0001193125-12-336306.txt : 20120806 0001193125-12-336306.hdr.sgml : 20120806 20120806082422 ACCESSION NUMBER: 0001193125-12-336306 CONFORMED SUBMISSION TYPE: 20FR12B/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 20120806 DATE AS OF CHANGE: 20120806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Brookfield Property Partners L.P. CENTRAL INDEX KEY: 0001545772 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 000000000 STATE OF INCORPORATION: D0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20FR12B/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-35505 FILM NUMBER: 121008375 BUSINESS ADDRESS: STREET 1: 73 FRONT STREET CITY: HAMILTON STATE: D0 ZIP: HM 12 BUSINESS PHONE: 212-417-7000 MAIL ADDRESS: STREET 1: THREE WORLD FINANCIAL CENTER STREET 2: 200 VESEY STREET,11TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10281-1021 20FR12B/A 1 d384817d20fr12ba.htm 20FR12B/A 20FR12B/A
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F/A

(Amendment No.2)

(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: 001-35505

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 ¨

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 ¨

 

 


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TABLE OF CONTENTS

 

             Page   
INTRODUCTION AND USE OF CERTAIN TERMS      1   
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS      4   
PART I      6   
  ITEM 1.   

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     6   
     1.A.     

DIRECTORS AND SENIOR MANAGEMENT

     6   
     1.B.   

ADVISERS

     6   
     1.C.   

AUDITORS

     6   
  ITEM 2.   

OFFER STATISTICS AND EXPECTED TIMETABLE

     6   
  ITEM 3.   

KEY INFORMATION

     6   
     3.A.   

SELECTED FINANCIAL DATA

     6   
     3.B.   

CAPITALIZATION AND INDEBTEDNESS

     7   
     3.C.   

REASONS FOR THE OFFER AND USE OF PROCEEDS

     7   
     3.D.   

RISK FACTORS

     7   
  ITEM 4.   

INFORMATION ON THE COMPANY

     36   
     4.A.   

HISTORY AND DEVELOPMENT OF THE COMPANY

     36   
     4.B.   

BUSINESS OVERVIEW

     39   
     4.C.   

ORGANIZATIONAL STRUCTURE

     59   
     4.D.   

PROPERTY, PLANTS AND EQUIPMENT

     64   
  ITEM 5.   

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     65   
     5.A.   

OPERATING RESULTS

     65   
     5.B.   

LIQUIDITY AND CAPITAL RESOURCES

     112   
     5.C.   

RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

     114   
     5.D.   

TREND INFORMATION

     114   
     5.E.   

OFF-BALANCE SHEET ARRANGEMENTS

     115   
     5.F.   

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

     115   
  ITEM 6.   

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     115   
     6.A.   

DIRECTORS AND SENIOR MANAGEMENT

     115   
     6.B.   

COMPENSATION

     118   
     6.C.   

BOARD PRACTICES

     119   
     6.D.   

EMPLOYEES

     123   
     6.E.   

SHARE OWNERSHIP

     123   
  ITEM 7.   

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     124   
     7.A.   

MAJOR SHAREHOLDERS

     124   
     7.B.   

RELATED PARTY TRANSACTIONS

     125   
     7.C.   

INTERESTS OF EXPERTS AND COUNSEL

     137   
  ITEM 8.   

FINANCIAL INFORMATION

     137   
     8.A.   

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL
INFORMATION

     137   
     8.B.   

SIGNIFICANT CHANGES

     137   
  ITEM 9.   

THE OFFER AND LISTING

     137   
     9.A.   

OFFER AND LISTING DETAILS

     137   
     9.B.   

PLAN OF DISTRIBUTION

     137   
     9.C.   

MARKETS

     137   
     9.D.   

SELLING SHAREHOLDERS

     137   
     9.E.   

DILUTION

     137   

 

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TABLE OF CONTENTS

(continued)

 

             Page   
     9.F.   

EXPENSES OF THE ISSUE

     137   
  ITEM 10.   

ADDITIONAL INFORMATION

     138   
     10.A.   

SHARE CAPITAL

     138   
     10.B.   

MEMORANDUM AND ARTICLES OF ASSOCIATION

     138   
     10.C.   

MATERIAL CONTRACTS

     161   
     10.D.   

EXCHANGE CONTROLS

     162   
     10.E.   

TAXATION

     162   
     10.F.   

DIVIDENDS AND PAYING AGENTS

     188   
     10.G.   

STATEMENT BY EXPERTS

     190   
     10.H.   

