Understanding of the market and the setting of appropriate terms

MHR shall maintain an understanding of the market relevant to the real estate relating to the operating assets by thoroughly analyzing the current conditions and future trends of supply and demand by geographic area and property use, with a particular focus on the characteristics, tenant needs and tenant trends at competing properties. In addition, MHR shall set the most appropriate rent and other terms after thoroughly understanding the characteristics of the real estate relating to the operating assets, including location, convenience of access to public transportation, customer mix and property age, as well as relative competitiveness in the market.

Attracting new tenants

Taking into consideration the “Understanding of the market and the setting of appropriate terms” set forth above, MHR shall consider the approach for attracting new tenants, and shall conduct appropriate marketing accordingly. Appropriate proposals shall be made to address potential new tenants’ various needs, including adjusting the schedules of moving in, ascertaining the required facilities, adding new equipment and conducting interior renovations. In addition, rent levels shall be determined based on an overall determination of the potential tenant’s creditworthiness, the ratio of the rent revenue to the overall portfolio and type of lease agreement (length of term and whether the term is fixed or not).

Tenant relations

MHR shall use its best efforts to provide appropriate responses and proposals by understanding tenant concerns and level of satisfaction with respect to the environment, cleanliness, aesthetics, safety, security and disaster countermeasures, as well as any inclinations towards expanding, reducing or changing their rented space, through daily communication and questionnaire survey (biennial). MHR shall recognize that high tenant satisfaction leads to a higher valuation in the real estate market for the real estate relating to the operating assets, as well as to attracting new tenants, and this point shall be appropriately reflected in the “day-to-day facility operation management” and “large-scale repairs and renovations”. Regarding renewal or extension of lease agreements, MHR shall carefully consider the importance of this as a negotiation point to ensure stable earnings, and shall make appropriate proposals by understanding tenants’ disposition. In addition, when a tenant moves out, appropriate negotiations on terms shall be conducted with a view to future tenants and taking into consideration contract terms, and appropriate renovation shall be undertaken.

Leasing schemes

Based on an overall consideration of the conditions of each real estate property relating to the operating assets, stability of rent revenue and efficiency of operational management, MHR shall make appropriate use of different leasing schemes such as direct leases with tenants, pass-through master lease agreements and fixed rent master lease agreements.

Direct Lease

Rather than adopting a master lease, the fiduciary trust or MHR directly leases to the end tenant.

Master Lease

The fiduciary trust or MHR leases to the master lessee, who in turn leases to the end tenant.

• Pass Through Master Lease
  In this type of master lease, the rent paid by the master lessee and the rent paid by the end tenant are always the same amount.
• Fixed Master Lease
  In this type of master lease, the master lessee pays a fixed amount regardless of the amount paid by the end tenant to the master lessee.

In the above, the master lessee is the party that leases the entire property from the fiduciary trust or MHR and subleases the units to third parties, and the end tenant is the party that actually pays the rent to the lessor (including the master lessee in the case of a fixed master lease) for the leased unit.

Entrusting PM to PM companies

MHR shall entrust the implementation of various measures regarding the real estate related to the operating assets, as well as the making of proposals with respect thereto, to PM companies as necessary. When a master lessee arrangement is utilized for the tenant lease of real estate relating to the operating assets, the PM company may be designated as the master lessee.

Selection criteria for PM companies

MHR shall select PM companies that understand the Investment Corporation’s investment policies and operating management policies for the assets relating to the operating assets, and can conduct operations based on a shared understanding with MHR, with the following criteria in mind:

• operational history
• financial condition
• organizational system
• knowledge and experience regarding the geographic area and market of the relevant real estate
• depth of knowledge of the relevant real estate and relationships with tenants
• ability to attract new tenants
• reporting capabilities with respect to the relevant real estate
• level of fees and compensation
• policies and systems, as well as ability to make proposals and provide execution, regarding sustainability

In addition to the above, when one of the following criteria is satisfied, Mori Building Co., Ltd. may be selected as the PM company.

• It is determined that Mori Building Co., Ltd. has the best understanding of the operational management details of the property, such as having planned or developed the property or having conducted property management at the real estate property.
• Economies of scale and efficient operational management can be expected based on the fact that Mori Building Co., Ltd. already conducts property management for multiple properties within the same geographical area as the real estate property.
• It is determined that appointing Mori Building Co., Ltd. would be effective and appropriate based on its strong information network and sales staff to attract new tenants or its management capabilities regarding the relevant real estate property.

Supervision of PM companies

MHR shall, in principle, receive reports from the PM company once a month regarding the items listed below to gain an understanding of the operating management status of the real estate related to the operating assets, analyze variances in results from the asset management funding plan, and based on the foregoing, take appropriate measures with regard to the PM company.

• status of rent collection from tenants
• status of expenses
• status of tenants moving in and out
• status of facility management (maintenance of facilities and equipment, status of maintenance and repair construction and execution plans for the following month)
• status of complaints and requests from tenants, and responses thereto
• rent market trends for the geographical area surrounding the real estate relating to the operating asset

Evaluation of PM companies

The term for entrusting property management operations shall, in principle, be the same as the term of the trust agreement (in the case of holding the real estate through trust beneficiary rights) or the master lease agreement (in the case of a master lease arrangement). However, the property management agreement shall allow for early termination at MHR’s discretion, and MHR shall evaluate the operations of the PM company at least once a year in accordance with the points listed below. As a result of such evaluation, if it is determined that the PM company does not satisfy the selection criteria, MHR shall terminate the PM agreement and appoint a different PM company. As necessary, as a result of the evaluation, MHR shall endeavor to raise the standards of the PM company's administrative capabilities through appropriate instruction. Also, the terms and conditions of the property management agreement shall be reviewed as necessary in order to seek rationalization of fees and costs.

• status of leasing management
• status of building operation and management
• status of construction management
• status of accounting and finance support operations
• status of reporting
• status of sustainability management
• status of other operations