Measures to Insure Fair Handling of Transactions with Conflict of Interests
The asset management company (ADIM) has established rules and rigorous check system to insure fair handling of asset management transactions with conflict of interests.
ADIM determined that there are two situations when conflicts of interests must be managed.
- When deciding who has the first look right for the same acquisition opportunity between ADR and private real estate investment funds of which ADIM manages their assets.
- When ADR transacts with related parties.
Prevention of Conflicts of Interests Between ADR and Private Real Estate Investment Funds
There will be conflicts of interests between ADR and the Private fund because both invest in the same asset-type, rental housings. ADIM prevents the conflicts of interests through the establishment of the following rule, “The Rules on Allocation of Acquisition Opportunities.”
Managing Conflicts of Interests in Related Party Transactions
1. Bylaw on Related Party Transactions
When ADR acquires/disposes assets from related parties, the transaction must go through the following authorization procedures set forth in the bylaw.
(Please refer to the diagram "Flow of Decision-Making for Asset Acquisition and Disposal”)
2. Authorization Procedures Set forth in the Bylaw
- All transactions with related parties, excluding one-time transactions with a value of less than 10 million yen and annual transaction value less than 30 million yen for ongoing transaction, must be deliberated to identify risks and compliance issues and receive approval from the Compliance Committee which includes an external independent member (a person having a specialized knowledge on compliance, appointed by ADIM’s Board of Directors).
- The Compliance Officer is to inform the Compliance Committee’s deliberations and the decisions to the Investment Committee.
- After the deliberation by the Investment Committee consisting an external independent member (a person having a professional knowledge on REIT’s investment management appointed by the ADIM’s Board of Directors), it approves the transaction and receive pre-authorization by ADR’s Board of Directors, the transaction is put forth to be resolved by ADIM’s Board of Directors.
- However, notwithstanding the preceding provision, ADIM’s Board of Directors may resolve the transaction before ADR’s Boards of Directors approval if the resolution is made with a condition precedent that it will be approved by ADR’s board.
Related-Party transactions and transactions that does not fully comply to the investment guidelines set out in the company bylaw must go through rigorous checks set forth below.
【Definition of Related-party】
(2) All shareholders with voting rights, officers and directors of the asset management company
(3) SPCs that are majority held by persons stated under (1) and (2) whom may have significant influence on the SPC
3. Definition of Related Parties
- Related parties defined under Article 15-(2)-1 of the Act on Investment Trusts and Investment Corporations
- Directors/Officers of the asset managing company and all its shareholders with voting rights.
- SPCs that are majority held by persons stated under a. and b. and thus may have significant influence on the company.
4. Scope of Related Party Transactions
- Acquisitions from Related Parties
Properties must not be acquired for more than the appraised value by an independent real estate appraiser. For specified assets other than properties, it must not be acquired for more than the market value. In either transactions, prior approval from ADR’s Board of Directors must be obtained.
- Acquisitions through Related Parties
Broker fees must be within the range specified in Article 46 of the Real Estate Brokerage Act and decided based on the value and difficulty of the transaction.
- Dispositions to Related Parties
Properties must not be disposed for less than the appraised value by an independent real estate appraiser. For specified assets other than properties, it must not be disposed for less than the market value. In either transactions, prior approval from ADR directors’ board must be obtained prior to the transaction.
- Real Estate Leasing to related parties
When leasing properties to related parties, the terms must be appropriately determined based on market price.
- Real Estate Leasing through Related Party Real Estate Agency
Commissions must be within the range specified in Article 46 of the Real Estate Brokerage Act and decided based on the value and difficulty of the transaction.
- Property Management by Related Parties
When selecting a property manager (PM) the criteria should be based on the managers’ track record and creditworthiness, while PM fees should be based on competing quotes obtained from multiple sources, market rates, services provided and workload.
- Placing Construction Orders to Related Parties
Construction orders should be placed at an appropriate price determined by referring to estimates obtained from a qualified third party, in addition to contractor's track record and creditworthiness.
5. Notifying ADR on Transactions with Potential Conflicts Interestsof Interests
In order to avoid the asset managing company from inappropriately conducting transactions defined in the Regulation for Enforcement of the Act on Investment Trusts and Investment Corporations between ADR, ADIM, ADIM’s directors, other REIT that ADIM manages their asset and other related parties due to conflict of interests, ADIM must prepare a brief letter describing the details of the transaction and give notice to ADR.
6. Appraisal by third parties
When ADR acquires or disposes any specified assets, an appraisal must be conducted by a qualified independent appraiser.