DOCUMENTS ON DISPLAY

     191   
     10.I.   

SUBSIDIARY INFORMATION

     191   
  ITEM 11.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      191   
  ITEM 12.   

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     192   
     12.A.   

DEBT SECURITIES

     192   
     12.B.   

WARRANTS AND RIGHTS

     192   
     12.C.   

OTHER SECURITIES

     192   
     12.D.   

AMERICAN DEPOSITARY SHARES

     192   
PART II      193   
  ITEM 13.   

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     193   
  ITEM 14.    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS
     193   
  ITEM 15.   

CONTROLS AND PROCEDURES

     193   
  ITEM 16.   

[RESERVED]

     193   
     16.A.   

AUDIT COMMITTEE FINANCIAL EXPERTS

     193   
     16.B.   

CODE OF ETHICS

     193   
     16.C.   

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     193   
     16.D.    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      193   
     16.E.    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS
     193   
     16.F.   

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     193   
     16.G.   

CORPORATE GOVERNANCE

     193   
     16.H   

MINING SAFETY DISCLOSURE

     193   
PART III      194   
  ITEM 17.   

FINANCIAL STATEMENTS

     194   
  ITEM 18.   

FINANCIAL STATEMENTS

     194   
  ITEM 19.   

EXHIBITS

     194   
SIGNATURES      195   
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 March 31, 2012, 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 Group 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 portion 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 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 the non-voting limited partnership interests in the Property Partnership with a right of redemption or exchange pursuant to the Redemption-Exchange Mechanism;

 

   

“Service Recipients” are to our company, the Property Partnership, the Holding Entities and, at the option of the Holding Entities, any wholly-owned subsidiary of a Holding Entity excluding any operating entity;

 

   

“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, which include all expenses attributable to the commercial property operations, such as property maintenance, utilities, insurance, realty taxes and property administration costs, and exclude interest expense, depreciation and amortization, income taxes, fair value gains (losses) and general and administrative expenses that do not relate directly to operations of a commercial property. 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 our office segment by evaluating NOI from “Existing properties”, or “same store” basis, and NOI from “Additions, dispositions and other” due to, among other things, the consolidation of the U.S. Office Fund during the period as discussed in Item 5.A. “Operating and Financial Review and Prospects — Operating Results — Overview of Our Business”. NOI from existing properties compares the performance of the property portfolio by excluding the effect of current and prior period dispositions and acquisitions, including developments, and “one-time items ”, which for the historical periods presented consists primarily of lease termination income. NOI presented within “Additions, dispositions and other” includes the results of current and prior period acquired, developed and sold properties, as well as the one-time items excluded from the “Existing properties” portion of NOI. We do not evaluate the performance of the operating results of the retail segment on a similar basis as the majority of our investments in the retail segment are accounted for under the equity method and, as a result, are not included in NOI. Similarly, we do not evaluate the operating results of our other segments on a same store basis based on the nature of the investments as the variances between same store and total NOI are not material. 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”.

Our definition of FFO includes all of the adjustments that are outlined in the National Association of Real Estate Investment Trusts, or NAREIT, definition of funds from operations, including the exclusion of gains (or losses) from the sale of real estate property, the add back of any depreciation and amortization related to real estate assets and the adjustment for unconsolidated partnerships and joint ventures. In addition to the adjustments prescribed by NAREIT, we also exclude any unrealized fair value gains (or losses) that arise as a result of

 

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reporting under IFRS, certain other non cash items, if any, and income taxes that arise as certain of our subsidiaries are structured as corporations as opposed to real estate investment trusts, or REITs. 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. 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 reconciliations of NOI, FFO and Total Return to IFRS measures, 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.

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;

 

 

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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 and are derived from, and should be read in conjunction with, the carve-out financial statements of Brookfield’s commercial property operations as at March 31, 2012, and for the three months ended March 31, 2012 and 2011, and the notes thereto, and 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 March 31, 2012 and for the three months ended March 31, 2012 and for the year ended December 31, 2011, included elsewhere in this Form 20-F.

 

 

(US$ Millions) Three months ended March 31,    2012      2011  

Total revenue

   $         775       $         603   

Net income

     710         532   

Net income attributable to parent company

     383         337   

FFO(1)

     141         136   

 

 

 

(US$ Millions) Years ended December 31,    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   

 

 

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(US$ Millions)    Mar. 31, 2012      Dec. 31, 2011      Dec. 31, 2010  

Investment properties

   $         28,138       $         27,594       $         20,960   

Equity accounted investments

     7,466         6,888         4,402   

Total assets

     41,049         40,317         30,567   

Property debt

     15,266         15,387         11,964   

Total equity

     22,599         21,494         15,144   

Equity in net assets attributable to parent company

     12,575         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”.

