager has established rules for managing insider trading and is committed to preventing trading similar to insider trading by employees, directors and the like of the asset manager. According to these rules, the acquisition of ADR's investment units by directors, employees and the like of the asset manager are prohibited.