20FR12B 1 d330735d20fr12b.htm FORM 20FR12B FORM 20FR12B
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

 

x REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

¨ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the fiscal year ended

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number:

Brookfield Property Partners L.P.

 

 

(Exact name of Registrant as specified in its charter)

N/A

 

(Translation of Registrant’s name into English)

Bermuda

 

(Jurisdiction of incorporation or organization)

73 Front Street Hamilton, HM 12 Bermuda

 

(Address of principal executive office)

Steven J. Douglas

Brookfield Property Partners L.P.

Three World Financial Center

11th Floor

New York, NY 10281-1021

Tel: 212-417-7000

Fax: 212-417-7196

 

 

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)


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Copy to:

Mile T. Kurta

Torys LLP

1114 Avenue of the Americas, 23rd Floor

New York, New York 10036-7703

(212) 880-6000

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

            Title of each class

 

       

Name of each exchange on which registered

 

Limited Partnership Units

 

                New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.                                                      N/A

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes ¨    No x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes ¨    No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ¨    No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ¨    No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨      Accelerated filer ¨                                         Non-accelerated filer x

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

                U.S. GAAP ¨    International Financial Reporting Standards as
issued by the International Accounting Standards Board
   x                                     Other ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17 ¨    Item 18 ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ¨    No ¨

 

 


Table of Contents

TABLE OF CONTENTS

 

             Page   
INTRODUCTION AND USE OF CERTAIN TERMS      1   
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS      4   
PART I      5   
  ITEM 1.   

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     5   
     1.A.     

DIRECTORS AND SENIOR MANAGEMENT

     5   
     1.B.   

ADVISERS

     5   
     1.C.   

AUDITORS

     5   
  ITEM 2.   

OFFER STATISTICS AND EXPECTED TIMETABLE

     5   
  ITEM 3.   

KEY INFORMATION

     5   
     3.A.   

SELECTED FINANCIAL DATA

     5   
     3.B.   

CAPITALIZATION AND INDEBTEDNESS

     6   
     3.C.   

REASONS FOR THE OFFER AND USE OF PROCEEDS

     6   
     3.D.   

RISK FACTORS

     6   
  ITEM 4.   

INFORMATION ON THE COMPANY

     35   
     4.A.   

HISTORY AND DEVELOPMENT OF THE COMPANY

     35   
     4.B.   

BUSINESS OVERVIEW

     37   
     4.C.   

ORGANIZATIONAL STRUCTURE

     54   
     4.D.   

PROPERTY, PLANTS AND EQUIPMENT

     58   
  ITEM 5.   

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     59   
     5.A.   

OPERATING RESULTS

     59   
     5.B.   

LIQUIDITY AND CAPITAL RESOURCES

     91   
     5.C.   

RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

     91   
     5.D.   

TREND INFORMATION

     91   
     5.E.   

OFF-BALANCE SHEET ARRANGEMENTS

     92   
     5.F.   

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

     92   
  ITEM 6.   

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     92   
     6.A.   

DIRECTORS AND SENIOR MANAGEMENT

     92   
     6.B.   

COMPENSATION

     94   
     6.C.   

BOARD PRACTICES

     94   
     6.D.   

EMPLOYEES

     98   
     6.E.   

SHARE OWNERSHIP

     98   
  ITEM 7.   

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     99   
     7.A.   

MAJOR SHAREHOLDERS

     99   
     7.B.   

RELATED PARTY TRANSACTIONS

     100   
     7.C.   

INTERESTS OF EXPERTS AND COUNSEL

     113   
  ITEM 8.   

FINANCIAL INFORMATION

     113   
     8.A.   

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL
INFORMATION

     113   
     8.B.   

SIGNIFICANT CHANGES

     113   
  ITEM 9.   

THE OFFER AND LISTING

     113   
     9.A.   

LISTING DETAILS

     113   
     9.B.   

PLAN OF DISTRIBUTION

     113   
     9.C.   

MARKETS

     113   
     9.D.   

SELLING SHAREHOLDERS

     114   
     9.E.   

DILUTION

     114   

 

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TABLE OF CONTENTS

(continued)

 

             Page   
     9.F.   

EXPENSES OF THE ISSUE

     114   
  ITEM 10.   

ADDITIONAL INFORMATION

     114   
     10.A.   

SHARE CAPITAL

     114   
     10.B.   

MEMORANDUM AND ARTICLES OF ASSOCIATION

     114   
     10.C.   

MATERIAL CONTRACTS

     137   
     10.D.   

EXCHANGE CONTROLS

     137   
     10.E.   

TAXATION

     137   
     10.F.   

DIVIDENDS AND PAYING AGENTS

     166   
     10.G.   

STATEMENT BY EXPERTS

     168   
     10.H.   

DOCUMENTS ON DISPLAY

     168   
     10.I.   

SUBSIDIARY INFORMATION

     169   
  ITEM 11.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      169   
  ITEM 12.   

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     169   
     12.A.   

DEBT SECURITIES

     169   
     12.B.   

WARRANTS AND RIGHTS

     169   
     12.C.   

OTHER SECURITIES

     169   
     12.D.   

AMERICAN DEPOSITARY SHARES

     169   
PART II      169   
  ITEM 13.   

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     169   
  ITEM 14.    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS
     169   
  ITEM 15.   

CONTROLS AND PROCEDURES

     169   
  ITEM 16.   

[RESERVED]

     170   
     16.A.   

AUDIT COMMITTEE FINANCIAL EXPERTS

     170   
     16.B.   

CODE OF ETHICS

     170   
     16.C.   

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     170   
     16.D.    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      170   
     16.E.    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS
     170   
     16.F.   

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     170   
     16.G.   

CORPORATE GOVERNANCE

     170   
PART III      171   
  ITEM 17.   

FINANCIAL STATEMENTS

     171   
  ITEM 18.   

FINANCIAL STATEMENTS

     171   
  ITEM 19.   

EXHIBITS

     171   
SIGNATURES      172   
INDEX TO FINANCIAL STATEMENTS      F-1   

UNAUDITED PRO FORMA FINANCIAL

  
 

STATEMENTS OF BROOKFIELD PROPERTY PARTNERS L.P.

     PF-1   

 

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INTRODUCTION AND USE OF CERTAIN TERMS

We have prepared this Form 20-F using a number of conventions, which you should consider when reading the information contained herein. Unless otherwise indicated or the context otherwise requires, in this Form 20-F:

 

   

the disclosure assumes that the spin-off has been completed;

 

   

operating and other statistical information with respect to our portfolio is presented as of December 31, 2011, as if we owned our portfolio as of such date although we will not acquire the commercial property operations of Brookfield Asset Management until shortly before the spin-off;

 

   

all operating and other statistical information is presented as if we own 100% of each property in our portfolio, regardless of whether we own all of the interests in each property, but unless otherwise specified excludes interests in Brookfield-sponsored real estate opportunity and finance funds and our interest in Canary Wharf plc, or Canary Wharf;

 

   

all financial information is presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, or IFRS, other than certain non-IFRS financial measures which are defined under “Use of Non-IFRS Measures”; and

 

   

the disclosure on Brookfield Asset Management’s ownership in our business following the spin-off does not reflect the nominal amount of our units that Brookfield Asset Management will withhold in connection with the satisfaction of Canadian federal and U.S. “backup” withholding tax requirements for non-Canadian registered shareholders.

In this Form 20-F, unless the context suggests otherwise, references to “we”, “us” and “our” are to our company, the Property Partnership, the Holding Entities and the operating entities, each as defined below, taken together. Unless the context suggests otherwise, in this Form 20-F references to:

 

   

an “affiliate” of any person are to any other person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such person;

 

   

“assets under management” are to assets managed by us or by Brookfield on behalf of our third party investors, as well as our own assets, and also include capital commitments that have not yet been drawn. Our calculation of assets under management may differ from that employed by other asset managers and, as a result, this measure may not be comparable to similar measures presented by other asset managers;

 

   

“Australia” are to Australia and New Zealand;

 

   

the “BPY General Partner” are to the general partner of our company, which prior to the spin-off will be 1648285 Alberta ULC, a wholly-owned subsidiary of Brookfield Asset Management, and following completion of the spin-off will be Brookfield Property Partners Limited, a wholly-owned subsidiary of Brookfield Asset Management;

 

   

“Brookfield” are to Brookfield Asset Management and any subsidiary of Brookfield Asset Management, other than us;

 

   

“Brookfield Asset Management” are to Brookfield Asset Management Inc.;

 

   

“our business” are to our business of owning, operating and investing in commercial property, both directly and through our operating entities;

 

   

“our company” or “our partnership” are to Brookfield Property Partners L.P., a Bermuda exempted limited partnership;

 

   

“commercial property” or “commercial properties” are to commercial and other real property which generates or has the potential to generate income, including office, retail, multi-family and industrial assets, but does not include, among other things, residential land development, home building, construction, real estate advisory and other similar operations or services;

 

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“Holding Entities” are to the direct subsidiaries of the Property Partnership, from time to time, through which it indirectly holds all of our interests in our operating entities;

 

   

“our limited partnership agreement” are to the amended and restated limited partnership agreement of our company to be entered into on or about the date of the spin-off;

 

   

the “Managers” are to the affiliates of Brookfield that provide services to us pursuant to our Master Services Agreement, which are expected to be Brookfield Asset Management (Barbados) Inc., BGRE Partners LP, Brookfield Developments Europe Ltd. and Brookfield Global Real Estate LLC, which are subsidiaries of Brookfield Asset Management, and unless the context otherwise requires, include any other affiliate of Brookfield that is appointed by the Managers from time to time to act as a Manager or otherwise provides services to us pursuant to our Master Services Agreement;

 

   

“Master Services Agreement” are to the master services agreement among the Service Recipients, the Managers, and certain other subsidiaries of Brookfield Asset Management who are parties thereto;

 

   

“operating entities” are to the entities in which the Holding Entities hold interests and that directly or indirectly hold our real estate assets other than entities in which the Holding Entities hold interests for investment purposes only of less than 5% of the equity securities;

 

   

“our portfolio” are to the commercial property assets in our office, retail, multi-family and industrial and opportunistic investment platforms, as applicable;

 

   

the “Property General Partner” are to the general partner of the Property GP LP, which prior to the spin-off will be 1648287 Alberta ULC, a wholly-owned subsidiary of Brookfield Asset Management, and following completion of the spin-off will be Brookfield Property General Partner Limited, a wholly-owned subsidiary of Brookfield Asset Management;

 

   

the “Property GP LP” are to Brookfield Property GP L.P., a wholly-owned subsidiary of Brookfield Asset Management, which serves as the general partner of the Property Partnership;

 

   

the “Property Partnership” are to Brookfield Property L.P.;

 

   

the “Redemption-Exchange Mechanism” are to the mechanism by which Brookfield may request redemption of its Redemption-Exchange Units in whole or in part in exchange for cash, subject to the right of our company to acquire such interests (in lieu of such redemption) in exchange for units of our company, as more fully described in Item 10.B. “Additional Information — Memorandum and Articles of Association — Description of the Property Partnership Limited Partnership Agreement — Redemption-Exchange Mechanism”;

 

   

the “Redemption-Exchange Units” are to units with a right of redemption issued by the Property Partnership to Brookfield in connection with the Redemption-Exchange Mechanism, as more fully described in Item 10.B. “Additional Information — Memorandum and Articles of Association — Description of the Property Partnership Limited Partnership Agreement — Redemption-Exchange Mechanism”;

 

   

“Service Recipients” are to our company, the Property Partnership and the Holding Entities;

 

   

“spin-off” are to the special dividend of our units by Brookfield Asset Management as described under Item 4.A. “Information on the Company — History and Development of the Company — The Spin-Off”; and

 

   

“our units” and “units of our company” are to the non-voting limited partnership units in our company and references to “our unitholders” and “our limited partners” are to the holders of our units.

 

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Historical Performance and Market Data

This Form 20-F contains information relating to our business as well as historical performance and market data for Brookfield Asset Management and certain of its operating platforms. When considering this data, you should bear in mind that historical results and market data may not be indicative of the future results that you should expect from us.

Financial Information

The financial information contained in this Form 20-F is presented in U.S. Dollars and, unless otherwise indicated, has been prepared in accordance with IFRS. All figures are unaudited unless otherwise indicated. In this Form 20-F, all references to “$” are to U.S. Dollars. Canadian Dollars, Australian Dollars, New Zealand Dollars, British Pounds, Euros and Brazilian Reais are identified as “C$”, “A$”, “NZ$”, “£”, “€” and “R$”, respectively.

Use of Non-IFRS Measures

In addition to results reported in accordance with IFRS, we use certain non-IFRS financial measures, such as property net operating income (“NOI”), funds from operations (“FFO”) and total return (“Total Return”) to evaluate our performance and to determine the net asset values of our business. These terms do not have standard meanings prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies. NOI, FFO and Total Return should not be regarded as alternatives to other financial reporting measures prepared in accordance with IFRS and should not be considered in isolation or as substitutes for measures prepared in accordance with IFRS.

We define NOI as revenues from operations of consolidated properties less direct operating costs. NOI is used as a key indicator of performance as it represents a measure over which management has a certain degree of control. We evaluate the performance of management by using a “same store analysis”, which compares the performance of the property portfolio adjusted for the effect of current and prior year dispositions and acquisitions, one-time items and foreign exchange. For a reconciliation of NOI to IFRS measures, see Item 5.A. “Operating and Financial Review and Prospects — Operating Results — Reconciliation of Performance Measures to IFRS Measures”.

We define FFO as income, including equity accounted income, before realized gains (losses), fair value gains (losses) (including equity accounted fair value gains (losses)), income tax expense (benefit), and less non-controlling interests. FFO is an important measure of our operating performance. FFO is a widely recognized measure that is frequently used by securities analysts, investors and other interested parties in the evaluation of real estate entities, particularly those that own and operate commercial properties. Because FFO excludes realized gains (losses), fair value gains (losses) (including equity accounted fair value gains (losses)), and income tax expense (benefit), it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs and interest costs, providing perspective not immediately apparent from net income. For a reconciliation of FFO to net income, see Item 5.A. “Operating and Financial Review and Prospects — Reconciliation of Performance Measures to IFRS Measures”. We reconcile FFO to net income attributable to Brookfield rather than cash flow from operating activities as we believe net income is the most comparable measure.

We define Total Return as income before income tax expense (benefit) and the related non-controlling interests. Total Return is used as a key indicator of performance as we believe that our performance is best assessed by considering FFO plus the increase or decrease in the value of our assets over a period of time because that is the basis on which we make investment decisions and operate our business. For a reconciliation of Total Return to net income, see Item 5.A. “Operating and Financial Review and Prospects — Operating Results — Reconciliation of Performance Measures to IFRS Measures”.

We urge you to review the IFRS financial measures in this Form 20-F, including the financial statements, the notes thereto, our pro forma financial statements and the other financial information contained herein, and not to rely on any single financial measure to evaluate our company.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 20-F contains certain forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Forward-looking statements in this Form 20-F include statements regarding the anticipated benefits of the spin-off, the quality of our assets, our anticipated financial performance, our company’s future growth prospects, our ability to make distributions and the amount of such distributions, the listing and liquidity of our units and our company’s access to capital. In some cases, you can identify forward-looking statements by terms such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “potential”, “should”, “will” and “would” or the negative of those terms or other comparable terminology.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or within our control. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. The following factors, among others, could cause our actual results to vary from our forward-looking statements:

 

   

changes in the general economy;

 

   

the cyclical nature of the real estate industry;

 

   

actions of competitors;

 

   

failure to attract new tenants and enter into renewal or new leases with tenants on favorable terms;

 

   

our ability to derive fully anticipated benefits from future or existing acquisitions, joint ventures, investments or dispositions;

 

   

actions or potential actions that could be taken by our co-venturers, partners, fund investors or co-tenants;

 

   

the bankruptcy, insolvency, credit deterioration or other default of our tenants;

 

   

actions or potential actions that could be taken by Brookfield;

 

   

the departure of some or all of Brookfield’s key professionals;

 

   

the threat of litigation;

 

   

changes to legislation and regulations;

 

   

possible environmental liabilities and other possible liabilities;

 

   

our ability to obtain adequate insurance at commercially reasonable rates;

 

   

our financial condition and liquidity;

 

   

downgrading of credit ratings and adverse conditions in the credit markets;

 

   

changes in financial markets, foreign currency exchange rates, interest rates or political conditions;

 

   

the general volatility of the capital markets and the market price of our units; and

 

   

other factors described in this Form 20-F, including those set forth under Item 3.D. “Key Information — Risk Factors”, Item 5. “Operating and Financial Review and Prospects” and Item 4.B. “Information on the Company — Business Overview”.

Except as required by applicable law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. We qualify any and all of our forward-looking statements by these cautionary factors. Please keep this cautionary note in mind as you read this Form 20-F.

 

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PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

1.A. DIRECTORS AND SENIOR MANAGEMENT

For information regarding our directors and senior management, see Item 6.A. “Directors, Senior Management and Employees — Directors and Senior Management”.

1.B. ADVISERS

Our U.S. and Canadian legal counsel is Torys LLP, 1114 Avenue of the Americas, 23rd Floor, New York, New York 10036. Our Bermuda legal counsel is Appleby, Canon’s Court, 22 Victoria Street, PO Box HM 1179, Hamilton, Bermuda.

1.C. AUDITORS

The BPY General Partner has retained Deloitte & Touche LLP to act as our company’s independent registered chartered accountants. The address for Deloitte & Touche LLP is Brookfield Place, 181 Bay Street, Suite 1400, Toronto, Ontario, M5J 2V1.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3. KEY INFORMATION

3.A. SELECTED FINANCIAL DATA

The following tables present selected financial data for Brookfield’s commercial property operations that will be contributed to us prior to the spin-off. The information in this section is derived from, and should be read in conjunction with, the carve-out financial statements of Brookfield’s commercial property operations as at December 31, 2011 and 2010, and for the years ended December 31, 2011, 2010 and 2009, and the notes thereto, each of which is included elsewhere in this Form 20-F. The information in this section should also be read in conjunction with our unaudited pro forma financial statements (“Unaudited Pro Forma Financial Statements”) as at and for the year ended December 31, 2011 included elsewhere in this Form 20-F.

 

 

(US$ Millions)    2011      2010      2009  

Total revenue

   $         2,820       $         2,270       $         1,999   

Net income (loss)

     3,745         2,109         (734

Net income (loss) attributable to parent company

     2,323         1,026         (477

FFO(1)

     576         426         391   

 

 

 

(US$ Millions)    Dec. 31, 2011      Dec. 31, 2010  

Investment properties

   $         27,594       $         20,960   

Equity accounted investments

     6,888         4,402   

Total assets

     40,317         30,567   

Property debt

     15,387         11,964   

Total equity

     21,494         15,144   

Equity in net assets attributable to parent company

     11,881         7,464   

 

 

(1)

FFO is a non-IFRS financial measure. See Item 5.A. “Operations and Financial Review and Prospects — Reconciliation of Performance Measures to IFRS Measures”.

 

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3.B. CAPITALIZATION AND INDEBTEDNESS

The following table sets forth our company’s pro forma capitalization and indebtedness as at the dates indicated below on an actual basis and as adjusted to give effect to the spin-off as well as the other transactions referred to in the Unaudited Pro Forma Financial Statements included elsewhere in this Form 20-F, as though they had occurred on December 31, 2011.

This information should be read in conjunction with Item 5.A. “Operating and Financial Review and Prospects — Operating Results” and Item 5.B. “Operating and Financial Review and Prospects — Liquidity and Capital Resources”, collectively referred to herein as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, and the Unaudited Pro Forma Financial Statements included elsewhere in this Form 20-F.

 

As at December 31, 2011  
(US$ Millions)   

Actual (1)

    

Pro Forma

 

Total Assets

     -         39,541   

Debt

     

Property debt

     -         14,619   

Capital securities

     -         2,494   

Total Debt

     -         17,113   

Other liabilities

        2,409   

Total Liabilities

     -         19,522   

Equity

     

Partnership equity

     -         10,396   

Non-controlling interests

     -         9,623   

Total Equity

     -         20,019   

Debt to total capitalization (total debt / total assets)

     -         43%   

 

  (1)

Balance sheet of our company as at March 15, 2012, which includes partnership equity of $0.001 which is not presented due to rounding.

3.C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.

3.D. RISK FACTORS

Your holding of units of our company will involve substantial risks. You should carefully consider the following factors in addition to the other information set forth in this Form 20-F. If any of the following risks actually occur, our business, financial condition and results of operations and the value of your units would likely suffer.

Risks Relating to Us and Our Company

Our company is a newly formed partnership with no separate operating history and the historical and pro forma financial information included herein does not reflect the financial condition or operating results we would have achieved during the periods presented, and therefore may not be a reliable indicator of our future financial performance.

Our company was formed on January 3, 2012 and has only recently commenced its activities and has not generated any significant net income to date. Our lack of operating history will make it difficult to assess our ability to operate profitably and make distributions to unitholders. Although some of our assets and operations have been under Brookfield’s control prior to the formation of our company, their combined results have not

 

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previously been reported on a stand-alone basis and the historical and pro forma financial statements included in this Form 20-F may not be indicative of our future financial condition or operating results. We urge you to carefully consider the basis on which the historical and pro forma financial information included herein was prepared and presented.

Our company relies on the Property Partnership and, indirectly, the Holding Entities and our operating entities to provide us with the funds necessary to pay distributions and meet our financial obligations.

Our company’s sole direct investment is its limited partnership interest in the Property Partnership, which owns all of the common shares or equity interests, as applicable, of the Holding Entities, through which we hold all of our interests in the operating entities. Our company has no independent means of generating revenue. As a result, we depend on distributions and other payments from the Property Partnership and, indirectly, the Holding Entities and our operating entities to provide us with the funds necessary to pay distributions on our units and to meet our financial obligations. The Property Partnership, the Holding Entities and our operating entities are legally distinct from our company and some of them are restricted in their ability to pay dividends and distributions or otherwise make funds available to our company pursuant to local law, regulatory requirements and their contractual agreements. Any other entities through which we may conduct operations in the future will also be legally distinct from our company and may be similarly restricted in their ability to pay dividends and distributions or otherwise make funds available to our company under certain conditions. The Property Partnership, the Holding Entities and our operating entities will generally be required to service their debt obligations before making distributions to us or their parent entity, as applicable, thereby reducing the amount of our cash flow available to pay distributions on our units, fund working capital and satisfy other needs.

We anticipate that the only distributions our company will receive in respect of our limited partnership interests in the Property Partnership will consist of amounts that are intended to assist our company in making distributions to our unitholders in accordance with our company’s distribution policy and to allow our company to pay expenses as they become due.

We are subject to foreign currency risk and our risk management activities may adversely affect the performance of our operations.

Some of our assets and operations are in countries where the U.S. Dollar is not the functional currency. These operations pay distributions in currencies other than the U.S. Dollar which we must convert to U.S. Dollars prior to making distributions on our units. A significant depreciation in the value of such foreign currencies may have a material adverse effect on our business, financial condition and results of operations.

When managing our exposure to such market risks, we may use forward contracts, options, swaps, caps, collars and floors or pursue other strategies or use other forms of derivative instruments. The success of any hedging or other derivative transactions that we enter into generally will depend on our ability to structure contracts that appropriately offset our risk position. As a result, while we may enter into such transactions in order to reduce our exposure to market risks, unanticipated market changes may result in poorer overall investment performance than if the transaction had not been executed. Such transactions may also limit the opportunity for gain if the value of a hedged position increases.

 

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Our company is not, and does not intend to become, regulated as an investment company under the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions) and if our company were deemed an “investment company” under the U.S. Investment Company Act of 1940, applicable restrictions would make it impractical for us to operate as contemplated.