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 March 31, 2012.

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” and the Unaudited Pro Forma Financial Statements included elsewhere in this Form 20-F.

 

As at March 31, 2012  
(US$ Millions)    Actual (1)      Pro Forma  

Total Assets

           $         39,610   

Debt

     

Property debt

             14,424   

Capital securities

             1,612   

Total Debt

             16,036   

Other liabilities

             2,388   

Total Liabilities

             18,424   

Equity

     

Partnership equity

             11,262   

Non-controlling interests

             9,924   

Total Equity

             21,186   

Debt to total capitalization (total debt / total assets)

             40%   

 

 

(1) Balance sheet of our company as at May 31, 2012, which includes partnership equity of $0.001 million 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.

 

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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 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 they 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. Any other entities through which we may conduct operations in the future will also be legally distinct from our company and may be restricted in their ability to pay dividends and distributions or otherwise make funds available to our company under certain conditions.

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.

 

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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.

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.

 

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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.

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.

 

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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.

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

 

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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;

 

   

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.

 

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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.

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

 

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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.

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

 

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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 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

 

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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.

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;

 

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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.

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.

 

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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.

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;

 

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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;

 

   

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

 

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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 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; (iii) any of the Managers is grossly negligent in the performance of its obligations under the Master Services Agreement and such gross negligence results in material harm to the Service Recipients; or (iv) upon the happening of certain events relating to the bankruptcy or insolvency of each 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

 

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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”.

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;

 

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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.

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

 

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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.

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. or Canadian judgments against us.

Our company is a Bermuda exempted limited partnership and a substantial portion of our assets are located outside the United States and Canada. 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 and Canada. As a result, it may be difficult or impossible for U.S. or Canadian investors to effect service of process within the United States or Canada upon us or our directors and executive officers, or to enforce, against us or these persons, judgments obtained in the U.S. or Canadian courts predicated upon the civil liability provisions of U.S. federal securities laws or Canadian 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. or Canadian courts, of claims predicated solely upon U.S. federal securities laws or Canadian securities laws. See Item 10.B. “Additional Information — Memorandum and Articles of Association — Description of Our Units and Our Limited Partnership Agreement — Our Units”.

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.

 

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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 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.

 

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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 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 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.

 

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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”.

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”.

 

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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.

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

 

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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”.

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

 

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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.

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

 

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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 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

 

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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 we do not deal at arm’s length for purposes of the Tax Act. The Department of Finance (Canada) has recently indicated that it is prepared to recommend further amendments to the prohibited investment rules contained in the Tax Act that will narrow the circumstances in which a holder of a TFSA or an annuitant of an RRSP or RRIF will have a “significant interest”, however, no draft legislation has been released as at the date hereof. 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.

 

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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 “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

 

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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.

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.

 

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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.

 

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.

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.

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.

 

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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.

 

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             % of our units to holders of its Class A limited voting shares and Class B limited voting shares, pursuant to which holders of Class A limited voting shares and Class B limited voting shares of Brookfield Asset Management will be entitled to receive one of our units for every              Class A limited voting shares or Class B limited voting shares held as of the record date of the special dividend. Based on approximately 624 million Class A limited voting shares and 85,120 Class B limited voting shares of Brookfield Asset Management that we expect to be outstanding on the record date for the spin-off, Brookfield Asset Management intends to make a special dividend of approximately              million units of our company. Immediately after the spin-off, Brookfield Asset Management will hold approximately              of our units, or approximately             % of our outstanding units.

 

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Holders of Brookfield Asset Management’s Class A limited voting shares or Class B limited voting shares will not be required to pay for the units to be received upon consummation of the spin-off or tender or surrender Class A limited voting shares or Class B limited voting shares of Brookfield Asset Management or take any other action in connection with the spin-off. No vote of Brookfield Asset Management’s shareholders will be required for the spin-off. If a holder owns Brookfield Asset Management Class A limited voting shares or Class B limited voting shares as of the close of business on the record date of the special dividend, a certificate reflecting the holder’s ownership of our units will be mailed the holder, or the holder’s brokerage account will be credited for our units, on or about             , 2012. The number of Class A limited voting shares and Class B limited voting shares of Brookfield Asset Management that a holder owns will not change as a result of the spin-off. Brookfield Asset Management’s Class A limited voting shares and Class B limited voting shares will continue to be traded on the NYSE under the symbol “BAM”, on the TSX under the symbol “BAM.A” and on the NYSE Euronext under the symbol “BAMA”.

