Corporate Governance of Top REIT

(1) Internal control and supervision by Supervisory Directors

The rules on the Board of Directors at Top REIT provide that it shall hold its meeting more than once every three months. In practice, however, the Board of Directors meeting is held at a frequency of around once a month. At the Board of Directors meeting, the Executive Officer reports on the status of business operations by the Asset Manager and the execution of duties by the Executive Officer. When the Executive Officer makes such reports, the Asset Manager offers supporting services including supplemental briefings and, when requested by the Supervisory Directors to report on the operation status and other items, makes appropriate responses. These exemplify that Top REIT has established a management system that enables its Board of Directors to supervise the execution of duties by the Executive Officer, the operations by the Asset Manager and other functions.

The Supervisory Directors supervise the execution of duties by the Executive Officer based on their professional experience and knowledge. In addition, the Supervisory Directors discuss agenda for the Board of Directors meetings in advance, and give their opinions and suggestions to the Executive Officer as needed through active discussions at the Board of Directors meetings. They can also request the Asset Manager to report on the status of asset management, issues on compliance and risks and other matters. As these show, the system of Top REIT allows the Supervisory Directors to fully implement their supervisory functions.

The present Supervisory Directors of Top REIT are comprised of two persons – a lawyer and a certified public accountant.

(2) Management system of Top REIT over related companies (excluding companies selling its investment units, etc.)

When an acquisition, sale, consignment of property management or lease of real estate and other assets is carried out between Top REIT and interested parties of the Asset Manager, the Asset Manager is required to immediately deliver documents that explain the relevant transactions to Top REIT. These documents allow Top REIT to check and grasp the substance of the transactions. In addition, the Asset Manager reports to the Board of Directors of Top REIT on the medium-term and annual management plans prepared by the Asset Manager concerning the assets, as well as on the status of operations based on such plans and on other important issues in a timely manner. Moreover, the system calls for the Asset Manager to respond to the requests of the Supervisory Directors to report on its asset management operations, if so requested.

Furthermore, the Supervisory Directors may request the administrative agent and the asset custodian to report on the status of their services at any time, and shall investigate as needed.

Basic Policy of the Asset Manager on Compliance

The Asset Manager places investor-oriented management as a pillar of its operating philosophy, and endeavors to build an internal control system that should fully secure compliance and risk management. Under this operating philosophy, the Asset Manager has established a basic policy for constructing an internal control system and has set up regulations on compliance, while building a strong compliance system including the establishment of the Risk and Compliance Committee and the Compliance Office. A summary of issues concerning compliance at the Asset Manager is mentioned below.

(1) Issues concerning compliance

1. (i)   The Asset Manager appoints the head of the Compliance Office as the Compliance Officer, who controls and supervises internal issues concerning compliance. The Compliance Office shall establish the internal system for compliance, and endeavor to develop a corporate culture that emphasizes strict abidance to laws and regulations.
2. (ii)  The Compliance Manual is reviewed on a regular basis, and revisions are made with the approval of the Board of Directors in principle. The Compliance Program is drafted by the Compliance Office for each fiscal year, and is discussed and resolved by the Risk and Compliance Committee. The progress status of the Compliance Program is regularly reported to the Board of Directors.
3. (iii) The Compliance Office shall examine decisions on and revisions of the investment management guidelines and various plans as well as the implementation of each management plan from the viewpoint of compliance. If the examinations reveal any problem in terms of compliance, the head of the Compliance Office can return the plans to the departments that prepared them. In addition, the head of the Compliance Office convenes the Risk and Compliance Committee for discussions on certain cases provided in the internal rules, such as establishing the investment management guidelines and conducting important transactions between Top REIT and interested parties of the Asset Manager.
4. (iv) The Compliance Office shall examine material issues concerning compliance, such as material transactions between Top REIT and its interested parties defined in the rules on transactions with interested parties, and, if necessary, convene the Risk and Compliance Committee to discuss and resolve the issues. The results are reported or sent as agenda for resolution to the Board of Directors after going through other internal procedures. All of the Directors who constitute the Board of Directors are seconded or concurrently assigned to the Asset Manager from the three Sponsors. However, checking functions are secured by the fact that the shareholding ratio of any of the three Sponsors does not exceed 50% and by the fact that Directors who have special interests pertaining to the issues to be resolved are not allowed to participate in the voting.

(2) Issues concerning internal audits, etc.

1. (i)   The Statutory Auditor of the Asset Manager is an independent organization of the company, with different responsibilities from the Directors. As such, the Statutory Auditor shall audit the business execution by the Directors and work to prevent illegal situations from arising.
2. (ii)  When any Director has committed an injustice or the possibility of such conduct is recognized by the Statutory Auditor, or when the Statutory Auditor recognizes that there is any fact that constitutes a violation of laws or the Articles of Incorporation or there is any extremely unjust fact, the Statutory Auditor shall report to the Board of Directors without delay and give necessary admonition, advice or indication of opinion.
3. (iii) Moreover, the Statutory Auditor shall attend the Board of Directors meetings and make necessary representation of opinions concerning decisions by the Asset Manager on material items and other issues.
4. (iv) In addition to the above, the Asset Manager shall establish the rules on internal audits. Based on these rules, persons responsible for internal audits, such as the head of the Compliance Office, shall, among other things, check the appropriateness and effectiveness of the internal control system, etc. on a regular basis; find and point out problems in the handling of work and other operations in departments being audited; evaluate the internal control system; and make suggestions on how to resolve the problems. Moreover, the Asset Manager shall establish rules on self-examination in each department to prevent the violation of laws or regulations and internal rules of the Asset Manager as well as to prevent accidents from happening. In addition, pursuant to the rules, examiners in the departments designated by the head of each department shall examine business execution and the handling of work on a regular basis, with the objective of contributing to business improvement, heightening efficiency and streamlining management.

Organization of the Asset Manager

Decision Making Flowchart

The Board of Directors and Conflicts of Interest

The Board of Directors of the Asset Manager plays a prominent role in preventing conflicts of interest. Additionally, the following two measures have been implemented to avoid conflicts of interest within the Board of Directors.

1. (1) The Board of Directors is comprised of seven members, of which no more than half can be from a single Sponsor. This prevents any single Sponsor from having a majority on the Board and the ability to unilaterally push through decisions.
2. (2) In the event that there is an acquisition, transfer or lease of an asset or the outsourcing of work regarding an asset that involves a Sponsor or other interested party, any Director(s) that is affiliated with such at the Sponsor or other interested party must refrain from participating in the decision on going forth with said transaction or outsourcing agreement.

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