The U.S. Investment Company Act of 1940 and the rules thereunder (and similar legislation in other jurisdictions) provide certain protections to investors and impose certain restrictions on companies that are registered as investment companies. Among other things, such rules limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities and impose certain governance requirements. Our company has not been and does not intend to become regulated as an investment company and our company intends to conduct its activities so it will not be deemed to be an investment company under the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions). In order to ensure that our company is not deemed to be an investment company, we may be required to materially restrict or limit the scope of our operations or plans, we will be limited in the types of acquisitions that we may make and we may need to modify our organizational structure or dispose of assets that we would not otherwise dispose of. Moreover, if anything were to happen which would potentially cause our company to be deemed an investment company under the U.S. Investment Company Act of 1940, it would be impractical for us to operate as intended, agreements and arrangements between and among us and Brookfield would be impaired and our business, financial condition and results of operations would be materially adversely affected. Accordingly, we would be required to take extraordinary steps to address the situation, such as the amendment or termination of our Master Services Agreement, the restructuring of our company and the Holding Entities, the amendment of our limited partnership agreement or the termination of our company, any of which would materially adversely affect the value of our units. In addition, if our company were deemed to be an investment company under the U.S. Investment Company Act of 1940, it would be taxable as a corporation for U.S. federal income tax purposes, and such treatment would materially adversely affect the value of our units. See Item 10.E. “Additional Information — Taxation — U.S. Tax Considerations — Partnership Status of Our Company and the Property Partnership”.

Our company is a “foreign private issuer” under U.S. securities laws and as a result is subject to disclosure obligations different from requirements applicable to U.S. domestic registrants listed on the New York Stock Exchange, or NYSE.

Although our company is subject to the periodic reporting requirement of the U.S. Securities Exchange Act, as amended, or the Exchange Act, the periodic disclosure required of foreign private issuers under the Exchange Act is different from periodic disclosure required of U.S. domestic registrants. Therefore, there may be less publicly available information about us than is regularly published by or about other public companies in the United States and our company is exempt from certain other sections of the Exchange Act that U.S. domestic registrants would otherwise be subject to, including the requirement to provide our unitholders with information statements or proxy statements that comply with the Exchange Act. In addition, insiders and large unitholders of our company will not be obligated to file reports under Section 16 of the Exchange Act and certain of the governance rules imposed by the NYSE will be inapplicable to our company.

Our company is expected to be an “SEC foreign issuer” under Canadian securities regulations and exempt from certain requirements of Canadian securities laws.

Although our company will become a reporting issuer in Canada, we expect it will be an “SEC foreign issuer” and exempt from certain Canadian securities laws relating to continuous disclosure obligations and proxy solicitation if our company complies with certain reporting requirements applicable in the United States, provided that the relevant documents filed with the U.S. Securities and Exchange Commission, or the SEC, are filed in Canada and sent to our company’s unitholders in Canada to the extent and in the manner and within the time required by applicable U.S. requirements. Therefore, there may be less publicly available information in Canada about us than is regularly published by or about other reporting issuers in Canada.

 

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Risks Relating to Our Business

Our economic performance and the value of our assets are subject to the risks incidental to the ownership and operation of real estate assets.

Our economic performance, the value of our assets and, therefore, the value of our units are subject to the risks normally associated with the ownership and operation of real estate assets, including but not limited to:

 

   

downturns and trends in the national, regional and local economic conditions where our properties and other assets are located;

 

   

the cyclical nature of the real estate industry;

 

   

local real estate market conditions, such as an oversupply of commercial properties, including space available by sublease, or a reduction in demand for such properties;

 

   

changes in interest rates and the availability of financing;

 

   

competition from other properties;

 

   

changes in market rental rates and our ability to rent space on favorable terms;

 

   

the bankruptcy, insolvency, credit deterioration or other default of our tenants;

 

   

the need to periodically renovate, repair and re-lease space and the costs thereof;

 

   

increases in maintenance, insurance and operating costs;

 

   

civil disturbances, earthquakes and other natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses;

 

   

the decrease in the attractiveness of our properties to tenants;

 

   

the decrease in the underlying value of our properties; and

 

   

certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges that must be made regardless of whether a property is producing sufficient income to service these expenses.

We are dependent upon the economic conditions of the markets where our assets are located.

We are affected by local, regional, national and international economic conditions and other events and occurrences that affect the markets in which we own assets. A protracted decline in economic conditions will cause downward pressure on our operating margins and asset values as a result of lower demand for space.

Substantially all of our properties are located in North America, Europe, Australia and Brazil. A prolonged downturn in one or more of these economies or the economy of any other country where we own property would result in reduced demand for space and number of prospective tenants and will affect the ability of our properties to generate significant revenue. If there is an increase in operating costs resulting from inflation and other factors, we may not be able to offset such increases by increasing rents.

Additionally, as part of our strategy for our office property platform is to focus on markets underpinned by major financial, energy and professional services businesses, a significant downturn in one or more of the industries in which these businesses operate would also adversely affect our results of operations.

 

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We face risks associated with the use of debt to finance our business, including refinancing risk.

We incur debt in the ordinary course of our business and therefore are subject to the risks associated with debt financing. These risks, including the following, may adversely affect our financial condition and results of operations:

 

   

cash flows may be insufficient to meet required payments of principal and interest;

 

   

payments of principal and interest on borrowings may leave insufficient cash resources to pay operating expenses;

 

   

we may not be able to refinance indebtedness on our properties at maturity due to business and market factors, including: disruptions in the capital and credit markets; the estimated cash flows of our properties and other assets; the value of our properties and other assets; and financial, competitive, business and other factors, including factors beyond our control; and

 

   

if refinanced, the terms of a refinancing may not be as favorable as the original terms of the related indebtedness.

Our operating entities have a significant degree of leverage on their assets. Highly leveraged assets are inherently more sensitive to declines in revenues, increases in expenses and interest rates, and adverse market conditions. A leveraged company’s income and net assets also tend to increase or decrease at a greater rate than would otherwise be the case if money had not been borrowed. As a result, the risk of loss associated with a leveraged company, all other things being equal, is generally greater than for companies with comparatively less debt.

We rely on our operating entities to provide our company with the funds necessary to make distributions on our units and meet our financial obligations. The leverage on our assets may affect the funds available to our company if the terms of the debt impose restrictions on the ability of our operating entities to make distributions to our company. In addition, our operating entities will generally have to service their debt obligations before making distributions to our company or their parent entity.

Leverage may also result in a requirement for liquidity, which may force the sale of assets at times of low demand and/or prices for such assets.

We may also incur indebtedness under future credit facilities, such as the revolving credit facility we expect to obtain from Brookfield, or other debt-like instruments, in addition to any asset-level indebtedness. We may also issue debt or debt-like instruments in the market in the future, which may or may not be rated. Should such debt or debt-like instruments be rated, a credit downgrade will have an adverse impact on the cost of such debt.

If we are unable to refinance our indebtedness on acceptable terms, or at all, we may need to dispose of one or more of our properties or other assets upon disadvantageous terms. In addition, prevailing interest rates or other factors at the time of refinancing could increase our interest expense, and if we mortgage property to secure payment of indebtedness and are unable to make mortgage payments, the mortgagee could foreclose upon such property or appoint a receiver to receive an assignment of our rents and leases. This may adversely affect our ability to make distributions or payments to our unitholders and lenders.

Restrictive covenants in our indebtedness may limit management’s discretion with respect to certain business matters.

Instruments governing any of our indebtedness or indebtedness of our operating entities or their subsidiaries may contain restrictive covenants limiting our discretion with respect to certain business matters. These covenants could place significant restrictions on, among other things, our ability to create liens or other encumbrances, to make distributions to our unitholders or make certain other payments, investments, loans and guarantees and to sell or otherwise dispose of assets and merge or consolidate with another entity. These covenants could also require us to meet certain financial ratios and financial condition tests. A failure to comply

with any such covenants could result in a default which, if not cured or waived, could permit acceleration of the relevant indebtedness.

 

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If we are unable to manage our interest rate risk effectively, our cash flows and operating results may suffer.

Advances under credit facilities and certain property-level mortgage debt bear interest at a variable rate. We may incur further indebtedness in the future that also bears interest at a variable rate or we may be required to refinance our debt at higher rates. In addition, though we attempt to manage interest rate risk, there can be no assurance that we will hedge such exposure effectively or at all in the future. Accordingly, increases in interest rates above that which we anticipate based upon historical trends would adversely affect our cash flows.

We face potential adverse effects from tenant defaults, bankruptcies or insolvencies.

A commercial tenant may experience a downturn in its business, which could cause the loss of that tenant or weaken its financial condition and result in the tenant’s inability to make rental payments when due or, for retail tenants, a reduction in percentage rent payable. If a tenant defaults, we may experience delays and incur costs in enforcing our rights as landlord and protecting our investments.

We cannot evict a tenant solely because of its bankruptcy. In addition, in certain jurisdictions where we own properties, a court may authorize a tenant to reject and terminate its lease. In such a case, our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. In any event, it is unlikely that a bankrupt or insolvent tenant will pay the full amount it owes under a lease. The loss of rental payments from tenants and costs of re-leasing would adversely affect our cash flows and results of operations. In the case of our retail properties, the bankruptcy or insolvency of an anchor tenant or tenant with stores at many of our properties would cause us to suffer lower revenues and operational difficulties, including difficulties leasing the remainder of the property. Significant expenses associated with each property, such as mortgage payments, real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the property. In the event of a significant number of lease defaults and/or tenant bankruptcies, our cash flows may not be sufficient to pay cash distributions to our unitholders and repay maturing debt or other obligations.

Reliance on significant tenants could adversely affect our results of operations.

Many of our properties are occupied by one or more significant tenants and, therefore, our revenues from those properties will be materially dependent on the creditworthiness and financial stability of those tenants. Our business would be adversely affected if any of those tenants failed to renew certain of their significant leases, became insolvent, declared bankruptcy or otherwise refused to pay rent in a timely fashion or at all. In the event of a default by one or more significant tenants, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing the property. If a lease of a significant tenant is terminated, it may be difficult, costly and time consuming to attract new tenants and lease the property for the rent previously received.

Our inability to enter into renewal or new leases with tenants on favorable terms or at all for all or a substantial portion of space that is subject to expiring leases would adversely affect our cash flows and operating results.

Our properties generate revenue through rental payments made by tenants of the properties. Upon the expiry of any lease, there can be no assurance that the lease will be renewed or the tenant replaced. The terms of any renewal or replacement lease may be less favorable to us than the existing lease. We would be adversely affected, in particular, if any major tenant ceases to be a tenant and cannot be replaced on similar or better terms or at all. Additionally, we may not be able to lease our properties to an appropriate mix of tenants. Retail tenants may negotiate leases containing exclusive rights to sell particular types of merchandise or services within a particular retail property. When leasing other space after the vacancy of a retail tenant, these provisions may limit the number and types of prospective tenants for the vacant space.

 

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Our competitors may adversely affect our ability to lease our properties which may cause our cash flows and operating results to suffer.

Each segment of the real estate industry is competitive. Numerous other developers, managers and owners of commercial properties compete with us in seeking tenants and, in the case of our multi-family properties, there are numerous housing alternatives which compete with our properties in attracting residents. Some of the properties of our competitors may be newer, better located or better capitalized. These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to make space available at lower prices than the space in our properties, particularly if there is an oversupply of space available in the market. Competition for tenants could have an adverse effect on our ability to lease our properties and on the rents that we may charge or concessions that we must grant. If our competitors adversely impact our ability to lease our properties, our cash flows and operating results may suffer.

Our ability to realize our strategies and capitalize on our competitive strengths are dependent on the ability of our operating entities to effectively operate our large group of commercial properties, maintain good relationships with tenants, and remain well-capitalized, and our failure to do any of the foregoing would affect our ability to compete effectively in the markets in which we do business.

Our insurance may not cover some potential losses or may not be obtainable at commercially reasonable rates, which could adversely affect our financial condition and results of operations.

We maintain insurance on our properties in amounts and with deductibles that we believe are in line with what owners of similar properties carry; however, our insurance may not cover some potential losses or may not be obtainable at commercially reasonable rates in the future.

There also are certain types of risks (such as war, environmental contamination such as toxic mold, and lease and other contract claims) which are either uninsurable or not economically insurable. Should any uninsured or underinsured loss occur, we could lose our investment in, and anticipated profits and cash flows from, one or more properties, and we would continue to be obligated to repay any recourse mortgage indebtedness on such properties.

Possible terrorist activity could adversely affect our financial condition and results of operations and our insurance may not cover some losses due to terrorism or may not be obtainable at commercially reasonable rates.

Possible terrorist attacks in the markets where our properties are located may result in declining economic activity, which could reduce the demand for space at our properties, reduce the value of our properties and could harm the demand for goods and services offered by our tenants.

Additionally, terrorist activities could directly affect the value of our properties through damage, destruction or loss. Our office portfolio is concentrated in large metropolitan areas, some of which have been or may be perceived to be subject to terrorist attacks. Many of our office properties consist of high-rise buildings, which may also be subject to this actual or perceived threat. Our insurance may not cover some losses due to terrorism or may not be obtainable at commercially reasonable rates.

We are subject to risks relating to development and redevelopment projects.

On a strategic and selective basis, we may develop and redevelop properties. The real estate development and redevelopment business involves significant risks that could adversely affect our business, financial condition and results of operations, including the following:

 

   

we may not be able to complete construction on schedule or within budget, resulting in increased debt service expense and construction costs and delays in leasing the properties;

 

   

we may not have sufficient capital to proceed with planned redevelopment or expansion activities;

 

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we may abandon redevelopment or expansion activities already under way, which may result in additional cost recognition;

 

   

we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations;

 

   

we may not be able to lease properties at all or on favorable terms, or occupancy rates and rents at a completed project might not meet projections and, therefore, the project might not be profitable;

 

   

construction costs, total investment amounts and our share of remaining funding may exceed our estimates and projects may not be completed and delivered as planned; and

 

   

upon completion of construction, we may not be able to obtain, or obtain on advantageous terms, permanent financing for activities that we have financed through construction loans.

We are subject to risks that affect the retail environment.

We are subject to risks that affect the retail environment, including unemployment, weak income growth, lack of available consumer credit, industry slowdowns and plant closures, low consumer confidence, increased consumer debt, poor housing market conditions, adverse weather conditions, natural disasters and the need to pay down existing obligations. All of these factors could negatively affect consumer spending and adversely affect the sales of our retail tenants. This could have an unfavorable effect on our operations and our ability to attract new retail tenants.

In addition, our retail tenants face competition from retailers at other regional malls, outlet malls and other discount shopping centers, discount shopping clubs, catalogue companies, and through internet sales and telemarketing. Competition of these types could reduce the percentage rent payable by certain retail tenants and adversely affect our revenues and cash flows. Additionally, our retail tenants are dependent on perceptions by retailers and shoppers of the safety, convenience and attractiveness of our retail properties. If retailers and shoppers perceive competing properties and other retailing options such as the internet to be more convenient or of a higher quality, our revenues may be adversely affected.

Some of our retail lease agreements include a co-tenancy provision which allows the mall tenant to pay a reduced rent amount and, in certain instances, terminate the lease, if we fail to maintain certain occupancy levels at the mall. In addition, certain of our tenants have the ability to terminate their leases prior to the lease expiration date if their sales do not meet agreed upon thresholds. Therefore, if occupancy, tenancy or sales fall below certain thresholds, rents we are entitled to receive from our retail tenants would be reduced and our ability to attract new tenants may be limited.

The computation of cost reimbursements from our retail tenants for common area maintenance, insurance and real estate taxes is complex and involves numerous judgments including interpretation of lease terms and other tenant lease provisions. Most tenants make monthly fixed payments of common area maintenance, insurance, real estate taxes and other cost reimbursements and, after the end of the calendar year, we compute each tenant’s final cost reimbursements and issue a bill or credit for the full amount, after considering amounts paid by the tenant during the year. The billed amounts could be disputed by the tenant or become the subject of a tenant audit or even litigation. There can be no assurance that we will collect all or any portion of these amounts.

We are subject to risks associated with the multi-family residential industry.

We are subject to risks associated with the multi-family residential industry, including the level of mortgage interest rates which may encourage tenants to purchase rather than lease and housing and governmental programs that provide assistance and rent subsidies to tenants. If the demand for multi-family properties is reduced, income generated from our multi-family residential properties and the underlying value of such properties may be adversely affected.

 

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In addition, certain jurisdictions regulate the relationship of an owner and its residential tenants. Commonly, these laws require a written lease, good cause for eviction, disclosure of fees, and notification to residents of changed land use, while prohibiting unreasonable rules, retaliatory evictions, and restrictions on a resident’s choice of landlords. Apartment building owners have been the subject of lawsuits under various “Landlord and Tenant Acts” and other general consumer protection statutes for coercive, abusive or unconscionable leasing and sales practices. If we become subject to litigation, the outcome of any such proceedings may materially adversely affect us and may continue for long periods of time. A few jurisdictions may offer more significant protection to residential tenants. In addition to state or provincial regulation of the landlord-tenant relationship, numerous towns and municipalities impose rent control on apartment buildings. The imposition of rent control on our multi-family residential units could have a materially adverse effect on our results of operations.

If we are unable to recover from a business disruption on a timely basis our financial condition and results of operations could be adversely affected.

Our business is vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. If we are unable to recover from a business disruption on a timely basis, our financial condition and results of operations would be adversely affected. We may also incur additional costs to remedy damages caused by such disruptions.

Because certain of our assets are illiquid, we may not be able to sell these assets when appropriate or when desired.

Large commercial properties like the ones that we own can be hard to sell, especially if local market conditions are poor. Such illiquidity could limit our ability to diversify our assets promptly in response to changing economic or investment conditions.

Additionally, financial difficulties of other property owners resulting in distressed sales could depress real estate values in the markets in which we operate in times of illiquidity. These restrictions reduce our ability to respond to changes in the performance of our assets and could adversely affect our financial condition and results of operations.

We face risks associated with property acquisitions.

Competition from other well-capitalized real estate investors, including both publicly-traded real estate investment trusts and institutional investment funds, may significantly increase the purchase price of, or prevent us from acquiring, a desired property. Acquisition agreements will typically contain conditions to closing, including completion of due diligence to our satisfaction or other conditions that are not within our control, which may not be satisfied. Acquired properties may be located in new markets where we may have limited knowledge and understanding of the local economy, an absence of business relationships in the area or unfamiliarity with local government and applicable laws and regulations. We may be unable to finance acquisitions on favorable terms or newly acquired properties may fail to perform as expected. We may underestimate the costs necessary to bring an acquired property up to standards established for its intended market position or we may be unable to quickly and efficiently integrate new acquisitions into our existing operations. We may also acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. Each of these factors could have an adverse effect on our results of operations and financial condition.

 

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We do not control certain of our operating entities, including General Growth Properties, Inc., or GGP and Canary Wharf, and therefore we may not be able to realize some or all of the benefits that we expect to realize from those entities.

We do not have control of certain of our operating entities, including GGP and Canary Wharf. Our interests in those entities subject us to the operating and financial risks of their businesses, the risk that the relevant company may make business, financial or management decisions that we do not agree with, and the risk that we may have differing objectives than the entities in which we have interests. Because we do not have the ability to exercise control over those entities, we may not be able to realize some or all of the benefits that we expect to realize from those entities. For example, we may not be able to cause such operating entities to make distributions to us in the amount or at the time that we need or want such distributions. In addition, we rely on the internal controls and financial reporting controls of the public companies in which we invest and the failure of such companies to maintain effective controls or comply with applicable standards may adversely affect us.

We do not have sole control over the properties that we own with co-venturers, partners, fund investors or co-tenants or over the revenues and certain decisions associated with those properties, which may limit our flexibility with respect to these investments.

We participate in joint ventures, partnerships, funds and co-tenancies affecting many of our properties. Such investments involve risks not present were a third party not involved, including the possibility that our co-venturers, partners, fund investors or co-tenants might become bankrupt or otherwise fail to fund their share of required capital contributions. The bankruptcy of one of our co-venturers, partners, fund investors or co-tenants could materially and adversely affect the relevant property or properties. Pursuant to bankruptcy laws, we could be precluded from taking some actions affecting the estate of the other investor without prior court approval which would, in most cases, entail prior notice to other parties and a hearing. At a minimum, the requirement to obtain court approval may delay the actions we would or might want to take. If the relevant joint venture or other investment entity has incurred recourse obligations, the discharge in bankruptcy of one of the other investors might result in our ultimate liability for a greater portion of those obligations than would otherwise be required.

Additionally, our co-venturers, partners, fund investors or co-tenants might at any time have economic or other business interests or goals which are inconsistent with those of our company, and we could become engaged in a dispute with any of them that might affect our ability to develop or operate a property. In addition, we do not have sole control of certain major decisions relating to these properties, including decisions relating to: the sale of the properties; refinancing; timing and amount of distributions of cash from such properties; and capital improvements.

In some instances where we are the property manager for a joint venture, the joint venture retains joint approval rights over various material matters such as the budget for the property, specific leases and our leasing plan. Moreover, in certain property management arrangements the other venturer can terminate the property management agreement in limited circumstances relating to enforcement of the property managers’ obligations. In addition, the sale or transfer of interests in some of our joint ventures and partnerships is subject to rights of first refusal or first offer and some joint venture and partnership agreements provide for buy-sell or similar arrangements. Such rights may be triggered at a time when we may not want to sell but we may be forced to do so because we may not have the financial resources at that time to purchase the other party’s interest. Such rights may also inhibit our ability to sell an interest in a property or a joint venture or partnership within our desired time frame or on any other desired basis.

We are subject to risks associated with commercial property loans.

We have interests in loans or participations in loans, or securities whose underlying performance depends on loans made with respect to a variety of commercial real estate. Such interests are subject to normal credit risks as

 

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well as those generally not associated with traditional debt securities. The ability of the borrowers to repay the loans will typically depend upon the successful operation of the related real estate project and the availability of financing. Any factors which affect the ability of the project to generate sufficient cash flow could have a material effect on the value of these interests. Such factors include, but are not limited to: the uncertainty of cash flow to meet fixed obligations; adverse changes in general and local economic conditions, including interest rates and local market conditions; tenant credit risks; the unavailability of financing, which may make the operation, sale, or refinancing of a property difficult or unattractive; vacancy and occupancy rates; construction and operating costs; regulatory requirements, including zoning, rent control and real and personal property tax laws, rates and assessments; environmental concerns; project and borrower diversification; and uninsured losses. Security underlying such interests will generally be in a junior or subordinate position to senior financing. In certain circumstances, in order to protect our interest, we may decide to repay all or a portion of the senior indebtedness relating to the particular interests or to cure defaults with respect to such senior indebtedness.

We invest in mezzanine debt, which can rank below other senior lenders.

We invest in mezzanine debt interests in real estate companies and properties whose capital structures have significant debt ranking ahead of our investments. Our investments will not always benefit from the same or similar financial and other covenants as those enjoyed by the debt ranking ahead of our investments or benefit from cross-default provisions. Moreover, it is likely that we will be restricted in the exercise of our rights in respect of our investments by the terms of subordination agreements with the debt ranking ahead of the mezzanine capital. Accordingly, we may not be able to take the steps necessary to protect our investments in a timely manner or at all and there can be no assurance that the rate of return objectives of any particular investment will be achieved. To protect our original investment and to gain greater control over the underlying assets, we may elect to purchase the interest of a senior creditor or take an equity interest in the underlying assets, which may require additional investment requiring us to expend additional capital.

We are subject to risks related to syndicating or selling participations in our interests.

The strategy of the finance funds in which we have interests depends, in part, upon syndicating or selling participations in senior interests, either through capital markets collateralized debt obligation transactions or otherwise. If the finance funds cannot do so on terms that are favorable to us, we may not make the returns we anticipate.

We face risks relating to the legal aspects of mortgage loans and may be subject to liability as a lender.