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. Brookfield Asset Management will use the volume-weighted average of the trading price of our units for the five trading days immediately following the spin-off to determine the value of our units for the purpose of calculating the cash payable in lieu of any fractional interests. 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 a combination of units of our company and Redemption-Exchange 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 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. 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. To satisfy the withholding tax liabilities of non-Canadian registered shareholders of Brookfield Asset Management, Brookfield Asset Management will withhold a portion 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 Item 10.E “Additional Information Taxation” which qualifies in its entirety the foregoing discussion.

 

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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 interest in the Property Partnership through our company’s ownership of the Class A non-voting limited partnership interests 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”.

In consideration for causing the Property Partnership to acquire substantially all of Brookfield Asset Management’s commercial property operations, Brookfield will receive (i) units of our company and Redemption-Exchange Units of the Property Partnership representing, in aggregate, an effective economic interest in our business of approximately 90% and (ii) $750 million of redeemable preferred shares of one of our Holdings Entities formed under the laws of the Province of Ontario. For a discussion of the terms of the preferred shares see Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield — Preferred Shares of Certain Holding Entities”.

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.

Our portfolio as of March 31, 2012 included interests in 123 office properties totaling 81 million square feet and 178 retail properties containing approximately 163 million square feet. We also held interests in a 17 million square foot office development pipeline and a $350 million retail redevelopment pipeline as further discussed below. In addition, as of March 31, 2012 we had an expanding multi-family and industrial platform which consisted of interests in over 12,400 multi-family units and 3 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.

 

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The charts below present the IFRS Value of our portfolio by asset class and by geographic location as at March 31, 2012:

 

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 20 and Note 25, respectively, to the March 31, 2012 unaudited and the December 31, 2011 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;

 

   

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

 

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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 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

 

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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. We have established the initial distribution level and the targeted distribution growth rate based on our projections for the amount of FFO that will be generated by us in the short to medium term. The projections were generated through analyzing the total underlying operating cashflows of all the investments held by us considering in-place revenue streams and capital investment plans. Our entitlement to the underlying cashflows in the operating entities were then weighed against reinvestment opportunities within those entities to determine the appropriate balance between distributions and reinvestment and the most appropriate allocation of capital and financing to maximize risk adjusted returns. We are not a passive investor and we typically hold positions of control or influence over assets in which we invest, enabling us to influence the distributions from those assets. In cases where potential operating cashflow distributions are deferred in the operating platforms in favor of reinvestment, distributions from the operating entities may be less than our entitlement, requiring us to finance, in the short term, payment of our distributions. To maintain distributions at a level reflective of the underlying total operating cashflow, there are a number of alternatives to maintain our distribution level that are described in further detail herein, including (a) using borrowings under the $500 million credit facility we expect to enter into with Brookfield prior to the completion of the spin-off and any other credit facility that we may enter into in the future, (b) the Property GP LP electing to accrue and/or waive distributions to be made in respect of the Redemption-Exchange Units that are to be held by Brookfield in accordance with the Property Partnership’s limited partnership agreement, (c) the payment of all or a portion of the fees owed to the Managers pursuant to the Master Services Agreement through the issuance of our units and/or limited partnership units of the Property Partnership, (d) the payment of any equity enhancement distributions to the Property GP LP through the issuance of Redemption-Exchange Units, and (e) utilizing capital returned from our diversified asset base where reinvestment opportunities are determined to be less attractive. However, despite our projections and the alternative methods available to us to maintain our distribution level, there can be no assurance that we will be able to make distributions of approximately $1.00 per unit on an annualized basis or meet our target growth rate. Our ability to make distributions will depend on several factors, some of which are out of our control, including, among other things, general economic conditions, our results of operations and financial condition, the amount of cash that is generated by our operations and investments, restrictions imposed by the terms of any indebtedness that is incurred to finance our operations and investments or to fund liquidity needs, levels of operating and other expenses, and contingent liabilities.

 

   

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.

 

   

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.

 

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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%.

 

   

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.

 

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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, or 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 reflects the gross internal rate of return before any management fees but after all property level service fees such as lease fees, development and construction fees and property management fees. 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 as discussed below) compared to the aggregate equity investments made in such commercial property, and includes all net proceeds generated by these investments.

