<DCF Analysis Not Yet Prevalent Among Real Estate Appraisals in Japan>
Under the Discounted Cash Flow (DCF) analysis, in general, it is assumed that real estate which is purchased will eventually be resold, and the price of the real estate is determined on the basis of cash income as the sum of the total current value of the net profit from the period of time until its resale plus the current value of its final sale price. In the U.S., DCF analysis is applied as a matter of course, but in Japan, this method is only beginning to become prevalent. The reason for this difference is that in Japan, there existed for a long time the strong tendency to assume that real estate, once purchased, would be held semi-permanently and not be resold. Therefore, the most popular method used for profit return was the “permanent return” approach, in which net profit is discounted by the return yield.
In the real estate investment market, investors base their investments on the assumption that they will resell the properties after acquiring real estate, and holding and operating it for a certain period of time. The price based on DCF analysis will provide an important standard for investment. For the future growth of Japan’s real estate investment market, there will be a need for many appraisers who are skilled in the use of DCF analysis.

<Appraisal Division of Tokyo Tatemono: Competence and Results>
Tokyo Tatemono’s appraisal division boasts a long tradition in the appraisal industry, and as an industry leader, has continued to provide analysis using the most advanced valuation techniques. We receive many orders from government agencies and have a strong reputation in the market. We began using DCF analysis earlier than other companies and have already applied it successfully in many cases. Currently, Tokyo Tatemono has 26 highly skilled licensed appraisers.

<Physical Inspection for Buildings Becoming Important>
For a long time in Japan, there was a strong tendency to emphasize the latent value of land, and the system of real estate valuation in Japan was said to be “land-centered”. There was little interest in the value of buildings. Even when real estate was sold, buildings were de-emphasized and seen as merely an incidental attachment to the land. Therefore, the inspection for buildings has not been well developed in Japan up to the present time. However, when real estate is seen as an investment target, buildings carry an extremely important role as the basis for rental income. Therefore when planning for investment efficiency, it is necessary to include an estimate of expenditures for building maintenance, management, and repairs. High quality building diagnosis is an important element for the expansion of the real estate investment market.

<Investigation of Predicted Earthquake Damage Provided in Securitization of Takanawa SPC>
In the securitization of the Takanawa SPC, a detailed engineering report was prepared by professional staff members. The scope of this investigation covered the entire building, including the structural aspects of interior and exterior finishes, roof, and exterior structure and the facility aspects of electrical and air conditioning equipment, water supply and drainage, and elevators. The investigation also included determination of whether any hazardous substances were used, and the predicted amount of damage in case of an earthquake.
At Tokyo Tatemono, we use our wealth of experience from many years of building operation and management to provide building diagnosis that investors can trust.

<More Disclosure Needed for the Fair Market>
For funds from a wide range of investors to flow into the Japanese real estate investment market and expand the size of this market, it is essential for property information to be disclosed to investors.
However, it may take more time for Japan to progress in terms of the disclosure of information such as rent rolls, due to the circumstances described below.

<Tenants Protected Under the Leasing Acts>
Under the Leasing Acts in Japan, tenants are strongly protected in commercial contract as well as with residential properties. Even before the end of a lease period, a tenant may demand a reduction in rent in certain cases, such as a large reduction in the market level of rents in the area. Even if the lessor and lessee have made a special written agreement to the effect that the rent would not be lowered during the lease period, such agreement may become invalid, and the tenant may still have the right to demand a rent reduction.
This law also provides strong protection for the tenant in the case of cancellation of a lease. Taking the example of a two-year lease, which is the general period for an office lease in Japan, for the owner to refuse to renew the lease at the end of that two-year period, the strict requirements of this law include a stipulation that the owner must provide “justifiable reasons” for such a refusal. However, the tenant may cancel the lease by refusing renewal with a certain period of advance notice.

<Leasing Conditions Vary Depending on Time of Lease Origination>
As a result of sharp fluctuations for rents just before and after a boom period, large differences exist in current rent levels for tenants who moved in at different times, even in the same building.
If the lease conditions were disclosed, those tenants paying higher rents could be expected to demand rent reductions or give notice of cancellation upon learning of these differences. And tenants can easily be lured out with lower rent. Therefore, owners are unwilling to disclose such information on individual leasing conditions in order to prevent this reaction.


<Endeavors by Tokyo Tatemono in Creation of New Lease Formats>
Under discussion at present is a fixed-term lease, different from current leases, in which the building would be surrendered to the owner upon expiration of a certain lease period, regardless of whether or not there exist “justifiable reasons.” If this is realized, it will provide a better balance between the positions of tenants and owners, forming a sounder lease market and promoting the disclosure of information concerning lease conditions, etc. from the owners.
Also, if fixed-term leases are introduced and owners are released from the risk of demands for rent reductions, this will ensure a stable rental income and facilitate the creation of real estate investment products.
As a pioneer in real estate investment products, Tokyo Tatemono is continuing to address the government and related authorities concerning the creation of fixed-term leases, which are necessary for the future of the real estate investment market. (Limited-term Lease Sysytem Implemented on March 1, 2000)

<Importance of Management>
In the real estate investment market, investors make use of their capital by owning real estate, either directly or indirectly. An important issue from the standpoint of investors is the question of whom to entrust with the tasks of asset management and administration of their real estate portfolio. If a property is well operated, then naturally its performance and value will increase at a high level in the market, and investors will be able to obtain a higher return as a result. The real estate investment market is expected to expand in the future as investors and funds, combining a wide range of capital, select and acquire real estate that suits their wishes as a means of asset administration (ownership), and real estate companies are commissioned to perform the asset management and administrative management of real estate (management). Therefore specialized expertise will be applied in each respective area, (separation of ownership and management).

<Tokyo Tatemono Group Has a Wealth of Experience and Expertise>
The Tokyo Tatemono Group has built up a wealth of experience and expertise during many years in the operation of office buildings, condominiums, hotels, and other properties. The Tokyo Tatemono Group has specialized subsidiaries in the areas of facility management, condominium management, hotel operation, repair &maintenance, cleaning services, and so on. Through these networks with our subsidiaries, we can offer a complete package in real estate operation as an asset manager and property manager.

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