Certain interests acquired by us will be subject to risks relating to the legal aspects of mortgage loans. Depending upon the applicable law governing mortgage loans (which laws may differ substantially), we may be adversely affected by the operation of law (including state or provincial law) with respect to our ability to foreclose mortgage loans, the borrower’s right of redemption, the enforceability of assignments of rents, due on sale and acceleration clauses in loan instruments, as well as other creditors’ rights provided in such documents. In addition, we may be subject to liability as a lender with respect to our negotiation, administration, collection and/or foreclosure of mortgage loans. As a lender, we may also be subject to penalties for violation of usury limitations, which penalties may be triggered by contracting for, charging or receiving usurious interest. Bankruptcy laws may delay our ability to realize on our collateral or may adversely affect the priority thereof through doctrines such as equitable subordination or may result in a restructuring of the debt through principles such as the “cramdown” provisions of applicable bankruptcy laws.

We have significant interests in public companies, and changes in the market prices of the stock of such public companies, particularly during times of increased market volatility, could have a negative impact on our financial condition and results of operations.

We hold significant interests in public companies, and changes in the market prices of the stock of such public companies could have a material impact on our financial condition and results of operations. Global securities markets have been highly volatile, and continued volatility may have a material negative impact on our consolidated financial position and results of operations.

 

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We have significant interests in Brookfield-sponsored real estate opportunity and finance funds, and poor investment returns in these funds could have a negative impact on our financial condition and results of operations.

We have, and expect to continue to have in the future, significant interests in Brookfield-sponsored real estate opportunity and finance funds, and poor investment returns in these funds, due to either market conditions or underperformance (relative to their competitors or to benchmarks), would negatively affect our financial condition and results of operations. In addition, interests in such funds are subject to the risks inherent in the ownership and operation of real estate and real estate-related businesses and assets generally.

Our ownership of underperforming real estate properties involves significant risks and potential additional liabilities.

We hold interests in certain real estate properties with weak financial conditions, poor operating results, substantial financial needs, negative net worth or special competitive problems, or that are over-leveraged. Our ownership of underperforming real estate properties involves significant risks and potential additional liabilities. Our exposure to such underperforming properties may be substantial in relation to the market for those interests and distressed assets may be illiquid and difficult to sell or transfer. As a result, it may take a number of years for the fair value of such interests to ultimately reflect their intrinsic value as perceived by us.

We face risks relating to the jurisdictions of our operations.

We own and operate commercial properties in a number of jurisdictions, including but not limited to North America, Europe, Australia and Brazil. Our operations will be subject to significant political, economic and financial risks, which vary by jurisdiction, and may include:

 

   

changes in government policies or personnel;

 

   

restrictions on currency transfer or convertibility;

 

   

changes in labor relations;

 

   

political instability and civil unrest;

 

   

fluctuations in foreign exchange rates;

 

   

challenges of complying with a wide variety of foreign laws including corporate governance, operations, taxes and litigation;

 

   

differing lending practices;

 

   

differences in cultures;

 

   

changes in applicable laws and regulations that affect foreign operations;

 

   

difficulties in managing international operations;

 

   

obstacles to the repatriation of earnings and cash; and

 

   

breach or repudiation of important contractual undertakings by governmental entities and expropriation and confiscation of assets and facilities for less than fair market value.

 

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We are subject to possible environmental liabilities and other possible liabilities.

As an owner and manager of real property, we are subject to various laws relating to environmental matters. These laws could hold us liable for the costs of removal and remediation of certain hazardous substances or wastes released or deposited on or in our properties or disposed of at other locations. These costs could be significant and would reduce cash available for our business. The failure to remove or remediate such substances could adversely affect our ability to sell our properties or our ability to borrow using real estate as collateral, and could potentially result in claims or other proceedings against us. Environmental laws and regulations can change rapidly and we may become subject to more stringent environmental laws and regulations in the future. Compliance with more stringent environmental laws and regulations could have an adverse effect on our business, financial condition or results of operations.

Regulations under building codes and human rights codes generally require that public buildings be made accessible to disabled persons. Non-compliance could result in the imposition of fines by the government or the award of damages to private litigants. If we are required to make substantial alterations or capital expenditures to one or more of our properties, it could adversely affect our financial condition and results of operations.

We may also incur significant costs complying with other regulations. Our properties are subject to various federal, state, provincial and local regulatory requirements, such as state, provincial and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or be subject to private damage awards. Existing requirements may change and compliance with future requirements may require significant unanticipated expenditures that may affect our cash flows and results from operations.

We may suffer a significant loss resulting from fraud, other illegal acts and inadequate or failed internal processes or systems.

We may suffer a significant loss resulting from fraud, other illegal acts and inadequate or failed internal processes or systems. We operate in different markets and rely on our employees to follow our policies and processes as well as applicable laws in their activities. Risk of illegal acts or failed systems is managed through our infrastructure, controls, systems, policies and people, complemented by central groups focusing on enterprise-wide management of specific operational risks such as fraud, trading, outsourcing, and business disruption, as well as people and systems risks. Failure to manage these risks could result in direct or indirect financial loss, reputational impact, regulatory censure or failure in the management of other risks such as credit or market risk.

We may be subject to litigation.

In the ordinary course of our business, we may be subject to litigation from time to time. The outcome of any such proceedings may materially adversely affect us and may continue without resolution for long periods of time. Any litigation may consume substantial amounts of our management’s time and attention, and that time and the devotion of these resources to litigation may, at times, be disproportionate to the amounts at stake in the litigation.

The acquisition, ownership and disposition of real property expose us to certain litigation risks which could result in losses, some of which may be material. Litigation may be commenced with respect to a property we have acquired in relation to activities that took place prior to our acquisition of such property. In addition, at the time of disposition of an individual property, a potential buyer may claim that it should have been afforded the opportunity to purchase the asset or alternatively that such buyer should be awarded due diligence expenses incurred or statutory damages for misrepresentation relating to disclosures made, if such buyer is passed over in favor of another as part of our efforts to maximize sale proceeds. Similarly, successful buyers may later sue us under various damage theories, including those sounding in tort, for losses associated with latent defects or other problems not uncovered in due diligence. We may also be exposed to litigation resulting from the activities of our tenants or their customers.

 

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We participate in transactions and make tax calculations for which the ultimate tax determination may be uncertain.

We participate in many transactions and make tax calculations during the course of our business for which the ultimate tax determination is uncertain. While we believe we maintain provisions for uncertain tax positions that appropriately reflect our risk, these provisions are made using estimates of the amounts expected to be paid based on a qualitative assessment of several factors. It is possible that liabilities associated with one or more transactions may exceed our provisions due to audits by, or litigation with, relevant taxing authorities which may materially affect our financial condition and results of operations.

Risks Relating to Our Relationship with Brookfield

Brookfield will exercise substantial influence over us and we are highly dependent on the Managers.

Brookfield is the sole shareholder of the BPY General Partner. As a result of its ownership of the BPY General Partner, Brookfield will be able to control the appointment and removal of the BPY General Partner’s directors and, accordingly, exercise substantial influence over us. In addition, the Managers, wholly-owned subsidiaries of Brookfield Asset Management, will provide management services to us pursuant to our Master Services Agreement. Our company and the Property Partnership do not currently have any senior management and will depend on the management and administration services provided by the Managers. Brookfield personnel and support staff who provide services to us are not required to have as their primary responsibility the management and administration of our company or the Property Partnership or to work exclusively for either our company or the Property Partnership. Any failure to effectively manage our business or to implement our strategy could have a material adverse effect on our business, financial condition and results of operations.

Brookfield has no obligation to source acquisition opportunities for us and we may not have access to all acquisitions of commercial properties that Brookfield identifies.

Our ability to grow will depend in part on Brookfield identifying and presenting us with acquisition opportunities. We were established by Brookfield Asset Management as the primary entity through which Brookfield Asset Management will own and operate its commercial property businesses on a global basis. However, Brookfield has no obligation to source acquisition opportunities specifically for us. In addition, Brookfield has not agreed to commit to us any minimum level of dedicated resources for the pursuit of acquisitions of commercial property other than as contemplated by our Master Services Agreement. There are a number of factors which could materially and adversely impact the extent to which acquisition opportunities are made available to us by Brookfield.

For example:

 

   

Brookfield will only recommend acquisition opportunities that it believes are suitable for us;

 

   

the same professionals within Brookfield’s organization who are involved in acquisitions of commercial property have other responsibilities within Brookfield’s broader asset management business. Limits on the availability of such individuals will likewise result in a limitation on the availability of acquisition opportunities for us;

 

   

Brookfield may consider certain assets or operations that have both infrastructure related characteristics and commercial property related characteristics to be infrastructure and not commercial property;

 

   

Brookfield may not consider an acquisition of commercial property that comprises part of a broader enterprise to be suitable for us, unless the primary purpose of such acquisition, as determined by Brookfield acting in good faith, is to acquire the underlying commercial property;

 

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legal, regulatory, tax and other commercial considerations will be an important factor in determining whether an opportunity is suitable for us; and

 

   

in addition to structural limitations, the determination of whether a particular acquisition is suitable for us is highly subjective and is dependent on a number of factors including our liquidity position at the time, the risk profile of the opportunity, its fit with the balance of our business and other factors.

The departure of some or all of Brookfield’s professionals could prevent us from achieving our objectives.

We will depend on the diligence, skill and business contacts of Brookfield’s professionals and the information and opportunities they generate during the normal course of their activities. Our future success will depend on the continued service of these individuals, who are not obligated to remain employed with Brookfield. Brookfield has experienced departures of key professionals in the past and may do so in the future, and we cannot predict the impact that any such departures will have on our ability to achieve our objectives. The departure of a significant number of Brookfield’s professionals for any reason, or the failure to appoint qualified or effective successors in the event of such departures, could have a material adverse effect on our ability to achieve our objectives. Our limited partnership agreement and our Master Services Agreement do not require Brookfield to maintain the employment of any of its professionals or to cause any particular professionals to provide services to us or on our behalf.

The control of the BPY General Partner may be transferred to a third party without unitholder consent.

The BPY General Partner may transfer its general partnership interest in our company to a third party, including in a merger or consolidation or in a transfer of all or substantially all of its assets, without the consent of our unitholders. Furthermore, at any time, the sole shareholder of the BPY General Partner may sell or transfer all or part of its shares in the BPY General Partner without the approval of our unitholders. If a new owner were to acquire ownership of the BPY General Partner and to appoint new directors or officers of its own choosing, it would be able to exercise substantial influence over our policies and procedures and exercise substantial influence over our management, our distributions and the types of acquisitions that we make. Such changes could result in our company’s capital being used to make acquisitions in which Brookfield has no involvement or which are substantially different from our targeted acquisitions. Additionally, we cannot predict with any certainty the effect that any transfer in the ownership of the BPY General Partner would have on the trading price of our units or our ability to raise capital or make investments in the future, because such matters would depend to a large extent on the identity of the new owner and the new owner’s intentions with regards to us. As a result, the future of our company would be uncertain and our financial condition and results of operations may suffer.

Brookfield will not owe our unitholders any fiduciary duties under our Master Services Agreement or our other arrangements with Brookfield.

Our Master Services Agreement and our other arrangements with Brookfield do not impose on Brookfield any duty (statutory or otherwise) to act in the best interests of the Service Recipients, nor do they impose other duties that are fiduciary in nature. As a result, the BPY General Partner, a wholly-owned subsidiary of Brookfield Asset Management, in its capacity as our general partner, will have sole authority to enforce the terms of such agreements and to consent to any waiver, modification or amendment of their provisions.

Our limited partnership agreement and the Property Partnership’s limited partnership agreement contain various provisions that modify the fiduciary duties that might otherwise be owed to our company and our unitholders, including when conflicts of interest arise. These modifications may be important to our unitholders because they restrict the remedies available for actions that might otherwise constitute a breach of fiduciary duty and permit the BPY General Partner and the Property General Partner to take into account the interests of third

 

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parties, including Brookfield, when resolving conflicts of interest. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield — Conflicts of Interest and Fiduciary Duties”. It is possible that conflicts of interest may be resolved in a manner that is not in the best interests of our company or the best interests of our unitholders.

Our organizational and ownership structure may create significant conflicts of interest that may be resolved in a manner that is not in the best interests of our company or the best interests of our unitholders.

Our organizational and ownership structure involves a number of relationships that may give rise to conflicts of interest between us and our unitholders, on the one hand, and Brookfield, on the other hand. In certain instances, the interests of Brookfield may differ from the interests of our company and our unitholders, including with respect to the types of acquisitions made, the timing and amount of distributions by us, the reinvestment of returns generated by our operations, the use of leverage when making acquisitions and the appointment of outside advisors and service providers, including as a result of the reasons described under Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield”.

Our arrangements with Brookfield have effectively been determined by Brookfield in the context of the spin-off and may contain terms that are less favorable than those which otherwise might have been obtained from unrelated parties.

The terms of our arrangements with Brookfield have effectively been determined by Brookfield in the context of the spin-off. These terms, including terms relating to compensation, contractual or fiduciary duties, conflicts of interest and Brookfield’s ability to engage in outside activities, including activities that compete with us, our activities and limitations on liability and indemnification, may be less favorable than those which otherwise might have resulted if the negotiations had involved unrelated parties. The transfer agreements under which our assets and operations will be acquired from Brookfield prior to the spin-off do not contain representations and warranties or indemnities relating to the underlying assets and operations. Under our limited partnership agreement, persons who acquire our units and their transferees will be deemed to have agreed that none of those arrangements constitutes a breach of any duty that may be owed to them under our limited partnership agreement or any duty stated or implied by law or equity.

The BPY General Partner may be unable or unwilling to terminate our Master Services Agreement.

Our Master Services Agreement provides that the Service Recipients may terminate the agreement only if: (i) any of the Managers defaults in the performance or observance of any material term, condition or covenant contained in the agreement in a manner that results in material harm to the Service Recipients and the default continues unremedied for a period of 60 days after written notice of the breach is given to such Manager; (ii) any of the Managers engages in any act of fraud, misappropriation of funds or embezzlement against any Service Recipient that results in material harm to the Service Recipients; or (iii) upon the happening of certain events relating to the bankruptcy or insolvency of any of the Managers. The BPY General Partner cannot terminate the agreement for any other reason, including if any of the Managers or Brookfield experiences a change of control, and there is no fixed term to the agreement. In addition, because the BPY General Partner is a wholly-owned subsidiary of Brookfield Asset Management, it may be unwilling to terminate our Master Services Agreement, even in the case of a default. If the Managers’ performance does not meet the expectations of investors, and the BPY General Partner is unable or unwilling to terminate our Master Services Agreement, the market price of our units could suffer. Furthermore, the termination of our Master Services Agreement would terminate our company’s rights under the Relationship Agreement and the licensing agreement. See “Relationship Agreement” and “Licensing Agreement” under Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield”.

 

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The liability of the Managers will be limited under our arrangements with them and we will agree to indemnify the Managers against claims that they may face in connection with such arrangements, which may lead them to assume greater risks when making decisions relating to us than they otherwise would if acting solely for their own account.

Under our Master Services Agreement, the Managers will not assume any responsibility other than to provide or arrange for the provision of the services described in our Master Services Agreement in good faith and will not be responsible for any action that the BPY General Partner takes in following or declining to follow their advice or recommendations. In addition, under our limited partnership agreement, the liability of the BPY General Partner and its affiliates, including the Managers, is limited to the fullest extent permitted by law to conduct involving bad faith, fraud, gross negligence or willful misconduct or, in the case of a criminal matter, action that was known to have been unlawful. The liability of the Managers under our Master Services Agreement will be similarly limited. In addition, we have agreed to indemnify the Managers to the fullest extent permitted by law from and against any claims, liabilities, losses, damages, costs or expenses incurred by an indemnified person or threatened in connection with our operations, investments and activities or in respect of or arising from our Master Services Agreement or the services provided by the Managers, except to the extent that the claims, liabilities, losses, damages, costs or expenses are determined to have resulted from the conduct in respect of which such persons have liability as described above. These protections may result in the Managers tolerating greater risks when making decisions than otherwise would be the case, including when determining whether to use leverage in connection with acquisitions. The indemnification arrangements to which the Managers will be parties may also give rise to legal claims for indemnification that are adverse to our company and our unitholders.

Risks Relating to our Units

The price of our units may fluctuate significantly and you could lose all or part of the value of your units.

The market price of our units may fluctuate significantly and you could lose all or part of the value of your units. Factors that may cause the price of our units to vary include:

 

   

changes in our financial performance and prospects and Brookfield’s financial performance and prospects, or in the financial performance and prospects of companies engaged in businesses that are similar to us or Brookfield;

 

   

the termination of our Master Services Agreement or the departure of some or all of Brookfield’s professionals;

 

   

changes in laws or regulations, or new interpretations or applications of laws and regulations, that are applicable to us;

 

   

sales of our units by our unitholders, including by Brookfield and/or other significant holders of our units;

 

   

general economic trends and other external factors, including those resulting from war, incidents of terrorism or responses to such events;

 

   

speculation in the press or investment community regarding us or Brookfield or factors or events that may directly or indirectly affect us or Brookfield;

 

   

our ability to raise capital on favorable terms; and

 

   

a loss of any major funding source.

 

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Securities markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies or partnerships. Any broad market fluctuations may adversely affect the trading price of our units.

Our units have never been publicly-traded and an active and liquid trading market for our units may not develop.

Prior to the spin-off, there has not been a market for our units. We cannot predict the extent to which investor interest will lead to the development of an active and liquid trading market for our units or, if such a market develops, whether it will be maintained. We cannot predict the effects on the price of our units if a liquid and active trading market for our units does not develop. In addition, if such a market does not develop, relatively small sales of our units may have a significant negative impact on the price of our units.

Our company may issue additional units in the future in lieu of incurring indebtedness which may dilute existing holders of our units or our company may issue securities that have rights and privileges that are more favorable than the rights and privileges accorded to holders of our units.

Our company may issue additional securities, including units and options, rights, warrants and appreciation rights relating to partnership securities for any purpose and for such consideration and on such terms and conditions as the BPY General Partner may determine. The BPY General Partner’s board of directors will be able to determine the class, designations, preferences, rights, powers and duties of any additional partnership securities, including any rights to share in our company’s profits, losses and distributions, any rights to receive partnership assets upon a dissolution or liquidation of our company and any redemption, conversion and exchange rights. The BPY General Partner may use such authority to issue additional units, which would dilute existing holders of our units, or to issue securities with rights and privileges that are more favorable than those of our units. You will not have any right to consent to or otherwise approve the issuance of any such securities or the terms on which any such securities may be issued.

Future sales or issuances of our units in the public markets, or the perception of such sales, could depress the market price of our units.

The sale or issuance of a substantial number of our units or other equity-related securities in the public markets, or the perception that such sales could occur, could depress the market price of our units and impair our ability to raise capital through the sale of additional equity securities. In addition, Brookfield expects its interests in the Property Partnership to be reduced over time through mergers, treasury issuances or secondary sales which could also depress the market price of our units. We cannot predict the effect that future sales or issuances of units, other equity-related securities, or the limited partnership units of the Property Partnership would have on the market price of our units.

Our unitholders do not have a right to vote on partnership matters or to take part in the management of our company.

Under our limited partnership agreement, our unitholders are not entitled to vote on matters relating to our company, such as acquisitions, dispositions or financing, or to participate in the management or control of our company. In particular, our unitholders do not have the right to remove the BPY General Partner, to cause the BPY General Partner to withdraw from our company, to cause a new general partner to be admitted to our partnership, to appoint new directors to the BPY General Partner’s board of directors, to remove existing directors from the BPY General Partner’s board of directors or to prevent a change of control of the BPY General Partner. In addition, except as prescribed by applicable laws, our unitholders’ consent rights apply only with respect to certain amendments to our limited partnership agreement. As a result, unlike holders of common stock of a corporation, our unitholders will not be able to influence the direction of our company, including its policies and procedures, or to cause a change in its management, even if they are dissatisfied with our performance. Consequently, our unitholders may be deprived of an opportunity to receive a premium for their units in the future through a sale of our company and the trading price of our units may be adversely affected by the absence or a reduction of a takeover premium in the trading price.

 

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Our company is a Bermuda exempted limited partnership and it may not be possible for our investors to serve process on or enforce U.S. judgments against us.

Our company is a Bermuda exempted limited partnership and a substantial portion of our assets are located outside the United States. In addition, certain of the directors of the BPY General Partner and certain members of the senior management team who will be principally responsible for providing us with management services reside outside of the United States. As a result, it may be difficult or impossible for U.S. investors to effect service of process within the United States upon us or our directors and executive officers, or to enforce, against us or these persons, judgments obtained in the U.S. courts predicated upon the civil liability provisions of U.S. federal securities laws. We believe that there is doubt as to the enforceability in Bermuda, in original actions or in actions to enforce judgments of U.S. courts, of claims predicated solely upon U.S. federal securities laws.

Risks Relating to Taxation

General

Changes in tax law and practice may have a material adverse effect on the operations of our company, the Holding Entities, and our operating entities and, as a consequence, the value of our assets and the net amount of distributions payable to our unitholders.

Our structure, including the structure of the Holding Entities and our operating entities, is based on prevailing taxation law and practice in the local jurisdictions in which we operate. Any change in tax legislation (including in relation to taxation rates) and practice in these jurisdictions could adversely affect these entities, as well as the net amount of distributions payable to our unitholders. Taxes and other constraints that would apply to our operating entities in such jurisdictions may not apply to local institutions or other parties, and such parties may therefore have a significantly lower effective cost of capital and a corresponding competitive advantage in pursuing acquisitions.

Our company’s ability to make distributions depends on it receiving sufficient cash distributions from its underlying operations, and we cannot assure unitholders that we will be able to make cash distributions in amounts that are sufficient to fund their tax liabilities.

Our Holding Entities and operating entities may be subject to local taxes in each of the relevant territories and jurisdictions in which they operate, including taxes on income, profits or gains and withholding taxes. As a result, our company’s cash available for distribution is indirectly reduced by such taxes, and the post-tax return to our unitholders is similarly reduced by such taxes. We intend for future acquisitions to be assessed on a case-by-case basis and, where possible and commercially viable, structured so as to minimize any adverse tax consequences to our unitholders as a result of making such acquisitions.

In general, a unitholder that is subject to income tax in the United States or Canada must include in income its allocable share of our company’s items of income, gain, loss, and deduction (including, so long as it is treated as a partnership for tax purposes, our company’s allocable share of those items of the Property Partnership) for each of our company’s fiscal years ending with or within such unitholder’s tax year. See Item 10.E. “Additional Information — Taxation”. However, the cash distributed to a unitholder may not be sufficient to pay the full amount of such unitholder’s tax liability in respect of its investment in our company, because each unitholder’s tax liability depends on such unitholder’s particular tax situation. If our company is unable to distribute cash in amounts that are sufficient to fund our unitholders’ tax liabilities, each of our unitholders will still be required to pay income taxes on its share of our company’s taxable income.

As a result of holding our units, our unitholders may be subject to U.S. federal, state, local or non-U.S. taxes and return filing obligations in jurisdictions in which they are not resident for tax purposes or otherwise not subject to tax.

Our unitholders may be subject to U.S. federal, state, local, and non-U.S. taxes, including unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property now or in the future, even if our unitholders do not reside in any of those

 

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jurisdictions. Our unitholders may be required to file income tax returns and pay income taxes in some or all of these jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with these requirements. Based on our organizational structure following the spin-off, as well as our company’s expected income and assets, the BPY General Partner and the Property General Partner currently believe that a unitholder is unlikely to incur an additional tax return filing obligation, solely as a result of owning our units, outside of the jurisdiction in which such unitholder is resident for tax purposes or otherwise is subject to tax. However, no assurance can be provided that this is currently the case or will be the case in the future. It is the responsibility of each unitholder to file all U.S. federal, state, local, and non-U.S. tax returns that may be required of such unitholder.

Our unitholders may be exposed to transfer pricing risks.

To the extent that our company, the Property Partnership, the Holding Entities or our operating entities enter into transactions or arrangements with parties with whom they do not deal at arm’s length, including Brookfield, the relevant tax authorities may seek to adjust the quantum or nature of the amounts received or paid by such entities if they consider that the terms and conditions of such transactions or arrangements differ from those that would have been made between persons dealing at arm’s length. This could result in more tax being paid by such entities, and therefore the return to investors could be reduced.

The BPY General Partner and the Property General Partner believe that the base management fee and any other amount that is paid to the Managers will be commensurate with the value of the services being provided by the Managers and comparable to the fees or other amounts that would be agreed to in an arm’s length arrangement. However, no assurance can be given in this regard.

If the relevant tax authority were to assert that an adjustment should be made under the transfer pricing rules to an amount that is relevant to the computation of the income of the Property Partnership or our company, such assertion could result in adjustments to amounts of income (or loss) allocated to our unitholders by our company for tax purposes. In addition, our company might also be liable for transfer pricing penalties in respect of transfer pricing adjustments unless reasonable efforts were made to determine, and use, arm’s length transfer prices. Generally, reasonable efforts in this regard are only considered to be made if contemporaneous documentation has been prepared in respect of such transactions or arrangements that support the transfer pricing methodology.

United States

The U.S. Internal Revenue Service, or IRS, may disagree with our valuation of the spin-off distribution.

Our U.S. unitholders will be considered to receive a taxable distribution as a result of the spin-off equal to the fair market value of our units received by them in the spin-off plus the amount of cash received in lieu of fractional units, without reduction for any Canadian tax withheld. We will use the five day volume weighted average of the trading price of our units for the five trading days immediately following the spin-off as the fair market value of our units for these purposes but this amount is not binding on the IRS. The IRS may disagree with this valuation and this could result in increased tax liability to you.

If either our company or the Property Partnership were to be treated as a corporation for U.S. federal income tax purposes, the value of our units might be adversely affected.

The value of our units to our unitholders will depend in part on the treatment of our company and the Property Partnership as partnerships for U.S. federal income tax purposes. In order for our company to be treated as a partnership for U.S. federal income tax purposes, under present law, 90% or more of our company’s gross income for every taxable year must consist of qualifying income, as defined in Section 7704 of the U.S. Internal Revenue Code of 1986, as amended, or the U.S. Internal Revenue Code, and the partnership must not be required to register, if it were a U.S. corporation, as an investment company under the U.S. Investment Company Act of 1940 and related rules. Although the BPY General Partner intends to manage our affairs so that our company will not need to be registered as an investment company if it were a U.S. corporation and so that it will meet the 90% test described above in each taxable year, our company may not meet these requirements, or current law may

 

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change so as to cause, in either event, our company to be treated as a corporation for U.S. federal income tax purposes. If our company (or the Property Partnership) were treated as a corporation for U.S. federal income tax purposes, adverse U.S. federal income tax consequences could result for our unitholders and our company (or the Property Partnership, as applicable), as described in greater detail in Item 10.E. “Additional Information — Taxation — U.S. Tax Considerations — Partnership Status of Our Company and the Property Partnership”.

The failure of certain of our operating entities (or certain of their subsidiaries) to qualify as real estate investment trusts under U.S. federal income tax rules generally would have adverse tax consequences which could result in a material reduction in cash flow and after-tax return for our unitholders and thus could result in a reduction of the value of our units.

Certain of our operating entities (and certain of their subsidiaries), including operating entities in which we do not have a controlling interest, such as GGP, intend to qualify for taxation as real estate investment trusts, or REITs, for U.S. federal income tax purposes. However, no assurance can be provided that any such entity will qualify as a REIT. An entity’s ability to qualify as a REIT depends on its satisfaction of certain asset, income, organizational, distribution, shareholder ownership, and other requirements on a continuing basis. No assurance can be provided that the actual results of operations for any particular entity in a given taxable year will satisfy such requirements. If any such entity were to fail to qualify as a REIT in any taxable year, it would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on its net taxable income at regular corporate rates, and distributions would not be deductible by it in computing its taxable income. Any such corporate tax liability could be substantial and could materially reduce the amount of cash available for distribution to our company, which in turn would materially reduce the amount of cash available for distribution to our unitholders or investment in our business and could have an adverse impact on the value of our units. Unless entitled to relief under certain U.S. federal income tax rules, any entity which so failed to qualify as a REIT would also be disqualified from taxation as a REIT for the four taxable years following the year during which it ceased to qualify as a REIT.

We may be subject to U.S. “backup” withholding tax or other U.S. withholding taxes if any unitholder fails to comply with U.S. tax reporting rules or if the IRS or other applicable state or local taxing authority does not accept our withholding methodology, and such excess withholding tax cost will be an expense borne by our company and, therefore, all of our unitholders on a pro rata basis.

We may become subject to U.S. backup withholding tax or other U.S. withholding taxes with respect to any U.S. or non-U.S. unitholder who fails to timely provide us (or the applicable intermediary) with an IRS Form W-9 or IRS Form W-8, as the case may be, or if the withholding methodology we use is not accepted by the IRS or applicable state or local taxing authorities. Accordingly, it is important that each of our unitholders timely provides us (or the relevant intermediary) with an IRS Form W-9 or IRS Form W-8, as applicable. In addition, under certain circumstances, our company may treat such U.S. backup withholding taxes or other U.S. withholding taxes as an expense, which will be borne indirectly by all unitholders on a pro rata basis. See Item 10.E. “Additional Information — Taxation — U.S. Tax Considerations — Administrative Matters — Withholding and Backup Withholding”.

Tax-exempt organizations may face certain adverse U.S. tax consequences from owning our units.

The BPY General Partner and the Property General Partner intend to use commercially reasonable efforts to structure the activities of our company and the Property Partnership, respectively, to avoid generating income connected with the conduct of a trade or business (which income generally would constitute “unrelated business taxable income”, or UBTI, to the extent allocated to a tax-exempt organization). However, no assurance can be provided that neither our company nor the Property Partnership will generate UBTI in the future. In particular, UBTI includes income attributable to debt-financed property, and neither our company nor the Property Partnership is prohibited from financing the acquisition of property with debt. The potential for income to be characterized as UBTI could make our units an unsuitable investment for a tax-exempt organization, as addressed in greater detail in Item 10.E. “Additional Information — Taxation — U.S. Tax Considerations — Consequences to U.S. Holders — U.S. Taxation of Tax-Exempt U.S. Holders of Our Units”.

 

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There may be limitations on the deductibility of our company’s interest expense.

So long as we are treated as a partnership for U.S. federal income tax purposes, each of our unitholders that is taxable in the United States generally will be taxed on its share of our company’s net taxable income. However, U.S. federal, state, or local income tax law may limit the deductibility of such unitholder’s share of our company’s interest expense. Therefore, any such unitholder may be taxed on amounts in excess of such unitholder’s share of the net income of our company. This could adversely impact the value of our units if our company were to incur a significant amount of indebtedness. See Item 10.E. “Additional Information — Taxation — U.S. Tax Considerations — Consequences to U.S. Holders — Holding of Units — Limitations on Interest Deductions”.

If our company were engaged in a U.S. trade or business, non-U.S. persons would face certain adverse U.S. tax consequences from owning our units.

Based on our organizational structure following the spin-off, as well as our expected income and assets, the BPY General Partner and the Property General Partner currently believe that our company is unlikely to earn income treated as effectively connected with a U.S. trade or business, including income attributable to the sale of a “U.S. real property interest”, as defined in the U.S. Internal Revenue Code. It is possible, however, that our company would be deemed to be engaged in a U.S. trade or business or to realize gain from the sale or other disposition of a U.S. real property interest. In such case, unitholders that are not U.S. persons would be required to file U.S. federal income tax returns and would be subject to U.S. federal withholding tax at rates as high as 35%. See Item 10.E. “Additional Information — Taxation — U.S. Tax Considerations — Consequences to Non-U.S. Holders”.

To meet U.S. federal income tax and other objectives, our company and the Property Partnership may invest through U.S. and non-U.S. Holding Entities that are treated as corporations for U.S. federal income tax purposes, and such Holding Entities may be subject to corporate income tax.

To meet U.S. federal income tax and other objectives, our company and the Property Partnership may invest through U.S. and non-U.S. Holding Entities that are treated as corporations for U.S. federal income tax purposes, and such Holding Entities may be subject to corporate income tax. Consequently, items of income, gain, loss, deduction, or credit realized in the first instance by our operating entities will not flow, for U.S. federal income tax purposes, directly to the Property Partnership, our company, or our unitholders, and any such income or gain may be subject to a corporate income tax, in the U.S. or other jurisdictions, at the level of the Holding Entity. Any such additional taxes may adversely affect our company’s ability to maximize its cash flow.

Certain of our Holding Entities or operating entities may be, or may be acquired through, an entity classified as a “passive foreign investment company” for U.S. federal income tax purposes.

U.S. holders may face adverse U.S. tax consequences arising from the ownership of a direct or indirect interest in a “passive foreign investment company”, or PFIC. Based on our organizational structure following the spin-off, as well as our expected income and assets, the BPY General Partner and the Property General Partner currently believe that one or more of our current Holding Entities and operating entities are likely to be classified as PFICs. In addition, we may in the future acquire certain investments or operating entities through one or more Holding Entities treated as corporations for U.S. federal income tax purposes, and such future Holding Entities or other companies in which we acquire an interest may be treated as PFICs. Our unitholders that are taxable in the U.S. may experience adverse U.S. tax consequences as a result of owning an indirect interest in a PFIC through our company. Investments in PFICs can produce taxable income prior to the receipt of cash relating to such income, and unitholders that are U.S. taxpayers generally would be required to take such income into account in determining their taxable income. In addition, gain from the sale of stock of a PFIC generally is subject to tax at ordinary income rates, and an interest charge generally applies. The adverse consequences of owning an interest in a PFIC, as well as certain tax elections for mitigating these adverse consequences, are described in greater detail in Item 10.E. “Additional Information — Taxation — U.S. Tax Considerations — Consequences to U.S. Holders — Passive Foreign Investment Companies”. You should consult an independent tax adviser regarding the implication of the PFIC rules for an investment in our units.

 

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Tax gain or loss from the disposition of our units could be more or less than expected.

If you sell your units and are taxable in the United States, then you will recognize gain or loss for U.S. federal income tax purposes equal to the difference between the amount realized and your adjusted tax basis in your units. Prior distributions to you in excess of the total net taxable income allocated to you will have decreased your tax basis in your units. Therefore, such excess distributions will increase your taxable gain or decrease your taxable loss when you sell your units, and may result in a taxable gain even if the sale price is less than the original cost. A portion of the amount realized, whether or not representing gain, could be ordinary income to you.

Our partnership structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. The tax characterization of our partnership structure is also subject to potential legislative, judicial, or administrative change and differing interpretations, possibly on a retroactive basis.

The U.S. federal income tax treatment of our unitholders depends in some instances on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Holders should be aware that the U.S. federal income tax rules, particularly those applicable to partnerships, are constantly under review by the Congressional tax-writing committees and other persons involved in the legislative process, the IRS, the U.S. Treasury Department and the courts, frequently resulting in changes which could adversely affect the value of our units or cause our company to change the way it conducts its activities. In addition, our company’s organizational documents and agreements permit the BPY General Partner to modify our limited partnership agreement, without the consent of our unitholders, to address such changes. These modifications could have a material adverse impact on our unitholders. See Item 10.E. “Additional Information — Taxation — U.S. Tax Considerations — New Legislation or Administrative or Judicial Action”.

The IRS may not agree with certain assumptions and conventions that our company uses in order to comply with applicable U.S. federal income tax laws or that our company uses to report income, gain, loss, deduction, and credit to our unitholders.

Our company will apply certain assumptions and conventions in order to comply with applicable tax laws and to report income, gain, deduction, loss, and credit to a unitholder in a manner that reflects such unitholder’s beneficial ownership of partnership items, taking into account variation in ownership interests during each taxable year because of trading activity. A successful IRS challenge to such assumptions or conventions could adversely affect the amount of tax benefits available to our unitholders and could require that items of income, gain, deduction, loss, or credit, including interest deductions, be adjusted, reallocated or disallowed in a manner that adversely affects our unitholders. See Item 10.E. “Additional Information — Taxation — Consequences to U.S. Holders”.

Our company’s delivery of required tax information for a taxable year may be subject to delay, which could require a unitholder to request an extension of the due date for such unitholder’s income tax return.

It may require longer than 90 days after the end of our company’s fiscal year to obtain the requisite information from all lower-tier entities so that IRS Schedule K-1s may be prepared for our company. For this reason, holders of our units who are U.S. taxpayers should anticipate the need to file annually with the IRS (and certain states) a request for an extension past April 15 or the otherwise applicable due date of their income tax return for the taxable year. See Item 10.E. “Additional Information — Taxation — U.S. Tax Considerations — Administrative Matters — Information Returns”.

 

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The sale or exchange of 50% or more of our units will result in the constructive termination of our partnership for U.S. federal income tax purposes.

Our partnership will be considered to have been terminated for U.S. federal income tax purposes if there is a sale or exchange of 50% or more of our units within a 12-month period. A constructive termination of our partnership would, among other things, result in the closing of its taxable year for U.S. federal income tax purposes for all unitholders and could result in the possible acceleration of income to certain unitholders and certain other consequences that could adversely affect the value of our units. However, the BPY General Partner does not expect a constructive termination, should it occur, to have a material impact on the computation of the future taxable income generated by our company for U.S. income tax purposes. See Item 10.E. “Additional Information — Taxation — U.S. Tax Considerations — Administrative Matters — Constructive Termination”.

The U.S. Congress has considered legislation that could, if enacted, adversely affect our company’s qualification as a partnership for U.S. federal tax purposes under the publicly-traded partnership rules and subject certain income and gains to tax at increased rates. If this or similar legislation were to be enacted and to apply to our company, then the after-tax income of our company, as well as the market price of our units, could be reduced.

Over the past several years, a number of legislative proposals have been introduced in the U.S. Congress which could have had adverse tax consequences for our company or the Property Partnership, including the recharacterization of certain items of capital gain income as ordinary income for U.S. federal income tax purposes. However, such legislation was not enacted into law. The Obama administration has indicated it supports such legislation and has proposed that the current law regarding the treatment of such items of capital gain income be changed to subject such income to ordinary income tax. For further detail on such proposed legislation, see Item 10.E. “Additional Information — Taxation — U.S. Tax Considerations — Proposed Legislation”.

Under legislation recently enacted by the U.S. Congress, certain payments of U.S.-source income (as well as gross proceeds from the disposition of property that could produce such income) made to our company or the Property Partnership on or after January 1, 2014, could be subject to a 30% federal withholding tax, unless an exception applies.

Under recently enacted U.S. legislation, certain payments of U.S.-source income made on or after January 1, 2014 (as well as payments attributable to dispositions of property which produce or could produce certain U.S.-source income) to our company or by our company to or through non-U.S. financial institutions or non-U.S. entities, could be subject to a 30% withholding tax under certain circumstances, as described in greater detail in Item 10.E. “Additional Information — Taxation — U.S. Tax Considerations — Administrative Matters — Additional Withholding Requirements”.

Canada

Canada Revenue Agency may disagree with our valuation of the spin-off dividend.

Our unitholders will be considered to receive a dividend upon the spin-off equal to the fair market value of the units of our company received upon the spin-off plus the amount of any cash received in lieu of fractional units. We will use the volume weighted average trading price of our units on the NYSE for the five trading days immediately following the spin-off as the fair market value of our units for these purposes but this amount is not binding on the Canada Revenue Agency, or CRA. CRA may disagree with this valuation and this could result in increased tax liability to you.

 

 

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If any non-Canadian subsidiaries in which the Property Partnership directly invests earn income that is characterized as “foreign accrual property income”, or FAPI, as defined in the Income Tax Act (Canada), or the Tax Act, our unitholders may be required to include amounts allocated from our company in computing their income for Canadian federal income tax purposes even though there may be no corresponding cash distribution.

Any non-resident subsidiaries in which the Property Partnership directly invests are expected to be “foreign affiliates” and “controlled foreign affiliates”, each as defined in the Tax Act, collectively referred to herein as CFAs, of the Property Partnership. If any of such non-Canadian subsidiaries earns income that is FAPI in a particular taxation year of the CFA, the Property Partnership’s proportionate share of such FAPI must be included in computing the income of the Property Partnership for Canadian federal income tax purposes for the fiscal period of the Property Partnership in which the taxation year of such CFA that earned the FAPI ends, whether or not the Property Partnership actually receives a distribution of such income. Our company will include its share of such FAPI of the Property Partnership in computing its income for Canadian federal income tax purposes and our unitholders will be required to include their proportionate share of such FAPI allocated from our company in computing their income for Canadian federal income tax purposes. As a result, our unitholders may be required to include amounts in their income even though they have not and may not receive an actual cash distribution of such amount.

The Canadian federal income tax consequences to you could be materially different in certain respects from those described in this Form 20-F if our company or the Property Partnership is a “SIFT partnership”.

Under the rules in the Tax Act applicable to a “SIFT partnership”, or the SIFT Rules, certain income and gains earned by a “SIFT partnership” will be subject to income tax at the partnership level at a rate similar to a corporation and allocations of such income and gains to its partners will be taxed as a dividend from a taxable Canadian corporation. In particular, a “SIFT partnership” will be required to pay a tax on the total of its income from businesses carried on in Canada, income from “non-portfolio properties” as defined in the Tax Act (other than taxable dividends), and taxable capital gains from dispositions of non-portfolio properties. “Non-portfolio properties” include, among other things, equity interests or debt of corporations, trusts or partnerships that are resident in Canada, and of non-resident persons or partnerships the principal source of income of which is one or any combination of sources in Canada (other than an “excluded subsidiary entity” as defined in the Tax Act), that are held by the “SIFT partnership” and have a fair market value that is greater than 10% of the equity value of such entity, or that have, together with debt or equity that the “SIFT partnership” holds of entities affiliated (within the meaning of the Tax Act) with such entity, an aggregate fair market value that is greater than 50% of the equity value of the “SIFT partnership”. The tax rate that is applied to the above mentioned sources of income and gains is set at a rate equal to the “net federal corporate rate”, plus the “provincial SIFT tax rate”, each as defined in the Tax Act.

Under the SIFT Rules, our company and the Property Partnership could each be a “SIFT partnership” for any taxation year in which either is a “Canadian resident partnership”. Our company and the Property Partnership will be a “Canadian resident partnership” if the central management and control of these partnerships is located in Canada. This determination is a question of fact and is expected to depend on where the BPY General Partner and the Property General Partner are located and exercise central management and control of the respective partnerships. The BPY General Partner and the Property General Partner advise that they will each take appropriate steps so that the central management and control of these entities is not located in Canada such that the SIFT Rules should not apply to our company or to the Property Partnership at any relevant time. However, no assurance can be given in this regard. If our company or the Property Partnership is a “SIFT partnership”, the Canadian income tax consequences to our unitholders could be materially different in certain respects from those described in Item 10.E. “Additional Information — Taxation — Canadian Federal Income Tax Considerations”.

On July 20, 2011, the Minister of Finance (Canada), or the Minister, announced tax proposals to amend the definition of “excluded subsidiary entity” for purposes of the SIFT Rules. Based on the limited details of these tax proposals provided by the Minister, these tax proposals should have no impact on the Property

 

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Partnership’s qualification as an “excluded subsidiary entity”. However no assurance can be given in this regard. In addition, there can be no assurance that the SIFT Rules will not be revised or amended in the future such that the SIFT Rules will apply to our company or to the Property Partnership.

Unitholders may be required to include imputed amounts in their income for Canadian federal income tax purposes in accordance with existing section 94.1 of the Tax Act as proposed to be amended under tax proposals announced on March 4, 2010 and contained in draft tax proposals released on August 27, 2010, if, it is reasonable to conclude, having regard to all the circumstances, that one of the main reasons for the unitholder, our company or the Property Partnership acquiring or holding an investment in a non-resident entity is to derive a benefit from “portfolio investments” as defined in the Tax Act in such a manner that taxes under the Tax Act on income, profits and gains for any year are significantly less than they would have been if such income, profits and gains had been earned directly.

On March 4, 2010, the Minister announced as part of the 2010 Canadian federal budget that the outstanding tax proposals regarding investments in “foreign investment entities” would be replaced with revised tax proposals under which the existing rules in section 94.1 of the Tax Act relating to investments in “offshore investment fund property” would remain in place subject to certain limited enhancements. On August 27, 2010, the Minister released draft legislation to implement the revised tax proposals. Existing section 94.1 of the Tax Act contains rules relating to investments in non-resident entities that could in certain circumstances cause income to be imputed to unitholders for Canadian federal income tax purposes, either directly or by way of allocation of such income imputed to our company or to the Property Partnership. These rules would apply if it is reasonable to conclude, having regard to all the circumstances, that one of the main reasons for the unitholder, our company or the Property Partnership acquiring or holding an investment in a non-resident entity is to derive a benefit from “portfolio investments” in such a manner that taxes under the Tax Act on income, profits and gains for any year are significantly less than they would have been if such income, profits and gains had been earned directly. In determining whether this is the case, existing section 94.1 of the Tax Act provides that consideration must be given to, among other factors, the extent to which the income, profits and gains for any fiscal period are distributed in that or the immediately following fiscal period. If these rules apply to a unitholder, our company or the Property Partnership, income for Canadian federal income tax purposes will be imputed directly to the unitholder or to our company or the Property Partnership and allocated to the unitholder in accordance with the rules in existing section 94.1 of the Tax Act as proposed to be amended. No assurance can be given that existing section 94.1, as proposed to be amended, will not apply to a unitholder, our company or the Property Partnership. The rules in existing section 94.1 of the Tax Act are complex and investors should consult their own tax advisors regarding the application of these rules to them in their particular circumstances.

Our units may or may not continue to be “qualified investments” under the Tax Act for registered plans.

Provided that our units are listed on a “designated stock exchange” as defined in the Tax Act (which includes the NYSE and the Toronto Stock Exchange, or TSX), our units will be “qualified investments” under the Tax Act for a trust governed by a registered retirement saving plan, or RRSP, deferred profit sharing plan, registered retirement income fund, or RRIF, registered education saving plan, registered disability saving plan, and a tax-free savings account, or TFSA. However, there can be no assurance that our units will be listed or continue to be listed on a designated stock exchange. There can also be no assurance that tax laws relating to qualified investments will not be changed. Taxes may be imposed in respect of the acquisition or holding of non-qualified investments by such registered plans and certain other taxpayers and with respect to the acquisition or holding of “prohibited investments” as defined in the Tax Act by a RRSP, RRIF or TFSA.

Our units will not be a “prohibited investment” for a trust governed by a RRSP, RRIF or TFSA, provided that the holder of the TFSA or the annuitant of the RRSP or RRIF, as the case may be, deals at arm’s length with our company for purposes of the Tax Act and does not have a “significant interest”, as defined in the Tax Act for purposes of the prohibited investment rules, in our company or in a corporation, partnership or trust with which

 

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we do not deal at arm’s length for purposes of the Tax Act. Investors who hold their units in a RRSP, RRIF or TFSA should consult their own tax advisors to ensure that our units will not be “prohibited investments” in their particular circumstances.

Unitholders who are not resident in Canada or deemed to be resident in Canada, or a non-Canadian limited partnership, may be subject to Canadian federal income tax with respect to any Canadian source business income earned by our company or the Property Partnership if our company or the Property Partnership were considered to carry on business in Canada.

If our company or the Property Partnership were considered to carry on a business in Canada for purposes of the Tax Act, non-Canadian limited partners would be subject to Canadian federal income tax on their proportionate share of any Canadian source business income earned or considered to be earned by our company, subject to the potential application of the safe harbour rule in section 115.2 of the Tax Act, as proposed to be amended under proposed amendments to the Tax Act announced by the Minister on October 31, 2010, and any relief that may be provided by any relevant income tax treaty or convention.

The BPY General Partner and the Property General Partner intend to manage the affairs of our company and the Property Partnership, to the extent possible, so that they do not carry on business in Canada and are not considered or deemed to carry on business in Canada for purposes of the Tax Act. Nevertheless, because the determination of whether our company or the Property Partnership is carrying on business and, if so, whether that business is carried on in Canada, is a question of fact that is dependent upon the surrounding circumstances, the CRA might contend successfully that either or both of our company and the Property Partnership carries on business in Canada for purposes of the Tax Act.

If our company or the Property Partnership is considered to carry on business in Canada or is deemed to carry on business in Canada for the purposes of the Tax Act, non-Canadian limited partners that are corporations would be required to file a Canadian federal income tax return for each year in which they are a non-Canadian limited partner regardless of whether relief from Canadian taxation is available under an applicable income tax treaty or convention. Non-Canadian limited partners who are individuals would only be required to file a Canadian federal income tax return for any taxation year in which they are allocated income from our company from carrying on business in Canada that is not exempt from Canadian taxation under the terms of an applicable income tax treaty or convention.

Non-Canadian limited partners may be subject to Canadian federal income tax on capital gains realized by our company or the Property Partnership on dispositions of “taxable Canadian property” as defined in the Tax Act.

A non-Canadian limited partner will be subject to Canadian federal income tax on its proportionate share of capital gains realized by our company or the Property Partnership on the disposition of “taxable Canadian property”, other than “treaty protected property”, as defined in the Tax Act. “Taxable Canadian property” includes, but is not limited to, property that is used or held in a business carried on in Canada and shares of corporations resident in Canada that are not listed on a “designated stock exchange”, as defined in the Tax Act, if more than 50% of the fair market value of the shares is derived from certain Canadian properties during the 60-month period immediately preceding the disposition. Property of our company and the Property Partnership generally will be “treaty-protected property” to a non-Canadian limited partner if the gain from the disposition of the property would, because of an applicable income tax treaty or convention, be exempt from tax under the Tax Act. Our company and the Property Partnership are not expected to realize capital gains or losses from dispositions of “taxable Canadian property”. However, no assurance can be given in this regard. Non-Canadian limited partners will be required to file a Canadian federal income tax return in respect of a disposition of “taxable Canadian property” by our company or the Property Partnership unless the disposition is an “excluded disposition” for the purposes of section 150 of the Tax Act. However, non-Canadian limited partners that are corporations will still be required to file a Canadian federal income tax return in respect of a disposition of

 

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“taxable Canadian property” that is an “excluded disposition” for the purposes of section 150 of the Tax Act if tax would otherwise be payable under Part I of the Tax Act by such non-Canadian limited partners in respect of the disposition but is not because of a tax treaty (otherwise than in respect of a disposition of “taxable Canadian property” that is “treaty-protected property of the corporation). In general, an “excluded disposition” is a disposition of property by a taxpayer in a taxation year where: (i) the taxpayer is a non-resident of Canada at the time of the disposition; (ii) no tax is payable by the taxpayer under Part I of the Tax Act for the taxation year; (iii) the taxpayer is not liable to pay any amounts under the Tax Act in respect of any previous taxation year (other than certain amounts for which the CRA holds adequate security); and (iv) each “taxable Canadian property” disposed of by the taxpayer in the taxation year is either: (i) “excluded property” (as defined in subsection 116(6) of the Tax Act); or (ii) is property in respect of the disposition of which a certificate under subsection 116(2), (4) or (5.2) has been issued by the CRA. Non-Canadian limited partners should consult their own tax advisors with respect to the requirements to file a Canadian federal income tax return in respect of a disposition of “taxable Canadian property” by our company or the Property Partnership.

Non-Canadian limited partners may be subject to Canadian federal income tax on capital gains realized on the disposition of our units if our units are “taxable Canadian property”.

Any capital gain arising from the disposition or deemed disposition of our units by a non-Canadian limited partner will be subject to taxation in Canada, if, at the time of the disposition or deemed disposition, our units are “taxable Canadian property” of the non-Canadian limited partner, unless our units are “treaty-protected property” to such non-Canadian limited partner. In general, our units will not constitute “taxable Canadian property” of any non-Canadian limited partner at the time of disposition or deemed disposition, unless (a) at any time in the 60-month period immediately preceding the disposition or deemed disposition, more than 50% of the fair market value of our units was derived, directly or indirectly (under proposed amendments to the Tax Act announced by the Minister on August 27, 2010, excluding through a corporation, partnership or trust, the shares or interest in which were not themselves “taxable Canadian property”), from one or any combination of: (i) real or immovable property situated in Canada; (ii) “Canadian resource property” as defined in the Tax Act; (iii) “timber resource property” as defined in the Tax Act; and (iv) options in respect of or interests in, or for civil law rights in, such property, whether or not such property exists, or (b) our units are otherwise deemed to be “taxable Canadian property”. Units of our company will be “treaty protected property” if the gain on the disposition of our units is exempt from tax under the Tax Act under the terms of an applicable income tax treaty or convention. It is not expected that our units will constitute “taxable Canadian property” at any time but no assurance can be given in this regard. If our units constitute “taxable Canadian property”, non-Canadian limited partners will be required to file a Canadian federal income tax return in respect of a disposition of or units unless the disposition is an “excluded disposition” (as discussed above). If our units constitute “taxable Canadian property”, non-Canadian limited partners should consult their own tax advisors with respect to the requirement to file a Canadian federal income tax return in respect of a disposition of our units.

Non-Canadian limited partners may be subject to Canadian federal income tax reporting and withholding tax requirements on the disposition of “taxable Canadian property”.

Non-Canadian limited partners who dispose of “taxable Canadian property”, other than “excluded property”, as defined in subsection 116(6) of the Tax Act, and certain other property described in subsection 116(5.2) of the Tax Act, (or who are considered to have disposed of such property on the disposition of such property by our company or the Property Partnership), are obligated to comply with the procedures set out in section 116 of the Tax Act and obtain a certificate thereunder. In order to obtain such certificate, the non-Canadian limited partner is required to report certain particulars relating to the transaction to CRA not later than 10 days after the disposition occurs. Our units are not expected to be “taxable Canadian property” and neither our company nor the Property Partnership is expected to dispose of property that is “taxable Canadian property” but no assurance can be given in these regards.

 

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Payments of dividends or interest (other than interest exempt from Canadian federal withholding tax) by residents of Canada to the Property Partnership will be subject to Canadian federal withholding tax and we may be unable to apply a reduced rate taking into account the residency or entitlement to relief under an applicable income tax treaty or convention of our unitholders.

Our company and the Property Partnership will be deemed to be a non-resident person in respect of certain amounts paid or credited to them by a person resident or deemed to be resident in Canada, including dividends or interest. Dividends or interest (other than interest exempt from Canadian federal withholding tax) paid by a person resident or deemed to be resident in Canada to the Property Partnership will be subject to withholding tax under Part XIII of the Tax Act at the rate of 25%. However, the CRA’s administrative practice in similar circumstances is to permit the rate of Canadian federal withholding tax applicable to such payments to be computed by looking through the partnership and taking into account the residency of the partners (including partners who are resident in Canada) and any reduced rates of Canadian federal withholding tax that any non-Canadian limited partners may be entitled to under an applicable income tax treaty or convention provided that the residency status and entitlement to treaty benefits can be established. In determining the rate of Canadian federal withholding tax applicable to amounts paid by the Holding Entities to the Property Partnership, we expect the Holding Entities to look-through the Property Partnership and our company to the residency of the partners of our company (including partners who are residents of Canada) and to take into account any reduced rates of Canadian federal withholding tax that non-Canadian limited partners may be entitled to under an applicable income tax treaty or convention in order to determine the appropriate amount of Canadian federal withholding tax to withhold from dividends or interest paid to the Property Partnership. However, there can be no assurance that the CRA will apply its administrative practice in this context. If the CRA’s administrative practice is not applied and the Holding Entities withhold Canadian federal withholding tax from applicable payments on a look-through basis, the Holding Entities may be liable for additional amounts of Canadian federal withholding tax plus any associated interest and penalties. Under the Canada-United States Tax Convention, or the Treaty, a Canadian resident payer is required in certain circumstances to look-through fiscally transparent partnerships, such as our company and the Property Partnership, to the residency and treaty entitlements of their partners and take into account the reduced rates of Canadian federal withholding tax that such partners may be entitled to under the Treaty.

While the BPY General Partner and the Property General Partner expect the Holding Entities to look-through our company and the Property Partnership in determining the rate of Canadian federal withholding tax applicable to amounts paid by the Holding Entities to the Property Partnership, we may be unable to accurately or timely determine the residency of our unitholders for purposes of establishing the extent to which Canadian federal withholding taxes apply or whether reduced rates of withholding tax apply to some or all of our unitholders. In such a case, the Holding Entities will withhold Canadian federal withholding tax from all payments made to the Property Partnership that are subject to Canadian federal withholding tax at the rate of 25%. Canadian resident unitholders will be entitled to claim a credit for such taxes against their Canadian federal income tax liability but non-Canadian limited partners will need to take certain steps to receive a refund or credit in respect of any such Canadian federal withholding taxes withheld equal to the difference between the withholding tax at a rate of 25% and the withholding tax at the reduced rate they are entitled to under an applicable income tax treaty or convention. See Item 10.E. “Additional Information — Taxation — Canadian Federal Income Tax Considerations” for further detail. Investors should consult their own tax advisors concerning all aspects of Canadian federal withholding taxes.

 

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ITEM  4. INFORMATION ON THE COMPANY

4.A. HISTORY AND DEVELOPMENT OF THE COMPANY

Our company is a leading global owner, operator and investor in high quality commercial property. We invest in well-located real estate assets that generate, or have the potential to generate, long-term, predictable and sustainable cash flows with attractive growth and development potential in some of the world’s most resilient and dynamic markets. We seek to enhance the cash flows and value of these assets through active asset management and our operations-oriented approach. Our properties are located in North America, Europe, Australia and Brazil and we may pursue growth in other markets where we identify attractive opportunities to build operating platforms or acquire assets and to achieve strong risk-adjusted returns. We strive to invest at attractive valuations, particularly in distress situations that create opportunities for superior valuation gains and cash flow returns, or to monetize assets at appropriate times to realize value.

Prior to the spin-off, we will acquire from Brookfield Asset Management substantially all of its commercial property operations, including its office, retail, multi-family and industrial assets. We will be Brookfield’s flagship public commercial property entity and the primary entity through which Brookfield Asset Management owns and operates these businesses on a global basis. We are positioned to take advantage of Brookfield’s global presence, providing unitholders with the opportunity to benefit from Brookfield’s operating experience, execution abilities and global relationships.

Given the size and scope of our business, we expect that we will have significant flexibility in sourcing and allocating real estate capital on a global basis and a strong global franchise to generate growth. We plan to grow by acquiring positions of control or influence over the assets in which we invest using a variety of strategies to target assets directly or through portfolios and corporate entities. Our goal is to be a premier entity for investors seeking exposure to commercial property across a wide spectrum of real estate sectors and geographies.

Brookfield Asset Management intends to make a special dividend of our units to holders of its Class A limited voting shares and Class B limited voting shares. It is currently anticipated that, immediately following the spin-off, holders of Class A limited voting shares and Class B limited voting shares of Brookfield Asset Management will hold units of our company representing in aggregate an effective economic interest in our business of approximately 10% and Brookfield Asset Management will hold units of Brookfield Property L.P., or the Property Partnership, representing an effective economic interest in our business of approximately 90%. Brookfield Asset Management expects its interests to be reduced from this level over time through mergers, treasury issuances or secondary sales.

Our general partner and the general partner of the Property Partnership are wholly-owned subsidiaries of Brookfield Asset Management. In addition, wholly-owned subsidiaries of Brookfield Asset Management will provide management services to us pursuant to our Master Services Agreement.

For additional information regarding our company, see Item 4.C. “Information on the Company Organizational Structure”.

THE SPIN-OFF

Background to and Purpose of the Spin-Off

Brookfield’s goal is to establish itself as the asset manager of choice for investors in real estate, infrastructure, power and private equity. In 2007, Brookfield Asset Management established Brookfield Infrastructure Partners L.P. as its primary entity to own and operate infrastructure assets on a global basis. In 2011, Brookfield Asset Management established Brookfield Renewable Energy Partners L.P. as its primary entity to own and operate renewable power assets on a global basis. Our company will be the primary entity through which Brookfield Asset Management owns and operates its commercial property businesses on a global basis. Brookfield, through affiliates, manages and is a significant owner of all these entities.

 

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LOGO

 

  (1) Estimated.

In creating our company, Brookfield has contributed substantially all of its commercial property operations into one entity. The spin-off of our units is intended to achieve the following objectives for Brookfield:

 

   

Create a company positioned to pay distributions at higher yields than the current dividend yield on the Class A and Class B limited voting shares of Brookfield Asset Management.

 

   

Create a company with significant market capitalization that, together with planned listings on the NYSE and the TSX, will provide an attractive currency to source and execute large-scale transactions across a wide spectrum of commercial real estate sectors and geographies.

 

   

Delineate and emphasize the scale and value of our commercial property operations for shareholders of Brookfield Asset Management.

 

   

Provide greater transparency for Brookfield as a global asset manager.

Mechanics of the Spin-Off

Brookfield Asset Management intends to make a special dividend of our units to holders of its Class A limited voting shares and Class B limited voting shares.

No holder will be entitled to receive any fractional interests in our units. Holders who would otherwise be entitled to a fractional unit will receive a cash payment. It is currently anticipated that, immediately following the spin-off, holders of Class A limited voting shares and Class B limited voting shares of Brookfield Asset Management will hold units of our company representing in the aggregate an effective economic interest in our business of approximately 10% and Brookfield Asset Management will hold units of the Property Partnership representing an effective economic interest in our business of approximately 90%. Brookfield Asset Management expects its interest to be reduced from this level over time through mergers, treasury issuances or secondary sales.

Limited partners who acquire our units pursuant to the spin-off will be considered to have received a taxable dividend for Canadian federal income tax purposes equal to the fair market value of our units so received (as determined by reference to the five day volume-weighted average of the trading price of our units following

 

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closing of the spin-off) plus the amount of any cash received in lieu of fractional units. Non-Canadian resident limited partners will be subject to Canadian federal withholding tax at the rate of 25% on the amount of the special dividend, subject to reduction under terms of an applicable income tax treaty or convention. See Item 10.E. “Additional Information — Taxation — Taxation of Non-Canadian Limited Partners — Spin-Off” for a more detailed discussion of this withholding tax. Limited partners who are taxable in the United States and who acquire our units pursuant to the spin-off generally will be considered to have received a taxable distribution for U.S. federal income tax purposes equal to the fair market value of our units so received plus the amount of any cash received in lieu of fractional units, without reduction for the amount of any Canadian tax withheld. A limited partner who is taxable in the United States may be subject to U.S. “backup” withholding tax if such limited partner fails to timely provide Brookfield Asset Management (or the relevant intermediary) with a properly completed IRS Form W-9. U.S. backup withholding tax is not an additional tax, and any amounts withheld under the backup withholding rules will be allowed as a credit against a limited partner’s U.S. federal income tax liability (or as a refund if in excess of such liability) provided the required information is timely furnished to the IRS. See Item 10.E. “Additional Information — Taxation — United States Federal Income Tax Considerations — Consequences to U.S. Holders”. To satisfy the withholding tax liabilities of non-Canadian registered shareholders of Brookfield Asset Management, Brookfield Asset Management will withhold a nominal amount of our units otherwise distributable and a portion of any cash distribution in lieu of fractional units otherwise distributable. Brookfield Asset Management will purchase these withheld units at a price equal to the fair market value of our units determined by reference to the five day volume-weighted average of the trading price of our units following closing of the spin-off. The proceeds of this sale of the withheld units together with the amount of any cash withheld from any cash distribution in lieu of fractional units will be remitted to the Canadian federal government or the U.S. federal government (as applicable) in satisfaction of the withholding tax liabilities described above. We estimate that the satisfaction of the Canadian federal and U.S. “backup” withholding tax obligations will result in Brookfield Asset Management withholding less than 1% of our outstanding units. For non-Canadian beneficial shareholders, these withholding tax obligations will be satisfied in the ordinary course through arrangements with their broker or other intermediary. See generally Item 10.E “Additional Information Taxation” which qualifies in its entirety the foregoing discussion.

Transaction Agreements

Our company and Brookfield Asset Management have entered into a master purchase agreement, which evidences the intent of Brookfield Asset Management to cause the Property Partnership to acquire, through the Holding Entities, substantially all of Brookfield Asset Management’s commercial property operations and our company’s intention to acquire an approximate 10% interest (as currently anticipated) in the Property Partnership. Our assets and operations will be acquired from Brookfield pursuant to separate securities purchase agreements and other agreements. These transfer agreements will each contain representations and warranties and related indemnities to us from Brookfield, including representations and warranties concerning: (i) organization and good standing; (ii) the authorization, execution, delivery and enforceability of the agreement and all agreements executed in connection therewith; and (iii) title to the securities being transferred to us. The transfer agreements will not contain representations and warranties or indemnities relating to the underlying assets and operations.

A copy of the master purchase agreement will be available electronically on the website of the SEC at www.sec.gov and our SEDAR profile at www.sedar.com and will be made available to our unitholders as described under Item 10.C. “Additional Information Material Contracts” and Item  10.H. “Documents on Display”.

4.B. BUSINESS OVERVIEW

Overview of our Business

Our company is a leading global owner, operator and investor in high quality commercial property. We recently acquired from Brookfield Asset Management substantially all of its commercial property operations, including its office, retail, multi-family and industrial assets. See Item 4.A. “Information on the Company — History and Development of the Company”.

 

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Our portfolio as of December 31, 2011 included interests in 126 office properties totaling 82 million square feet and 184 retail properties containing approximately 163 million square feet. We also held interests in an 18 million square foot office development pipeline and a $350 million retail redevelopment pipeline. In addition, as of December 31, 2011 we had an expanding multi-family and industrial platform which consisted of interests in approximately 11,900 multi-family units and 2 million square feet of industrial space, and an opportunistic investment platform which consisted of investments in distressed and under-performing real estate assets and businesses and commercial real estate mortgages and mezzanine loans.

The charts below present the IFRS Value of our portfolio by asset class and by geographic location as at December 31, 2011:

 

LOGO   LOGO

IFRS Value represents equity attributable to parent company and means total assets less total liabilities and non-controlling interests. For a discussion of IFRS Value see Item 5.A. “Operations and Financial Review and Prospects — Performance Measures”. Information regarding the revenues attributable to each of our operating platforms and the geographic locations in which we operate is presented in Note 25 to the audited carve-out financial statements of the commercial property operations of Brookfield Asset Management included elsewhere in this Form 20-F.

Our Business Strategy

We invest in well-located real estate assets that generate, or have the potential to generate, long-term, predictable and sustainable cash flows with attractive growth and development potential in some of the world’s most resilient and dynamic markets. We seek to enhance these cash flows through active asset management and our operations-oriented approach. Our properties are located in North America, Europe, Australia and Brazil and we may pursue growth in other markets where we identify attractive opportunities to build operating platforms or acquire assets and to achieve strong risk-adjusted returns.

We strive to invest at attractive valuations, particularly in distress situations that create opportunities for superior valuation gains and cash flow returns, or to monetize assets at appropriate times to realize value. At all points along the risk-return spectrum, we draw on the resources and local market intelligence of our operating entities. We believe our strategy will enable us to generate a high level of stable and sustainable cash flows in our core properties while allowing us to pursue opportunistic returns by taking advantage of dislocations and inefficiencies in the various real estate markets in which we operate. In executing these strategies, we will leverage our established property platform, our strategic relationship with Brookfield and our large capitalization to grow our business over time.

To execute our strategy, we seek to:

 

   

have “best-in-class” operating platforms with high quality real estate assets that are financed with conservative, long-term asset financing, with limited recourse to our company;

 

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maintain a high level of financial liquidity and operational flexibility to be able to capitalize on opportunities to enhance value through acquisitions, development activity and operational improvements;

 

   

invest where we possess competitive advantages;

 

   

acquire assets on a value basis with a goal of maximizing return on capital;

 

   

build sustainable cash flows to reduce risk and lower the cost of capital; and

 

   

recognize that superior returns often require contrarian thinking.

Given the size and scope of our business, we believe that we have significant flexibility to source and allocate real estate capital on a global basis and a strong global franchise to generate growth. We are not a passive investor. We plan to grow by acquiring positions of control or influence over the assets in which we invest using a variety of strategies to target assets directly or through portfolios and corporate entities. We seek to create value and reduce the risk profile of portfolio assets through our in-house property management, leasing, brokerage, development and construction capabilities.

We expect to be primarily focused on commercial property and have therefore not acquired Brookfield’s residential land development, home building, construction, real estate advisory services and other similar operations and services. However, we may pursue acquisitions in those sectors, either as part of commercial property acquisitions or on a stand-alone basis, if it would allow us to generate attractive returns.

An integral part of our strategy is to pursue acquisitions through consortium arrangements with institutional investors, strategic partners or financial sponsors and to form partnerships to pursue acquisitions on a specialized or global basis. Brookfield has a strong track record of leading such consortiums and partnerships and actively managing underlying assets to improve performance. Brookfield has established and manages a number of private investment entities, managed accounts, joint ventures, consortiums, partnerships and investment funds whose investment objectives include the acquisition of commercial property and Brookfield may in the future establish similar funds. We expect to be the lead investor when Brookfield raises its flagship opportunistic private real estate fund.

Competitive Strengths

We believe that a number of competitive strengths differentiate us from other real property companies.

 

   

Global Scale. We are one of the world’s largest publicly-traded commercial property owners. Coupled with Brookfield’s experience, execution abilities and global relationships, our global presence should permit us to source and execute large-scale transactions across a wide spectrum of real estate sectors and geographies.

 

   

Sector and Geographic Diversification. We intend to leverage the size and scope of our operating platforms to provide increased revenue diversity and scale, financial strength and capital deployment. Because we have interests in office, retail, multi-family and industrial assets in North America, Europe, Australia and Brazil, we expect our opportunities to be greater and our revenue streams to be more stable than if we were focused on a single type of real property or one geographic region. Our diversification positions us well to pursue growth through development, opportunistic and turn-around strategies and select investments in emerging and high-growth markets.

 

   

Superior Operating Capabilities. Brookfield’s operating experience and expertise should provide a strong pipeline of deal flow, sourcing capabilities and industry visibility, market-specific underwriting expertise, and the ability to add value at the property and operations level. As we pursue opportunities in the various markets in which we operate, we will benefit from Brookfield’s experience in owning, operating and investing in high quality commercial properties, sourcing and structuring deals with financial and regulatory complexity, executing opportunistic strategies and

 

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turnarounds, and employing an operations-oriented approach to adding value by leveraging the strength of our operating entities.

 

   

Stable and Growing Cash Flow. We believe we will have sustainable and growing cash flow which will be underpinned by our high quality assets, quality credit tenant base and long term lease expiry profile. Our company intends to make quarterly cash distributions in an initial amount currently anticipated to be approximately $1.00 per unit on an annualized basis, which initially represents an estimated dividend yield of approximately 4% of IFRS Value. We will target an initial pay-out ratio of approximately 80% of FFO and are initially pursuing a distribution growth rate target in the range of 3% to 5% annually.

 

   

Brookfield’s Flagship Commercial Property Entity. We will be the primary entity through which Brookfield Asset Management owns and operates its commercial property businesses on a global basis. As such, Brookfield Asset Management has agreed to offer us the opportunity to take-up Brookfield’s share in any investment in commercial property that is suitable for us. We have access to Brookfield’s private investments through our right to take up Brookfield’s share in them, including investments in opportunistic, real estate finance and property operations in select emerging markets. Our goal is to have a significant influence or a majority controlling interest in each of these investments. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield”.

 

   

Capitalization and Growth. Our significant market capitalization and planned listings on the NYSE and the TSX will provide us with an attractive currency to source and execute large-scale transactions, typically as the lead investor, across a wide spectrum of real estate sectors and geographies. We will also seek opportunities to grow our portfolio by re-allocating capital from stabilized investments to more accretive opportunities where appropriate risk-adjusted returns can be earned.

Development of our Business

Brookfield and its predecessor companies have been active in various facets of the real estate business since the 1920s. Canadian Arena Corporation, the predecessor company to Brookfield Office Properties, built the Montreal Forum in 1924 to provide facilities for hockey and other sporting and cultural events and its earnings were derived principally from the ownership of the Montreal Forum and the Montreal Canadiens of the National Hockey League until the sale of the hockey franchise in 1978.

In 1976, Brookfield expanded its real estate interests by acquiring a controlling interest in one of Canada’s largest public real estate companies. The steady escalation in commercial property values over the next ten years provided the capital base to expand. Brookfield took advantage of falling real estate values during the recession of the early 1990s to upgrade and expand its directly owned commercial property portfolio. In 2003, Brookfield made its first investments outside of North America by making property investments in the United Kingdom. Brookfield further expanded outside of North America in 2007 by making property investments in Australia.

The accumulation of our current portfolio of assets was completed through various corporate and property purchases, including the following acquisitions:

 

   

BCE Developments – 7 million square feet: In 1990, Brookfield acquired a 50% interest in a portfolio of office properties in Toronto, Denver and Minneapolis from BCE Developments. In 1994, this interest was increased to 100%. Brookfield Place, Brookfield’s flagship office complex in Toronto, was acquired in this transaction.

 

   

Olympia & York U.S.A. – 14.7 million square feet: In 1996, Brookfield acquired a 46% interest in World Financial Properties LP, the corporation formed from the bankruptcy of Olympia & York, which included three of the four towers of the World Financial Center, One Liberty Plaza and 245 Park Avenue in Manhattan. Brookfield subsequently increased its interest to 99.4%.

 

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Trizec Western Canada – 3.5 million square feet: In 2000, Brookfield acquired a portfolio of Calgary properties, including the Bankers Hall complex.

 

   

United Kingdom – 8.8 million square feet: In 2003, Brookfield acquired a 9% interest in Canary Wharf, marking its entry into the United Kingdom real estate market. Canary Wharf owned and operated 8.8 million square feet of office and retail properties at that time and had 1 million square feet of office space under construction. Brookfield’s interest in Canary Wharf was increased to approximately 22% in 2010. In 2005, Brookfield also purchased an 80% interest in a 555,000 square foot office property at 20 Canada Square, Canary Wharf, London. Brookfield now owns 100% of this property. In addition, in 2010, Brookfield acquired a 50% stake in 100 Bishopsgate, a development site in the City of London.

 

   

O&Y Properties/O&Y REIT – 11.6 million square feet: In 2005, Brookfield acquired 100% of O&Y with other partners and continues to own a direct 25% interest in a portfolio of high-quality office properties owned by O&Y Properties and O&Y REIT in Toronto, Ottawa, Calgary and Edmonton with a consortium of investors.

 

   

Trizec Properties/Trizec Canada – 26 million square feet: In 2006, Brookfield acquired Trizec’s portfolio of 58 office properties in New York, Washington, D.C., Los Angeles and Houston in a joint venture with a partner.

 

   

Brazil – 2.5 million square feet: In 2007, Brookfield’s retail property fund in Brazil entered into an agreement to acquire five high-quality shopping centers in São Paulo and Rio de Janeiro. This acquisition expanded Brookfield’s portfolio to approximately 2.5 million square feet of retail centers in south-central Brazil.

 

   

Australia Portfolio – 6.2 million square feet: In 2007, Brookfield acquired Multiplex Limited and Multiplex Property Trust, or Multiplex, an Australian commercial property owner and developer. Multiplex’s assets included approximately $3.6 billion of core office and retail properties within nine funds and a $3 billion high-quality office portfolio.

 

   

General Growth Properties, Inc. – 160 million square feet: In 2010, Brookfield led the recapitalization of GGP, the second largest mall owner in the United States with 166 malls as at December 31, 2011. In 2011, Brookfield acquired an additional 113.3 million common shares of GGP, giving Brookfield and its consortium partners an approximate 38% equity interest in GGP (Brookfield’s interest is approximately 21%). In January 2012, GGP spun-off Rouse Properties, Inc., or Rouse, which at the time of the spin-off held a portfolio of 30 malls.

Since 1989, Brookfield has invested approximately $17.3 billion of equity in commercial property, generating an estimated compound annual return (“IRR”) of approximately 15.4% through December 31, 2011. The return represents the composite levered investment return from all of the opportunistic and core entities and investments that will be acquired by our company from Brookfield in connection with the spin-off, from inception through December 31, 2011. The IRR was determined using the value of Brookfield’s investments in commercial property as at December 31, 2011 (which includes valuations of unrealized investments that are based on assumptions management believes are reasonable), compared to the aggregate equity investments made in such commercial property, and includes all net proceeds generated by these investments. The historical performance of Brookfield should not be taken as an indication of performance by our company or Brookfield in the future.

Recent Developments

On January 12, 2012, GGP completed the spin-off of Rouse through a special dividend of the common stock of Rouse to holders of GGP common stock. Following completion of the spin-off, we and the other members of Brookfield’s consortium owned approximately 37% of the common stock of Rouse. At the time of the spin-off, Rouse owned and managed 30 dominant Class B regional malls in secondary and tertiary markets. On March 19, 2012, Rouse completed a $200 million rights offering. Following the spin-off and the rights offering, we and the other members of Brookfield’s consortium hold an aggregate of approximately 27 million shares of Rouse, representing approximately 54% of the outstanding shares of common stock of Rouse.

 

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In the first quarter of 2012, Brookfield announced a joint venture with an industrial partner to acquire, develop and manage industrial property, principally large warehouses, across the United States. The assets acquired in this joint venture will be held by us.

Operating Platforms

Our business is organized in four operating platforms, with assets as of December 31, 2011 as set forth in the diagram below. The capital invested in these operating platforms is through a combination of: direct investment; investments in asset level partnerships or joint venture arrangements; sponsorship and participation in private equity funds; and the ownership of shares in other public companies. Combining both publicly-listed and private institutional capital provides a competitive advantage in flexibility and access to capital to fund growth. For a discussion of our organizational structure and how we hold our commercial property operations, see Item 4.C. “Information on the Company Organizational Structure — Operating Entities”.

 

LOGO

Office Platform

Our strategy for our office platform includes:

 

   

Growing our high quality portfolio. We are continuing to grow our high quality office portfolio in gateway cities. We seek to build a diversified global presence by targeting markets primarily underpinned by major financial, energy and professional services businesses in key urban centers in North America, Australia, and Europe. Our goal is to maintain a meaningful presence in each of our primary markets in order to maximize the value of our tenant relationships.

 

   

Optimizing rental revenues. In order to ensure the long-term sustainability of rental revenues through economic cycles, we seek to continue to attract tenants with strong credit quality, maintain high occupancy levels through proactive leasing initiatives across our portfolio and initiate mark-to-market opportunities on leases.

 

   

Adding value through development. We seek to add value across our portfolio by enhancing existing portfolio properties through major capital projects on a selective basis and by creating “best-in-class” new office stock in premium locations through development initiatives.

 

   

Utilizing a prudent capital structure. We seek to generate strong risk-adjusted returns by utilizing conservative financing structures while pursuing liquidity initiatives across our portfolio.

As at December 31, 2011, our office portfolio consisted of interests in 126 properties containing approximately 82 million square feet of space. The majority of these properties are located in the central business districts of New York, Washington, D.C., Houston, Los Angeles, Toronto, Calgary, Ottawa, Sydney, Melbourne, Perth and London, making us a global leader in the ownership and management of high-quality office assets. Landmark properties include the World Financial Center in New York, Brookfield Place in Toronto, Bank of America Plaza in Los Angeles, Bankers Hall in Calgary, Darling Park in Sydney and City Square in Perth.

 

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The following is a brief overview of the office property assets in our portfolio and the office property markets in which we operate as at December 31, 2011:

 

     Number of
Properties(1)
  Total Area (000’s
Sq. Ft.)
  Average Market
Occupancy Rate
(%)
  Our Average
Occupancy Rate
(%)
  In-place Market
Net Rent
($/Sq. Ft.)
  Our In-place Net
Rent
($/Sq. Ft.)
United States   62   49,250   88.9   91.3   31.21   24.53
Canada   29   21,167   95.4   96.3   29.87   25.48
Australia   34   11,180   92.8   96.6   48.93   48.33
Europe(2)   1   576   94.0   100.0   59.87   60.47
Total/Average   126   82,173   91.1   93.3   33.62   28.55

 

(1) Does not include office assets held within our opportunistic investment platform.
(2) Does not include office assets held through our approximate 22% interest in Canary Wharf.

The table below presents the following information on the assets in our office platform by geographic location as at December 31, 2011: (i) the number of properties, the percentage of the space under lease and the size of the office, retail, leasable, parking and total space in our office portfolio, which provides information as if we own 100% of the office assets in which we have an interest; (ii) our proportionate interest in those office assets before considering minority interests; and (iii) our proportionate interest in those office assets net of minority interests. For more detailed information on each property in our office platform, see Appendix A to this Form 20-F.

 

OFFICE PROPERTY
PORTFOLIO(1)

  Number of
properties
          Assets Under Management     Proportionate(2)     Proportionate net
of Minority
Share(3)
 
(Sq.Ft. in 000’s)     Leased
%
    Office     Retail     Leasable     Parking     Total     Owned
%
    Leasable     Total     Leasable     Total  

U.S. Properties

                       

New York

    10        92.5     18,301        550        18,851        281        19,132        86     16,220        16,501        8,070        8,210   

Boston

    1        63.5     771        25        796        235        1,031        100     796        1,031        396        512   

Washington, D.C.

    30        93.0     5,977        527        6,504        1,028        7,532        82     5,390        6,192        2,866        3,349   

Los Angeles

    6        84.3     4,106        424        4,530        1,156        5,686        79     3,593        4,514        1,829        2,298   

Houston

    9        89.9     7,872        291        8,163        1,509        9,672        74     6,180        7,128        3,090        3,564   

Denver

    2        98.3     2.595        48        2,643        503        3,146        80     1,999        2,502        1,000        1,251   

Minneapolis

    4        94.0     1,718        812        2,530        521        3,051        100     2,530        3,051        1,265        1,526   
                                                                                                 
    62        91.2     41,340        2,677        44,017        5,233        49,250        83     36,708        40,919        18,516        20,710   
                                                                                                 
Canadian Properties                        

Toronto

    12        93.5     7,995        764        8,759        1,792        10,551        66     5,698        6,976        2,378        2,909   

Calgary

    9        99.2     5,641        303        5,944        969        6,913        49     2,896        3,363        1,222        1,419   

Ottawa

    6        99.7     1,710        37        1,747        1,030        2,777        25     437        694        183        292   

Vancouver

    1        96.5     494        95        589        264        853        100     589        853        245        355   

Other

    1        100.0     70        3        73               73        100     73        73        36        36   
                                                                                                 
    29        96.3     15,910        1,202        17,112        4,055        21,167        56     9,693        11,959        4,064        5,011   
                                                                                                 

Australian Properties

                       

Sydney

    16        98.1     4,650        436        5,086        467        5,553        59     2,984        3,268        1,923        2,114   

Melbourne

    4        98.3     2,207        70        2,277        251        2,528        82     1,876        2,065        850        938   

Brisbane

    3        92.4     819        6        825        59        884        87     717        769        717        769   

Perth

    2        94.6     611        1        612        31        643        84     516        540        336        351   

Canberra

    1        100.0     152        24        176        28        204        100     176        204        176        204   

New Zealand

    8        92.8     1,157        33        1,190        178        1,368        100     1,190        1,368        595        684   
                                                                                                 
    34        97.0     9,596        570        10,166        1,014        11,180        73     7,459        8,214        4,597        5,060   
                                                                                                 
European Properties                        

London

    1        100.0     539        17        556        20        576        100     556        576        556        576   
    1        100.0     539        17        556        20        576        100     556        576        556        576   
                                                                                                 
Total Office Properties     126        93.3     67,385        4,466        71,851        10,322        82,173        75     54,416        61,668        27,733        31,357   

 

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(1) Does not include office assets held within our opportunistic investment platform or our approximate 22% interest in Canary Wharf.
(2) Reflects our company’s interest before considering minority interests, including minority interests in the Property Partnership, Brookfield Office Properties, Brookfield Canada Office Properties, the U.S. Office Fund, Brookfield Prime Property Fund, Brookfield Heritage Partners LLC, Multiplex New Zealand Property Fund, and Brookfield Financial Partners L.P.
(3) Reflects our company’s interest net of minority interests described in the note above other than the minority interest in the Property Partnership.

An important characteristic of our office portfolio is the strong credit quality of our tenants. We direct special attention to tenant credit quality in order to ensure the long-term sustainability of rental revenues through economic cycles. The following list shows our major tenants, each with over one million square feet of space in our portfolio by leased area, and their respective credit ratings and lease commitments as at December 31, 2011:

 

Tenant    Primary Location    Credit
Rating(1)
   Year of
Expiry(2)
   Total
(000’s
Sq. Ft.)
         Sq. Ft.
(%)

Government and Government Agencies

   All markets    AA+    Various    6,172         8.6
Bank of America/Merrill Lynch(3) and Bank of America/Merrill Lynch subtenants    Toronto/New York/Denver/Los Angeles    A    Various    4,658         6.5

Wells Fargo/Wachovia Securities(4)

   New York    AA-    2019    1,544         2.1

CIBC World Markets(5)

   Toronto/New York/Calgary    A+    2033    1,427         2.0

Suncor Energy

   Calgary    BBB+    2028    1,313         1.8

Royal Bank of Canada

   Vancouver/Toronto/Calgary/New York/Los Angeles/Minneapolis    AA-    2023    1,298         1.8

Kellogg Brown & Root

   Houston    Not
Rated
   2030    1,268         1.8

Bank of Montreal

   Calgary/Toronto    A+    2024    1,132         1.6

Total

                  18,812         26.2

 

(1) From Standard & Poor’s Rating Services, Moody’s Investment Services, Inc. or DBRS Limited. Reflects credit rating of tenant, and does not reflect credit rating of any subtenants.
(2) Reflects the year of maturity related to leases beyond 2016 and is calculated for multiple leases on a weighted average basis based on square feet where practicable.
(3) Bank of America/Merrill Lynch leases 4.6 million square feet in the World Financial Center, of which they occupy 2.7 million square feet with the balance being leased to various subtenants ranging in size up to 500,000 square feet.
(4) Wells Fargo/Wachovia leases 1.4 million square feet at One New York Plaza, of which they occupy 148,000 square feet with the balance being leased to five subtenants ranging in size up to 756,000 square feet.
(5) CIBC World Markets leases 1,094,000 square feet at 300 Madison Avenue in New York, of which they sublease 925,000 square feet to PriceWaterhouseCoopers LLP.

Our strategy is to sign long-term leases in order to mitigate risk, reduce our overall re-tenanting costs and ensure stable and sustainable cash flows. We typically commence discussions with tenants regarding their space requirements well in advance of the contractual expiration.

The following table summarizes our lease expiry profile as at December 31, 2011:

 

               Expiring leases
(Sq.Ft. in 000’s)    Net
Rental
Area(1)
   Currently
Available(2)
   2012    2013    2014    2015    2016    2017    2018 &
Beyond

United States

   44,017    3,851    3,027    5,810    3,171    3,849    2,036    1,773    20,500

Canada

   17,112    639    435    1,798    439    1,680    1,809    625    9,687

Australia

   10,166    347    378    670    851    1,227    1,017    1,038    4,638

Europe(3)

   556    -    -    -    262    -    -    -    294

Total

   71,851    4,837    3,840    8,278    4,723    6,756    4,862    3,436    35,119

Percentage of total

   100%    6.7%    5.3%    11.5%    6.6%    9.4%    6.8%    4.8%    49.0%

 

(1) Does not include office assets held within our opportunistic investment platform.
(2) Indicates rental area that is not leased.
(3) Does not include office assets held through our approximate 22% interest in Canary Wharf.

 

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We also hold, as at December 31, 2011, interests in centrally-located development sites with a total development pipeline of approximately 18 million square feet in the United States, Canada, Australia and Europe, including City Square in Perth, 100 Bishopsgate in London and Manhattan West in New York. With the exception of City Square in Perth, these development sites are in planning stages. We will seek to develop these sites only when our risk-adjusted return hurdles are met and when preleasing targets with one or more lead tenants have been achieved.

The following table summarizes the office development projects in our portfolio by geographic location as at December 31, 2011. For more detailed information on each development project in our commercial office development pipeline, see Appendix A to this Form 20-F.

 

               (000’s Sq. Ft.)
      Number
of Sites
   Owned
Interest
(%)
   Total    At
Ownership

United States

   7    95    9,657    9,152

Canada

   5    78    4,227    3,301

Australia

   5    100    2,677    2,677

Europe

   1    50    950    475

Total

   18    89    17,511    15,605

Retail Platform

Our strategy for our retail platform includes:

 

   

Growing our high quality portfolio. We are continuing to grow our high quality retail portfolio by focusing on growth areas in dynamic and resilient markets where we have a significant presence that we believe are under-served by quality retail centers. We also redevelop our retail properties on a selective basis to enhance our portfolio when we believe a market is ready and appropriate risk-adjusted returns can be earned. We look to maintain a meaningful presence in each of our primary markets in order to maximize the value of our tenant relationships.

 

   

Positioning malls as the “only” or “best” mall in town. We seek to position our malls as the “only” or “best” mall in their market areas in order to concentrate consumer traffic and capture favorable demographic trends. We aim to do this by creating malls as irreplaceable destinations within the community.

 

   

Optimizing occupancy and enhance income. In order to optimize occupancy levels, we look for ways to increase tenant sales per square foot and lease spreads while decreasing our occupancy costs. We also seek to diversify the tenants at our malls across retail sectors in order to achieve complementary retail mixes. We continue to pursue alternative income streams through parking, merchandising and other initiatives at our malls, while assessing cost efficiencies and synergies across our retail portfolio.

 

   

Actively managing our portfolio capital structures. We intend to achieve our goal of protecting and creating growth in the value of our retail portfolio by actively managing capital structures and conservatively financing assets.

Our retail portfolio consists of high quality retail centers in target markets predominantly in the United States, Brazil and Australia. As at December 31, 2011, our retail portfolio consisted of interests in 184 retail properties containing approximately 163 million square feet of retail space.

As at December 31, 2011, our retail portfolio consisted of 166 regional malls totaling approximately 157 million square feet in major and middle markets throughout the United States with the concentration of our regional malls as a percentage of our total regional mall net operating income allocated as follows: west region (26%), southeast region (23%), midwest region (20%), northeast region (17%) and southwest region (14%). We

 

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believe 24 regional malls in our retail portfolio are the premier regional malls in their market areas when measured against the top 100 leading malls in the United States. These high quality regional malls typically have average annual tenant sales per square foot of $725 or higher. Regional malls in our portfolio include Ala Moana in Honolulu, Fashion Show in Las Vegas, the Natick Collection in Natick (Boston), Tysons Galleria in Washington, D.C., Park Meadows in Lone Tree (Denver) and Water Tower Place in Chicago. More broadly, we own an interest in 125 of the top 600 regional malls in the country. A significant number of these regional malls are either the only mall in their market area, or, as part of a cluster of malls, receive relatively high consumer traffic.

Our portfolio also includes, as at December 31, 2011, 10 malls totaling approximately 3 million square feet in Brazil, 62% of which is located in São Paolo, 31% of which is located in Rio de Janeiro and 7% of which is located in Belo Horizonte. These properties are mostly concentrated in premier locations in highly dense urban areas and thereby have leading positions in their respective trade areas. Our core properties include the Rio Sul Shopping Center in Rio de Janeiro and the Shopping Pátio Paulista and Shopping Pátio Higienópolis in São Paulo.

In Australia, as at December 31, 2011, our portfolio consists of an economic interest in 8 retail centers totaling approximately 3 million square feet, 44% of which is located in Sydney, 35% of which is located in New Zealand and 21% of which is located in Brisbane.

The following is a brief overview of the retail property assets in our portfolio and the retail property markets in which we operate as at December 31, 2011:

 

      Number of
Properties(1)
   Gross Leasable
Area (000’s
Sq. Ft.)
   Occupancy Rate
(%)
   Average Annual
Tenant Sales
(per Sq.Ft.)(2)
   Our In-place
Rent
($/Sq.Ft.)

United States(3)

   166    157,348    93.2    475    63.64

Brazil

   10    3,132    94.7    818    52.50

Australia(4)

   8    2,997    98.1    608    9.54

Total/Average

   184    163,477    93.5    484    60.87

 

(1) Does not include retail assets held within our opportunistic investment platform.
(2) Based only on properties with respect to which tenants are contractually obligated to report this information.
(3) Includes only U.S. regional malls.
(4) Includes 3 industrial properties totalling approximately 2.1 million square feet.

 

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The table below presents the following information on the assets in our retail platform by geographic location as at December 31, 2011: (i) the number of properties, the percentage of the space under lease and the size of the office, retail, leasable, parking and total space in our retail assets under management, which provides information as if we own 100% of the retail assets in which we have an interest; (ii) our proportionate interest in those retail assets before considering minority interests; and (iii) our proportionate interest in those retail assets net of minority interests.

 

RETAIL PROPERTY
PORTFOLIO(1)

 

Number

of
properties

          Assets Under Management     Proportionate(2)     Proportionate
net of Minority
Share(3)
 
(Sq.Ft. in 000’s)     Leased
%
    Office     Retail     Leasable     Parking     Total     Owned
%
    Leasable     Total     Leasable     Total  

U.S. Properties

                       

Midwest Region

    34        93.9     731        31,514        32,245               32,245        89     28,583        28,583        5,604        5,604   
Northeast Region     28        92.4     898        25,090        25,988               25,988        83     21,496        21,496        4,083        4,083   
Southeast Region     37        93.5     363        36,453        36,816               36,816        86     31,568        31,568        6,088        1,352   
Southwest Region     20        97.4     110        21,441        21,551               21,551        89     19,145        19,145        3,751        3,751   

West Region

    47        91.8     975        39,773        40,748               40,748        89     36,362        36,362        7,186        7,186   
                                                                                                 
    166        93.6     3,077        154,271        157,348               157,348        87     137,154        137,154        26,712        21,976   
                                                                                                 
Brazilian Properties                        

Rio de Janeiro

    3        97.0     63        908        971               971        75     727        727        208        208   

São Paulo

    6        93.8            1,935        1,935               1,935        45     877        877        149        149   

Belo Horizonte

    1        100.0            226        226               226        50     113        113        20        20   
                                                                                                 
    10        95.2     63        3,069        3,132               3,132        55     1,717        1,717        378        378   
                                                                                                 
Australian Properties                        

Sydney

    4        95.9     14        1,200        1,214        125        1,339        100     1,214        1,339        1,214        1,339   

Brisbane

    2        99.3            583        583        88        671        100     583        671        583        671   

New Zealand

    2        100.0            987        987               987        100     987        987        494        494   
                                                                                                 
    8        98.0     14        2,770        2,784        213        2,997        100     2,784        2,997        2,291        2,504   
                                                                                                 
Total Retail Properties     184        93.9     3,153        160,111        163,264        213        163,477        87     141,654        141,867        29,379        24,856   

 

(1) Does not include retail assets held within our opportunistic investment platform or the retail assets held by GGP outside of the United States and non-regional malls.
(2) Reflects our company’s interest before considering minority interests, including minority interests in the Property Partnership, GGP, Brazil Retail Fund and Multiplex New Zealand Property Fund.
(3) Reflects our company’s interest net of minority interests described in the note above other than the minority interest in the Property Partnership.

The following table summarizes our lease expiry profile as at December 31, 2011:

 

               Expiring leases
(Sq.Ft. in 000’s)    Net Rental
Area
   Currently
Available
   2012    2013    2014    2015    2016    2017    2018 &
Beyond

United States(1)

   61,638    4,211    6,509    6,334    5,906    5,363    5,684    5,076    22,555

Australia

   2,953    55    33    20    31    122    719    336    1,637

Brazil

   3,069    164    675    376    470    433    218    109    624

Total

   67,660    4,430    7,217    6,730    6,407    5,918    6,621    5,521    24,816

Percentage of total

   100%    6.5%    10.7%    9.9%    9.5%    8.7%    9.8%    8.2%    36.6%

 

(1) Represents regional malls only and excludes leases on traditional anchor stores and specialty leasing license agreements.

 

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The following list reflects the ten largest tenants in our malls as at December 31, 2011. We have a diversified tenant base with our largest tenant in our retail property portfolio accounting for approximately 3% of our minimum retail rents, tenant recoveries and other as at December 31, 2011.

 

Tenant    Primary DBA    Percent of
Minimum
Rents,
Tenant
Recoveries
and Other
(%)
   Size
(000’s
Sq.
Ft.)
   Number
of
Locations

Limited Brands

   Victoria’s Secret, Bath & Body Works    2.9    1,774    308

The Gap

   Gap, Banana Republic, Old Navy    2.7    2,415    236

Foot Locker

   Footlocker, Champs Sports, Footaction USA    2.1    1,466    371

Abercrombie & Fitch Stores

   Abercrombie, Abercrombie & Fitch, Hollister    2.1    1,509    214

Golden Gate Capital

   Express, J. Jill, Eddie Bauer    1.6    1,211    147

Forever 21

   Forever 21, Gadzooks    1.5    2,069    110

American Eagle Outfitters

   American Eagle, Aerie, Martin + OSA    1.5    914    163

Macy’s

   Macy’s, Bloomingdale’s    1.4    20,624    133

Luxottica Retail North America

   Lenscrafters, Sunglass Hut, Pearle Vision    1.2    587    292

Genesco

   Journeys, Lids, Underground Station, Johnston & Murphy    1.1    539    354

Total

        17.9    33,108    2,328

We develop and redevelop retail properties on a selective basis to enhance our portfolio when we believe risk-adjusted returns can be earned. As of December 31, 2011, we had a $268 million U.S. retail redevelopment pipeline of existing malls.

Multi-Family and Industrial Platform

Our strategy for our multi-family and industrial platform includes:

 

   

Targeting under-performing properties. We focus on acquiring multi-family properties and developing industrial properties in high growth, supply-constrained markets by selectively targeting properties that we believe are under-valued, neglected or under-performing.

 

   

Leveraging our strategic relationships. We are seeking to leverage the deep sourcing and operating capabilities of Fairfield Residential Company LLC, or Fairfield, for our future investments in multi-family properties. Fairfield, which is 65% owned by Brookfield, is one of the largest vertically-integrated multi-family real estate companies in the United States and is a leading provider of acquisition, development, construction, renovation and property management services.

 

   

In early 2012, Brookfield entered into a joint venture with an industrial partner for the acquisition of industrial properties in the United States, which we believe will provide us with access to investment opportunities and enable us to leverage our partner’s operating capabilities. Our partner has a fully-integrated, national platform and owns or manages 30 million square feet of industrial warehouse property and controls one of the largest industrial land banks in the United States.

 

   

Enhancing revenues. We seek to leverage our experience and that of our partners in property management services to enhance revenues at our multi-family and industrial properties by growing rents and improving operational efficiencies, with the goal of generating stable but growing rental revenue. We also seek to create value by enhancing our multi-family portfolio through renovation programs and marketing initiatives and selectively developing industrial assets.

 

   

Positioning portfolios for institutional ownership. Our goal is to position our multi-family and industrial portfolios for institutional ownership. For our multi-family properties, we seek to do this by stabilizing and minimizing the risk profile of our multi-family portfolio. For our industrial properties, we typically seek to do this by aggregating single property, development or complicated portfolio acquisitions into portfolios suitable for institutional ownership through a combination of proactive leasing, marketing and financing initiatives.

 

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As of December 31, 2011, we owned an interest in approximately 11,900 multi-family units located in coastal and select interior markets in North America, a portion of which are managed by Fairfield. Our focus is on multi-family properties that we believe have significant value-enhancement potential through the application of dedicated hands-on asset management and operational expertise. As of December 31, 2011, we owned interests in several industrial properties in the United States consisting of approximately 2 million square feet of industrial space.

Opportunistic Investment Platform

Our strategy for our opportunistic investment platform includes:

 

   

Pursuing an opportunistic investment strategy. We invest in assets with a view to maximizing long-term, risk-adjusted return on capital by pursuing an opportunistic strategy to take advantage of dislocations and inefficiencies at all stages of the investment cycle. We seek to acquire positions of control or influence in individual properties, real estate holding companies and distressed loans, with a focus on large, complex, platform acquisitions, which we believe Brookfield is uniquely positioned to source and execute.

 

   

Providing strong sponsorship. We invest in opportunities that we believe leverage Brookfield’s competitive strengths, such as deal sourcing, financial or restructuring expertise or operational advantages. Our opportunistic investment platform makes investments primarily in Brookfield-sponsored real estate opportunity and finance funds. We expect to be the lead investor when Brookfield raises its flagship opportunistic private real estate fund. We believe that these funds provide a significant growth platform for us to participate in large-scale, opportunistic transactions alongside private institutional partners by providing us with access to transactions with the potential for significant returns. We hold the largest limited partner interest in almost all of the funds in which we are invested, and we expect that we will typically be the lead investor in these funds in the future. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield”.

 

   

Providing operating excellence. We seek to create long-term value by building long-term sustainable revenues and stabilizing assets through operational, financial structuring and other improvements in our portfolio assets.

 

   

Diversifying geographically. We seek to build a diversified portfolio of real estate assets in emerging and growth markets by targeting global opportunities where we believe a market offers attractive risk-adjusted returns. Initiatives underway include opportunistic acquisitions of large-scale, distressed corporate platforms and non-performing loan portfolios in the United States, Europe and Australia, office development opportunities in Brazil, distressed and development opportunities in the Middle East and local real estate investment strategies in India.

Our opportunistic investment platform pursues opportunistic investments predominantly in distressed and under-performing real estate assets and businesses and in commercial real estate mortgages and mezzanine loans. As of December 31, 2011, we held interests in a diverse portfolio of funds with approximately $1.7 billion of invested fund capital. Through these funds, we have interests in approximately 12 million square feet of office space, mezzanine loans and other real estate assets located in North America, Europe, Australia, Brazil and emerging markets. Depending on the nature of our investment and the specifics of the underlying assets, we may seek to hold and/or enhance the assets we invest in or sell the assets in order to realize a return on our investment. Once an asset has been sufficiently developed and its risk profile stabilized, we may determine to hold the asset through our office, retail, or multi-family and industrial platform as a long-term, stable investment.

 

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Market Overview and Opportunities

We believe that we are well-positioned to take advantage of attractive investment conditions in the key regions in which we have operations. We believe that the current volatility in global capital markets will provide compelling investment opportunities, as well as reinforce the benefits of our investment focus on high quality real estate assets with conservative financing that generate, or have the potential to generate, long-term, predictable and sustainable cash flows.

Capital preservation and risk mitigation remain key tenets of our investment philosophy – in every investment and in every economic environment. We believe the next few years will present some very attractive opportunities for real estate investors as economic conditions around the world recover and capital markets stabilize. We believe our company offers an attractive opportunity to participate in these markets by establishing a group of properties that produce significant cash flow for distribution to our unitholders and for the accretive acquisition and development of high-quality assets.

The following is an overview of the real estate industry in each of our primary markets.

North America

Supply and demand fundamentals remain sound in core markets for core assets and we continue to see strong investment demand for well-located, high quality assets. We believe the ability to add value through leasing and property management of under-performing real estate assets in core markets will continue to be a key competitive advantage in these economic conditions.

Further, we continue to see distressed situations requiring new capital and strong sponsorship, especially in the United States. These opportunities are coming directly from banks, private entities facing looming debt maturities and lower asset values, the unwinding of dysfunctional partnerships, operators seeking new growth capital, and deleveraging initiatives, among others. While the regulatory and policy approach in the United States has not been as rigid as Europe’s, we believe the large upcoming debt maturity profile of the United States through 2017 and pool of distressed assets requiring recapitalization in the United States will continue to provide opportunities.

Europe

Sovereign debt issues are continuing to put significant pressure on macroeconomic conditions and capital markets. Europe currently has the largest debt funding gap in the world, and we believe that this, combined with the impact of austerity measures, will provide ample opportunities to acquire groups of assets in various asset classes across Europe in the next few years. Industry sources currently estimate a €400 to €700 billion funding gap in European real estate assets. New government regulations will force banks under government ownership to divest portions of their real estate by 2014 – 2015. We believe that this, combined with the introduction of new fund regulations, will provide further consolidation and rationalization of real estate ownership.

Our European focus remains on the continent’s largest markets, including the United Kingdom, France, Germany and Spain, across various asset classes.

Australia

Our primary focus in Australia remains on the office sector, in which we already have a platform and also see the largest opportunities. The office market is still in the early stages of recovery, driven by growth in the domestic economy and overall low unemployment rates. Supply is limited, boding well for robust rental and capital growth over the medium term, and we believe demand fundamentals remain strong in the major markets. Banks are seeking to reduce exposure to troubled real estate assets, resulting in asset sales and alternative debt funding opportunities are emerging as a result.

 

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Our Australian portfolio also includes assets in New Zealand, where our primary focus remains on the office sector, in which we already have a platform and see acquisition and value-add opportunities. The primary office market of Auckland is in the early stages of recovery with increasing leasing enquiry and positive net absorption. There remains a large volume of distressed land throughout New Zealand, and banks are releasing some assets into receivership/sale in a controlled manner presenting opportunities for alternative debt funding.

Brazil

As with other emerging markets, Brazil fared materially better than many developed countries during the recession, however, while we believe that the demographic changes occurring in the region fuelled by a burgeoning middle class will continue to drive growth, we expect the return set in the near-term to be less opportunistic.

We remain focused on the retail and office segments. Retail fundamentals continue to improve throughout the country, driven by the low unemployment rates and increasing household income. Retail sales growth remains strong. National shopping center penetration levels are still low when compared to international levels, especially outside the main capitals. The office sector continues to post strong absorption levels, as the influx of multinational companies and continued relocation of tenants from older dysfunctional assets to new modern structures is driving demand. Both Rio de Janeiro and São Paulo remain at historic lows for vacancy. In Brazil, given that real estate operators are heavily reliant on the public markets for capital to execute business plans, we believe there could be substantial opportunities for private capital, especially with volatility in the Brazilian stock market.

Competition and Marketing

The nature and extent of competition we face varies from property to property and platform to platform. Our direct competitors include other publicly-traded office, retail, multi-family and industrial development and operating companies, private real estate companies and funds, commercial property developers and other owners of real estate that engage in similar businesses.

We believe the principal factors that our tenants consider in making their leasing decisions include: rental rates; quality, design and location of properties; total number and geographic distribution of properties; management and operational expertise; and financial position of the landlord. Based on these criteria, we believe that the size and scope of our operating platforms, as well as the overall quality and attractiveness of our individual properties, enable us to compete effectively for tenants in our local markets. Our marketing efforts focus on emphasizing these competitive advantages and leveraging our relationship with Brookfield. We benefit from using the “Brookfield” name and the Brookfield logo in connection with our marketing activities as Brookfield has a strong reputation in the global real estate industry. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield”.

Employees

Our company does not currently have any senior management who carry out the management and activities of our company. The personnel that carry out these activities are employees of Brookfield, and their services are provided to our company or for our benefit under our Master Services Agreement. For a discussion of the individuals from Brookfield’s management team that are expected to be involved in our business, see Item 6.A. “Directors, Senior Management and Employees — Directors and Senior Management — Our Management”. As at December 31, 2011, our operating entities had approximately 6,000 employees.

 

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Intellectual Property

Our company and the Property Partnership have each entered into a licensing agreement with Brookfield pursuant to which Brookfield has granted a non-exclusive, royalty-free license to use the name “Brookfield” and the Brookfield logo. Other than under this limited license, we do not have a legal right to the “Brookfield” name and the Brookfield logo.

Brookfield may terminate the licensing agreement effective immediately upon termination of our Master Services Agreement or with respect to any licensee upon 30 days’ prior written notice of termination if any of the following occurs:

 

   

the licensee defaults in the performance of any material term, condition or agreement contained in the agreement and the default continues for a period of 30 days after written notice of termination of the breach is given to the licensee;

 

   

the licensee assigns, sublicenses, pledges, mortgages or otherwise encumbers the intellectual property rights granted to it pursuant to the licensing agreement;

 

   

certain events relating to a bankruptcy or insolvency of the licensee; or

 

   

the licensee ceases to be an affiliate of Brookfield.

A termination of the licensing agreement with respect to one or more licensees will not affect the validity or enforceability of the agreement with respect to any other licensees.

Governmental, Legal and Arbitration Proceedings

Our company has not been since its formation and is not currently subject to any material governmental, legal or arbitration proceedings which may have or have had a significant impact on our company’s financial position or profitability nor is our company aware of any such proceedings that are pending or threatened.

We are occasionally named as a party in various claims and legal proceedings which arise during the normal course of our business. We review each of these claims, including the nature of the claim, the amount in dispute or claimed and the availability of insurance coverage. Although there can be no assurance as to the resolution of any particular claim, we do not believe that the outcome of any claims or potential claims of which we are currently aware will have a material adverse effect on us.

Regulation

Our business is subject to a variety of federal, state, provincial and local laws and regulations relating to the ownership and operation of real property, including the following:

 

   

We are subject to various laws relating to environmental matters. These laws could hold us liable for the costs of removal and remediation of certain hazardous substances or wastes released or deposited on or in our properties or disposed of at other locations.

 

   

We must comply with regulations under building codes and human rights codes that generally require that public buildings be made accessible to disabled persons.

 

   

We must comply with laws and regulations concerning zoning, design, construction and similar matters, including regulations which impose restrictive zoning and density requirements.

 

   

We are also subject to state, provincial and local fire and life safety requirements.

 

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These laws and regulations may change and we may become subject to more stringent laws and regulations in the future. Compliance with more stringent laws and regulations could have an adverse effect on our business, financial condition or results of operations. We have established policies and procedures for environmental management and compliance, and we have incurred and will continue to incur significant capital and operating expenditures to comply with health, safety and environmental laws and to obtain and comply with licenses, permits and other approvals and to assess and manage potential liability exposure.

Environmental Protection

We are committed to continuous improvement of our environmental performance. Sustainability is a priority for our tenants, and, as landlords, our goal is to exceed their expectations. We know that shrinking the environmental footprint in our buildings, and cutting back on energy, water and waste will have a positive effect on the financial performance of our assets.

Our company intends to build all future office developments to a LEED Gold standard or local equivalent. The LEED Green Building Rating System is an internationally accepted scorecard for sustainable sites, water efficiency, energy and atmosphere, materials and resources, and indoor environmental quality. Within our 82 million square foot global office portfolio:

 

   

we have 20 LEED certifications;

 

   

80% of our U.S. office properties have earned the EPA’s ENERGY STAR award and 100% of our Canadian office properties have achieved BOMA BESt (Building Environmental Standards); and

 

   

74% of our Australian office properties have received a 4-Star rating or higher under NABERS.

We continue to expand and enhance the features, systems and programs that foster energy efficiency in our existing office buildings, as well as the health and safety of all of our tenants, employees and the community. We perform regular, comprehensive environmental reviews and upgrades at our office properties and endeavor to maximize energy efficiency at every office building.

Our goal is to be responsible stewards of our resources, and good citizens in all that we do. We are an active contributor in the communities where we conduct business. We are proud of the commitment we have made to corporate social responsibility. The initiatives we undertake and the investments we make in building our company are guided by our core set of values around sustainable development, as we create a culture and organization that can be successful today and in the future.

 

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4.C. ORGANIZATIONAL STRUCTURE

Organizational Chart

The chart below represents a simplified summary of our organizational structure.

 

LOGO

 

(1) The limited partnership units of the Property Partnership held by Brookfield are redeemable for cash or exchangeable for our units in accordance with the Redemption-Exchange Mechanism. See Item 10.B. “Additional Information — Memorandum and Articles of Association — Description of Property Partnership Limited Partnership Agreement — Redemption-Exchange Mechanism”. This ownership percentage does not reflect the nominal amount of our units that Brookfield Asset Management will withhold in connection with the satisfaction of Canadian federal and U.S. “backup” withholding tax requirements for non-Canadian registered shareholders. See Item 4.A. “Information on the Company — History and Development of the Company — The Spin-Off — Mechanics of the Spin-Off”.
(2) Brookfield holds 100% of the limited partnership interests of Property GP LP.
(3) Brookfield holds $1.5 billion of redeemable preferred shares of one of our Holdings Entities, which it received as partial consideration for causing the Property Partnership to directly acquire substantially all of Brookfield Asset Management’s commercial property operations. In addition, Brookfield owns a nominal amount of preferred shares of two other Holding Entities (or wholly-owned subsidiaries thereof), which preferred shares will be entitled to vote with the common shares. The applicable Holding Entity or subsidiary will have an aggregate of 1% of the votes to be cast in respect of any such applicable Holding Entity or subsidiary. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield — Preferred Shares of Certain Holding Entities”.
(4) All percentages listed represent our economic interest in the applicable entity or group of assets, which may not be the same as our voting interest in those entities and groups of assets. All interests are rounded to the nearest one percent and, except with respect to Rouse, are calculated as at December 31, 2011. We acquired an interest in Rouse on January 12, 2012, and before that it was wholly-owned by GGP. In March 2012, our ownership increased as a result of Rouse’s rights offering.
(5) Our interest in Brookfield Office Properties is comprised of 49.6% of the outstanding common shares and 97.1% of the outstanding voting preferred shares. Brookfield Office Properties owns an approximate 83.3% aggregate equity interest in Brookfield Canada Office Properties, a Canadian real estate investment trust that is listed on the TSX and the NYSE, and an approximate 84.3% interest in the U.S. Office Fund, which consists of a consortium of institutional investors and which is led and managed by Brookfield Office Properties.

 

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(6) Our Australian office platform consists of our economic interest in certain of our Australian office properties not held through Brookfield Office Properties.
(7) Our interest in GGP is comprised of an interest in approximately 21% of the outstanding shares of common stock (assuming the exercise of all outstanding warrants to acquire additional shares of common stock, which warrants were “in-the-money” as at December 31, 2011).
(8) Rouse is a newly formed NYSE-listed company that GGP spun-out to its shareholders on January 12, 2012. In March 2012, our ownership increased as a result of Rouse’s rights offering.
(9) Our multi-family and industrial portfolio is held through various Brookfield-sponsored private funds in which we hold an interest.

Our Company

Our company was established on January 3, 2012 as a Bermuda exempted limited partnership registered under the Bermuda Limited Partnership Act of 1883, as amended, and the Bermuda Exempted Partnerships Act of 1992, as amended. Our company’s head and registered office is 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda and our company’s telephone number is +441 294-3304. Our company is a leading global owner, operator and investor in high quality commercial property. Our real estate assets are located in North America, Europe, Australia and Brazil.

Prior to the spin-off, we will acquire from Brookfield Asset Management substantially all of its commercial property operations, including its office, retail, multi-family and industrial assets. We will be Brookfield’s flagship public commercial property entity and the primary entity through which Brookfield Asset Management owns and operates these businesses on a global basis. We are positioned to take advantage of Brookfield’s global presence, providing unitholders with the opportunity to benefit from Brookfield’s operating experience, execution abilities and global relationships.

Property Partnership

Our company’s sole direct investment is a limited partnership interest in the Property Partnership. It is currently anticipated that our company will hold approximately a 10% limited partnership interest in the Property Partnership and Brookfield will hold approximately a 90% interest in the Property Partnership through limited partnership units of the Property Partnership which are redeemable for cash or exchangeable for our units in accordance with the Redemption-Exchange Mechanism. Brookfield’s interest in the Property Partnership includes a 1% general partnership interest held by Property GP LP, a wholly-owned subsidiary of Brookfield Asset Management, which entitles it to receive equity enhancement distributions and incentive distributions from the Property Partnership. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield — Equity Enhancement and Incentive Distributions”.

Our Managers

The Managers, wholly-owned subsidiaries of Brookfield Asset Management, provide management services to us pursuant to our Master Services Agreement. The senior management team that is principally responsible for providing us with management services include many of the same executives that have successfully overseen and grown Brookfield’s global real estate business, including Richard B. Clark who is Senior Managing Partner and Chief Executive Officer of Brookfield Asset Management’s global real estate group. See Item 4.A. “Information on the Company — History and Development of the Company — About Brookfield”.

The BPY General Partner

The BPY General Partner, a wholly-owned subsidiary of Brookfield Asset Management, has sole authority for the management and control of our company. Holders of our units, in their capacities as such, may not take part in the management or control of the activities and affairs of our company and do not have any right or authority to act for or to bind our company or to take part or interfere in the conduct or management of our company. See Item 10.B. “Additional Information — Memorandum and Articles of Association — Description of Our Units and Our Limited Partnership Agreement”.

 

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Property GP LP and Property General Partner

The Property GP LP serves as the general partner of the Property Partnership and has sole authority for the management and control of the Property Partnership. The general partner of Property GP LP is the Property General Partner, a corporation owned indirectly by Brookfield Asset Management but controlled by our company, through the BPY General Partner, pursuant to the Voting Agreement. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Voting Agreements”. Property GP LP will be entitled to receive equity enhancement distributions and incentive distributions from the Property Partnership as a result of its ownership of the general partnership interests of the Property Partnership. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield — Equity Enhancement and Incentive Distributions”.

Holding Entities

Our company indirectly holds its interests in our operating entities through the Holding Entities, which are newly formed entities. The Property Partnership owns all of the common shares or equity interests, as applicable, of the Holding Entities. Brookfield holds $1.5 billion of redeemable preferred shares of one of our Holdings Entities, which it received as partial consideration for causing the Property Partnership to directly acquire substantially all of Brookfield Asset Management’s commercial property operations. Brookfield owns a nominal amount of preferred shares of two other Holding Entities (or wholly-owned subsidiaries thereof). See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield — Preferred Shares of Certain Holding Entities”.

Operating Entities

Our business is organized in four operating platforms: office, retail, multi-family and industrial, and opportunistic investment. The capital invested in these operating platforms is through a combination of: direct investment; investments in asset level partnerships or joint venture arrangements; sponsorship and participation in private equity funds; and the ownership of shares in other public companies. Combining both publicly-listed and private institutional capital provides a competitive advantage in flexibility and access to capital to fund growth. As at the dates set out below, we held our commercial property operations through our interests in the entities and groups of assets set out below.

 

Operations    Dec. 31, 2011    Dec. 31, 2010    Dec. 31, 2009

Office

        

Brookfield Office Properties Inc.(1)

   50%    50%    50%

Australia(2)

   100%    100%    100%

Europe

   100%    100%    100%

Canary Wharf Group plc

   22%    22%    15%

Retail

        

General Growth Properties, Inc.(3)

   21%    8%    -

Rouse Properties, Inc.(4)

   -    -    -

Brazil Retail Fund

   35%    25%    25%

Australia

   100%    100%    100%

Europe

   -    100%    100%

Multi-Family & Industrial

        

Multi-Family (through various funds)

   10%-52%    29%-52%    29%-52%

Industrial (through various funds)

   29%    -    -

Opportunistic Investments

        

Opportunity Funds

   29% -82%    29% -82%    29% -82%

Finance Funds

   25%-33%    28%-33%    28%-33%
(1)

Our interest in Brookfield Office Properties is comprised of 49.6% of the outstanding common shares and 97.1% of the outstanding voting preferred shares. Brookfield Office Properties owns an approximate 83.3% aggregate equity interest in Brookfield Canada

 

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  Office Properties, a Canadian real estate investment trust that is listed on the TSX and the NYSE and an approximate 84.3% interest in the U.S. Office Fund, which consists of a consortium of institutional investors and which is led and managed by Brookfield Office Properties.
(2) Our Australian office platform consists of our economic interest in certain of our Australian office properties not held through Brookfield Office Properties.
(3) Our interest in GGP is comprised of an interest in approximately 21% of the outstanding shares of common stock (assuming the exercise of all outstanding warrants to acquire additional shares of common stock).
(4) Rouse is a newly formed NYSE-listed company that GGP spun-out to its shareholders on January 12, 2012. Our interest in Rouse is currently 37%.

Office Platform

Brookfield Office Properties Inc.: Our U.S. and Canadian office properties and our economic interests in most of our Australian office properties are held through our approximate 50% voting interest in Brookfield Office Properties, a global pure-play office company that is incorporated under the laws of Canada and is listed on the NYSE and the TSX. Brookfield Office Properties owns all of its Canadian office properties through its approximate 83.3% aggregate equity interest in Brookfield Canada Office Properties, a real estate investment trust formed under the laws of Canada and listed on the TSX and the NYSE. Brookfield Office Properties also owns a portion of its U.S. office properties through its approximate 84.3% interest in the U.S. Office Fund, which consists of a consortium of institutional investors and which is led and managed by Brookfield Office Properties. As at December 31, 2011, Brookfield Office Properties’ portfolio consisted of interests in 108 properties totaling 77 million square feet and interests in 16 million square feet of high quality, centrally-located development sites. Brookfield has held an interest in Brookfield Office Properties and its predecessors for over 20 years.

Australia: In addition to the office properties in Australia in which Brookfield Office Properties has an economic interest, we hold an economic interest in office properties in Sydney, Melbourne, Brisbane and New Zealand. As at December 31, 2011, this portfolio consisted of 15 office properties totaling approximately 3.6 million square feet in and 3 office development sites totaling approximately 1 million square feet. Brookfield acquired these office properties in 2007.

Europe: In addition to the office properties in Europe in which Brookfield Office Properties has an interest, we own 100% of a 576,000 square foot office property at 20 Canada Square, Canary Wharf, London. Brookfield acquired an interest in this office property in 2005.

Canary Wharf Group plc: The remainder of our European office property operations consists of our approximate 22% interest in Canary Wharf, a company incorporated under the laws of England and Wales which, as at December 31, 2011, owned and operated 16 office and retail properties (not including our interest in the office property at 20 Canada Square) totaling approximately 6.9 million square feet. Brookfield acquired an interest in Canary Wharf in 2003.

Retail Platform

General Growth Properties, Inc.: A substantial portion of our retail properties are held through our approximate 21% interest in GGP, an NYSE-listed company that is incorporated under the laws of Delaware. GGP is the second largest mall owner in the United States. The majority of GGP’s properties rank among the highest quality U.S. retail assets. In late 2010, Brookfield successfully led GGP out of Chapter 11 with a cornerstone investment. In February 2011, Brookfield acquired a further interest in GGP. We and the other members of Brookfield’s consortium hold an aggregate of approximately 422 million shares of GGP, representing approximately 40% of the outstanding shares of common stock of GGP (assuming the exercise of approximately 65 million warrants to acquire additional shares of common stock, which warrants were “in-the-money” as at December 31, 2011). We are entitled to designate three of the nine individuals nominated for election to GGP’s board of directors. GGP’s portfolio consists of 136 retail properties totaling approximately 136 million square feet. Brookfield acquired an interest in GGP in November 2010.

 

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Rouse Properties, Inc.: On January 12, 2012, we and other members of Brookfield’s consortium acquired an approximate 37% interest in Rouse, a newly formed NYSE-listed company that is incorporated under the laws of Delaware, that GGP spun-out to its shareholders. After giving effect to Rouse’s rights offering in March 2012, we increased our holdings to approximately 37% of the outstanding shares of Rouse common stock and we, together with other members of Brookfield’s consortium, increased our holdings to approximately 54% of the outstanding shares of Rouse common stock. We have also provided a $100 million subordinated credit facility to Rouse. Rouse is the eighth largest publicly-traded regional mall owner in the United States based on square footage and owns and manages dominant Class B regional malls in secondary and tertiary markets. At the time of Rouse’s spin-off, it owned and operated 30 retail properties totaling approximately 21 million square feet.

Brazil Retail Fund: We hold an approximate 35% interest in the Brazil Retail Fund, a Brookfield-sponsored retail fund in Brazil. As at December 31, 2011, the Brazil Retail Fund’s portfolio consisted of 10 malls totaling 3 million square feet in Brazil, 62% of which is located in São Paolo, 31% of which is located in Rio de Janeiro and 7% of which is located in Belo Horizonte. Brookfield acquired an interest in the Brazil Retail Fund in 2006.

Australia: We hold an economic interest in Brookfield’s retail property portfolio in Australia. As at December 31, 2011, this portfolio consisted of 8 retail centers totaling approximately 3 million square feet, 44% of which is located in Sydney, 35% of which is located in New Zealand and 21% of which is located in Brisbane. Brookfield acquired these retail properties in 2007.

Multi-Family and Industrial Platform

Multi-Family: As at December 31, 2011, our multi-family portfolio consisted of interests in approximately 11,900 multi-family units, which were held primarily through a number of Brookfield-sponsored real estate opportunity and finance funds.

Industrial: Our industrial portfolio consists of interests in approximately 2 million square feet of industrial space through our interests in several industrial properties in the United States. We hold these interests both directly and through private funds.

Opportunistic Investment Platform

Our opportunistic investment portfolio consists of interests in approximately 12 million square feet of office space, mezzanine loans and other real estate assets, which we hold primarily through a number of Brookfield-sponsored real estate opportunity and finance funds. The opportunity funds have made direct real estate investments at the individual property, portfolio and entity levels. The finance funds are dedicated commercial real estate debt funds which originate, invest in and manage portfolios primarily comprised of commercial real estate mortgages and mezzanine loans. We hold the largest limited partner interest in almost all of these funds in which we are invested. Other than such real estate opportunity and finance funds, the remainder of our opportunistic investment portfolio consists of a minority interest in a public company, a directly-owned office development in São Paolo, Brazil, and a mezzanine loan in Germany.

4.D. PROPERTY, PLANTS AND EQUIPMENT

See Item 4.B. “Information on the Company — Business Overview” and Item 4.C. “Information on the Company Organizational Structure — Operating Entities”.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.

 

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

5.A. OPERATING RESULTS

Introduction

Prior to completing the spin-off, Brookfield Property Partners L.P. will acquire from Brookfield Asset Management, or Brookfield substantially all of its commercial property operations, including its office, retail, multi-family and industrial assets. We will be the primary vehicle through which Brookfield will seek to own and operate these businesses on a global basis. As at December 31, 2011 these operations included interests in 126 office properties and 184 retail properties. In addition, Brookfield had interests in an expanding multi-family and industrial platform and an 18 million square foot commercial office development pipeline, positioning us well for continued growth. These operations also include interests in several Brookfield-sponsored real estate opportunity and finance funds that hold loans and opportunistic equity investments in commercial property businesses. Brookfield’s real estate assets are primarily located in North America, Europe, Australia and Brazil.

This management’s discussion and analysis, or MD&A, covers the financial position as at December 31, 2011 and 2010 and results of operations for the years ended December 31, 2011, 2010 and 2009 of the business comprising Brookfield’s commercial property operations that will be contributed to our company prior to the spin-off (“our business”). The information in this MD&A should be read in conjunction with the carve-out financial statements of Brookfield’s commercial property operations, or the Financial Statements, for the aforementioned periods included elsewhere in this Form 20-F.

In addition to historical information, this MD&A contains forward-looking statements. Readers are cautioned that these forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. See section entitled “Special Note Regarding Forward-Looking Statements” at the beginning of this Form 20-F and Item 3.D. “Key Information—Risk Factors.”

Basis of Presentation

The carve-out results of our assets and operations have not previously been reported on a stand-alone basis and therefore the historical Financial Statements presented in this Form 20-F may not be indicative of future financial condition or operating results. The Financial Statements include the assets, liabilities, revenues, expenses and cash flows of our business, including non-controlling interests therein, which reflect the ownership interests of other parties. We also discuss the results of operations on a segment basis, consistent with how we manage and view our business. Our operating segments are office, including our office development projects, retail, multi-family and industrial, and opportunistic investments.

Financial data provided has been prepared using accounting policies in accordance with IFRS. Non-IFRS measures used in this MD&A are reconciled to or calculated from such financial information. All operating and other statistical information is presented as if we own 100% of each property in our portfolio, regardless of whether we own all of the interests in each property, but unless otherwise specified excludes interests held through Brookfield-sponsored opportunity and finance funds and Brookfield’s interest in Canary Wharf. All dollar references, unless otherwise stated, are in millions of U.S. Dollars. Canadian Dollars, Australian Dollars, British Pounds, Euros, and Brazilian Reais are identified as “C$”, “A$”, “£”, “€” and “R$”, respectively.

 

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Performance Measures

To measure our performance, we focus on, property net operating income (“NOI”), funds from operation (“FFO”), total return (“Total Return”), net asset value (“IFRS Value”) and occupancy levels. NOI, FFO, Total Return and IFRS Value do not have standardized meanings prescribed by IFRS and therefore may differ from similar metrics used by other companies. We define each of these measures as follows:

 

   

NOI: means revenues from operations of consolidated properties less direct operating costs.

 

   

FFO: means income, including equity accounted income, before realized gains (losses), fair value gains (losses) (including equity accounted fair value gains (losses)), income tax expense (benefits), and less non-controlling interests.

 

   

Total Return: means income before income tax expense (benefit), and related non-controlling interests.

 

   

IFRS Value: represents equity attributable to parent company and means total assets less total liabilities and non-controlling interests.

NOI is used as a key indicator of performance as it represents a measure over which management has a certain degree of control. We evaluate the performance of management using a “same store analysis”, which compares the performance of the property portfolio adjusted for the effect of current and prior year dispositions and acquisitions, one-time items and foreign exchange. We provide the components of NOI by segment below under “— Reconciliation of Performance measures to IFRS Measures”.

We also consider FFO an important measure of our operating performance. FFO is a widely recognized measure that is frequently used by securities analysts, investors and other interested parties in the evaluation of real estate entities, particularly those that own and operate income producing properties. Because FFO excludes fair value gains (losses) (including equity accounted fair value gains (losses)), realized gains (losses) and income tax expense (benefits), it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs and interest costs, providing perspective not immediately apparent from net income. We provide a reconciliation of net income attributable to parent company to FFO below under “— Reconciliation of Performance Measures to IFRS Measures”. We reconcile FFO to net income attributable to Brookfield rather than cash flow from operating activities as we believe net income is the most comparable measure.

We use Total Return as key indicator as we believe that our performance is best assessed by considering FFO plus the increase or decrease in the value of our assets over a period of time, because that is the basis on which we make investment decisions and operate our business. We provide reconciliation of net income attributable to parent company to Total Return below under “ Reconciliation of Performance Measures to IFRS Measures”.

We use IFRS Value as a key indicator of performance as it represents one of the principal valuation metrics for real estate entities. IFRS Value is driven primarily by the valuation of our properties together with the effect of leverage. We use IFRS Value to measure our performance in increasing our equity in net assets. We provide the components of IFRS Value by segment below in this MD&A.

We do not utilize net income on its own as a key metric in assessing the performance of our business because, in our view, it does not provide a consistent or complete measure of the ongoing performance of the underlying operations. Nevertheless, we recognize that others may wish to utilize net income as a key measure and therefore provide a discussion of net income and a reconciliation to FFO in this MD&A.

 

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Overview of our Business

Our business entails owning, operating and investing in commercial property both directly and through operating entities. We focus on well-located, high quality assets that generate or have the potential to generate long-term, predictable and sustainable cash flows, require relatively minimal capital to maintain and, by virtue of barriers to entry or other characteristics, tend to appreciate in value over time. As at December 31, 2011, our principal business segments consist of the following:

 

   

Office: We have interests in 126 properties containing approximately 82 million square feet of commercial office space. We also develop office properties on a selective basis throughout North America, Australia and Europe in close proximity to our existing properties. Our office development assets consist of interests in 18 high-quality, centrally located sites totaling approximately 18 million square feet.

 

   

Retail: We have interests in 184 properties predominantly in the United States, Brazil and Australia. These properties encompass approximately 163 million square feet of retail space. A substantial portion of our retail properties are held through our approximate 21% interest in GGP, which we acquired during 2010 and in February 2011.

 

   

Multi-Family and Industrial: We have interests in approximately 11,900 multi-family units in the United States and Canada, and 2 million square feet of industrial space in the United States.

 

   

Opportunistic Investments: We have interests in Brookfield-sponsored real estate opportunity and finance funds that includes investments in distressed and under-performing real estate assets and businesses and commercial real estate mortgages and mezzanine loans.

Financial Highlights and Overall Performance

The following tables reflect the results for our business as at December 31, 2011 and 2010, and for each of the years ended December 31, 2011, 2010 and 2009. Further details on our operations and financial position are contained within the review of our business segments below.

 

       
(US$ Millions)    2011      2010      2009  

Total revenue

   $         2,820       $         2,270       $         1,999   

Net income (loss)

     3,745         2,109         (734

Net income (loss) attributable to parent company

     2,323         1,026         (477

Funds from operations

     576         426         391   

 

     
(US$ Millions)    Dec. 31, 2011      Dec. 31, 2010  

Investment properties

   $         27,594       $         20,960   

Equity accounted investments

     6,888         4,402   

Total assets

     40,317         30,567   

Property debt

     15,387         11,964   

Total equity

     21,494         15,144   

Equity in net assets attributable to parent company

     11,881         7,464   

 

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The following table presents NOI, FFO and Total Return for each of the years ended December 31, 2011, 2010 and 2009 and IFRS Value as at December 31, 2011 and 2010 for the geographies indicated:

 

(US$ Millions)    NOI      FFO      Total Return      IFRS Value  
      2011      2010      2009      2011      2010      2009      2011      2010      2009      Dec. 31,
2011
     Dec. 31,
2010
 

Office

                                      
           

United States

   $ 561       $ 418       $ 459       $ 435       $ 427       $ 463       $ 985       $ 742       $ 195       $ 7,395       $ 5,678   
           

Canada

     259         243         202         213         227         162         297         302         (13)         2,044         2,081   
           

Australia

     264         214         154         134         91         75         152         202         (211)         2,315         2,028   
           

Europe

     32         31         31         20         27         18         194         76         (34)         958         783   
           

Developments

     -         -         -         -         -         -         -         -         -         560         509   
           

Unallocated(1)

     -         -         -         (490)         (405)         (395)         (490)         (405)         (395)         (6,735)         (5,787)   
     1,116         906         846         312         367         323         1,138         917         (458)         6,537         5,292   

Retail

                                      
           

United States

     -         -         -         206         (11)         -         1,302         71         -         3,938         980   
           

Australia

     26         24         22         11         11         18         26         25         (53)         200         247   
           

Brazil

     111         94         67         (8)         (3)         3         83         2         (12)         311         159   
           

Europe

     1         12         13         (1)         (2)         (2)         (4)         9         (63)         -         43   
     138         130         102         208         (5)         19         1,407         107         (128)         4,449         1,429   
Multi-Family and Industrial      46         22         13         (5)         3         8         12         35         8         157         164   
           

Opportunistic Investments

     207         192         163         61         61         41         43         26         (5)         738         579   
     $ 1,507       $ 1,250       $ 1,124       $ 576       $ 426       $ 391       $ 2,600       $ 1,085       $ (583)       $ 11,881       $ 7,464   
(1) Balance sheet and statement of income amounts related to unsecured facilities, capital securities and non-controlling interests in Brookfield Office Properties, one of our operating entities.

See “— Reconciliation of Performance Measures to IFRS Measures” below in this MD&A for a reconciliation of NOI, FFO and Total Return to the most directly comparable IFRS measures.

Performance Highlights

Net income attributable to parent company increased by $1.3 billion and $1.5 billion during the years ended December 31, 2011 and 2010, respectively, compared to their prior periods, as a result of the changes discussed below in Total Return and increases in income tax expense.

 

   

NOI increased by $257 million and $126 million during the years ended December 31, 2011 and 2010, respectively, compared to their prior periods.

The increase during 2011 is primarily due to new leasing activity and currency appreciation in our Australian and Canadian properties offset by reduced occupancies. In addition, the consolidation of the U.S. Office Fund, as well as acquisitions during the period, also contributed to the increase. The increase during 2010 is primarily attributable to property acquisitions and the completion of development projects.

 

   

FFO increased by $150 million and $35 million during the years ended December 31, 2011 and 2010, respectively, compared to their prior periods.

The increase during 2011 is primarily due to the FFO from our investments in GGP which were acquired in November 2010 and February 2011, offset by the increase of non-controlling interest as a result of the transfer of economic interests in 16 Australian assets to Brookfield Office Properties. The increase during 2010 is primarily related to our office segment, which was offset by the sale of income producing investments in our opportunity funds and operating loss in our retail platform.

 

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Total Return increased by $1.5 billion and $1.7 billion during the years ended December 31, 2011 and 2010, respectively, compared to their prior periods.

The increase during 2011 and 2010 is primarily related to the increases in FFO as mentioned above and higher projected cash flows and lower discount rates across our office portfolio which is detailed below under “— Office.” In addition, in 2011 we had significant fair value gains from our investment in GGP as a result of compression of the implied capitalization rates in the United States.

IFRS Value increased by $4.4 billion during the year ended December 31, 2011.

The increase during 2011 is primarily due the increase in net income as detailed above and our additional investment of $1.7 billion into GGP in February 2011, which increased our ownership to approximately 21%.

Recent Initiatives

 

   

We simplified our real estate structure and better positioned key operating entities to create enhanced value.

In the third quarter of 2011 we restructured our U.S. Office Fund, which is held within Brookfield Office Properties and are now consolidating most of the U.S. Office Fund assets. In the third quarter of 2010, we transferred to Brookfield Office Properties most of our economic interests in our Australian office properties.

 

   

Our operating teams completed a number of important initiatives to increase the values and cash flows in our office segment.

During the year ended December 31, 2011 we acquired interests in office properties in New York, Denver, Washington D.C., Houston, Melbourne and Perth, and sold properties in New Jersey, Boston, and Houston. We also signed approximately 11 million square feet of new commercial office leases as compared to the 7.2 million square feet of new commercial office leases we signed during the year ended December 31, 2010. This resulted in a reduction in our 2012 to 2015 lease rollover exposure by 550 basis points.

 

   

We are working on a number of attractive growth opportunities, including expansion of our existing operations and potential acquisitions.

Commercial office development activities are focused on five projects comprising approximately 9 million square feet and a total value of $7 billion. In January 2012, our U.S. retail operation spun-off a group of 30 non-core retail malls in order to focus on its core mall properties.

Outlook

We expect to increase the cash flows from our office and retail property activities through continued leasing activity as described below. In particular, we are operating at least 400 basis points below our normal office occupancy level in the United States, which provides the opportunity to expand cash flows through higher occupancy. Most of our markets have favorable outlooks, which we expect will also lead to strong growth in lease rates. We do, however, still face a meaningful amount of office lease rollover in 2013, which may restrain FFO growth from this part of our portfolio in the near term.

In our North American retail business, we continue to improve the profitability of the business by rationalizing the portfolio, refinancing debt and reducing costs. In January 2012, GGP completed its plan to spin off Rouse to its shareholders, including Brookfield, in line with the objective to focus GGP on its highest performing mall portfolio, which generates tenant sales over $500 per square feet.

 

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Transaction activity is picking up across our global office markets and we are considering a number of different opportunities to acquire single assets, development sites and portfolios at attractive returns. In our continued effort to enhance returns through capital reallocation, we are also looking to divest all of, or a partial interest in, a number of mature assets to capitalize on existing market conditions.

Given the small amount of new office development that occurred over the last decade and the near total development halt during the global financial crisis, we see an opportunity to advance our development inventory in the near term in response to demand we are seeing in our major markets. We are currently focused on five development projects totaling approximately nine million square feet. This pipeline could add more than $7.2 billion in assets and we are actively advancing planning and entitlements and seeking tenants for these sites. In addition, we continue to reposition and redevelop existing retail properties, in particular, a number of the highest performing shopping centers in the U.S.

Office

We own interests in and operate one of the highest quality commercial office portfolios in the world, located in major financial, energy and government center cities in North America, Europe and Australia. Our strategy is to own and manage a combination of core assets consisting of prominent, well-located properties in high growth, supply-constrained markets that have high barriers to entry and attractive tenant bases and to pursue an opportunistic strategy to take advantage of dislocations in the various markets in which we operate. Our goal is to maintain a meaningful presence in each of our primary markets in order to maximize the value of our tenant relationships.

Our U.S., Canadian and most of the economic interests in our Australian properties are held through our approximate 50% voting interest in Brookfield Office Properties. Brookfield Office Properties in turn operates a number of private and listed entities through which public and institutional investors participate in our portfolios. This gives rise to non-controlling interests in the IFRS Value, NOI, FFO and Total Return of our office property portfolio. Our European operations consist primarily of our approximate 22% interest in Canary Wharf.

IFRS Value – Office

The following table presents the IFRS Value of our office portfolio by region as at December 31, 2011 and 2010:

 

(US$ Millions)    United States      Canada      Australia      Europe      Total  
      Dec. 31,
2011
     Dec. 31,
2010
     Dec. 31,
2011
     Dec. 31,
2010
     Dec. 31,
2011
     Dec. 31,
2010
     Dec. 31,
2011
     Dec. 31,
2010
     Dec. 31,
2011
     Dec. 31,
2010
 

Office properties

   $ 12,959       $ 7,119       $ 4,571       $ 4,179       $ 3,739       $ 3,321       $ 521       $ 517       $ 21,790       $ 15,136   

Equity accounted investments

     1,467         2,168         13         21         957         976         -         -         2,437         3,165   

Accounts receivable and other

     1,315         1,254         134         193         490         386         994         831         2,933         2,664   
     15,741         10,541         4,718         4,393         5,186         4,683         1,515         1,348         27,160         20,965   

Property-specific borrowings

     6,679         3,701         1,840         1,670         2,452         2,434         442         443         11,413         8,248   

Accounts payable and other

     1,031         755         407         372         229         95         115         122         1,782         1,344   

Non-controlling interests

     636         407         427         270         190         126         -         -         1,253         803   
     $ 7,395       $ 5,678       $ 2,044       $ 2,081       $ 2,315       $ 2,028       $ 958       $ 783       $ 12,712       $ 10,570   

Unallocated

                             

Unsecured facilities

                           $ 381       $ 428   

Capital securities

                             994         1,038   

Non-controlling interests

                                                                             5,360         4,321   

IFRS Value(1)

                                                                           $ 5,977       $ 4,783   
(1) Does not include office developments which are described in the table below on a geographic basis.

 

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IFRS Value increased by $1.2 billion during the year ended December 31, 2011 to $6.0 billion, excluding office development activities. These increases represent gains in the fair values of properties due to a combination of higher projected cash flows and lower discount rates, as well as the impact of currency appreciation on the value of our Australian and Canadian properties. Unallocated non-controlling interests relate primarily to the interests of other shareholders in Brookfield Office Properties, whereas the non-controlling interests in each region relate to funds and joint ventures in those regions.

Specific 2011 major variances include the following:

 

   

In the third quarter of 2011, we concluded the joint venture with our partner in the portfolio owned through the U.S. Office Fund, which resulted in the consolidation of most of the underlying properties. This added $5.0 billion and $3.3 billion to the carrying value of our office properties and property specific borrowings, respectively.

 

   

The carrying value of equity accounted investments declined by $0.7 billion to $2.4 billion, representing the consolidation of the U.S. Office Fund, offset by the inclusion of equity accounted properties within the U.S. Office Fund’s portfolio, and the reclassification of Four World Financial Center to consolidated properties following our acquisition of our partner’s interest in the building.

Equity accounted investments as at December 31, 2011 primarily include: in the United States, 245 Park Avenue ($0.6 billion) and Grace Building ($0.6 billion); and in Australia, a variety of property funds and joint ventures interests. Our interest