IRR does not have a standard meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies. IRR is used by Brookfield as a key indicator of investment performance because it provides a measure of performance that accounts for the value of unrealized investments in addition to realized investments.

In calculating the IRR, valuations of unrealized investments include assumptions that management believes are fair and reasonable reflecting the fair value exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between non-arm’s length market participants at the measurement date. The December 31, 2011 valuations of unrealized investments reflect the reported fair values under the respective accounting regime, which are within the scope of the 2011 year-end financial statement audit conducted by external auditors. To determine the year-end valuations, management assumptions include, but are not limited to:

 

   

projected occupancy rates based on current occupancy, lease renewals and lease-up plans;

 

   

projected rental rates based on current rent rolls and anticipated growth based on market activity and lease-up plans;

 

   

projected operating expenses based on current expenses, inflation and lease-up plans;

 

   

capital expenditures based on age of properties and required upgrades;

 

   

appropriate discount rates; and

 

   

terminal capitalization rates.

The historical performance of Brookfield should not be taken as an indication of performance by our company or Brookfield in the future or of any returns expected on an investment in our units.

Operating Platforms

Our business is organized in four operating platforms, with assets as of March 31, 2012 as set forth in the diagram below. The capital invested in these operating platforms is through a combination of: direct

 

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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.

 

LOGO

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    March 31, 2012   December 31, 2011   December 31, 2010   December 31, 2009

Office

        

Brookfield Office Properties Inc.(1)

   50%   50%   50%   50%

Interest in Australia(2)

   100%   100%   100%   100%

Europe

   100%   100%   100%   100%

Canary Wharf Group plc

   22%   22%   22%   15%

Retail

        

General Growth Properties, Inc.(3)

   21%   21%   8%   -

Rouse Properties, Inc.(4)

   37%   -   -   -

Brazil Retail Fund

   35%   35%   25%   25%

Interest in Australia

   100%   100%   100%   100%

Europe

   -   -   100%   100%

Multi-Family & Industrial(5)

        

Multi-Family (through various funds)

   10%-52%   10%-52%   29%-52%   29%-52%

Industrial (through various funds)

   29%-41%   29%   -   -

Opportunistic Investments(5)

        

Opportunity Funds

   29%-82%   29%-82%   29%-82%
  29%-82%

Finance Funds

   13%-33%   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 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 economic interest in approximately 21% (38% with our consortium partners) 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 March 31, 2012).
(4) Rouse is a newly formed NYSE-listed company that GGP spun-out to its shareholders on January 12, 2012. As at March 31, 2012, we had interests of approximately 37% (54% with our consortium partners) of the outstanding shares of common stock.
(5) Our economic interest set forth in the table above is reflected as a range because we hold certain of our multi-family and industrial and opportunistic investment assets through a combination of different funds in which we hold varying economic interests.

 

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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 March 31, 2012, our office portfolio consisted of interests in 123 properties containing approximately 81 million square feet of commercial office 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 Brookfield Place (formerly City Square) in Perth.

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 March 31, 2012:

 

     Number of
Properties(1)
 

Total Area

(000’s Sq. Ft.)

 

Average

Market
Occupancy

Rate (%)

 

Our Average
Occupancy

Rate (%)

 

Market Net

Rent ($/Sq. Ft.)

 


Average In-
Place Net rent

($/Sq. Ft.)

US   62   49,306   88.7     91.0     31.33     24.76
Canada   28   20,786   95.0     96.8     31.34     26.06
Australia   32   10,658   92.6     97.6     50.28     49.88
Europe(2)   1        576   94.6   100.0     58.43     62.26
Total/Avg   123   81,326   90.9     93.4     34.12     28.96

 

(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.

 

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The table below presents the following information on the assets in our office platform by geographic location as at March 31, 2012: (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. We believe information presented as if we own 100% of each of the properties provides an appropriate basis on which to evaluate the performance of properties in the portfolio relative to each other and to other properties in the market. Our proportionate interests in the investments demonstrate our ability to manage the underlying economics of the relevant investments, including the financial performance and cash flows. Proportionate interest in the assets net of minority interests represents our economic interest in the underlying property and is relevant because it represents the net assets and operations of the underlying property that we manage that are directly attributable to us.

 

Office Property Portfolio(1)

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

U.S. Properties

                                       

New York

    10        94.2         18,344        559        18,903            282        19,185            86     16,194        16,475            8,096        8,236   

Boston

    1        63.9         771        25        796            235        1,031            99     791        1,025            396        512   

Washington, D.C.

    30        90.0         5,969        535        6,504            1,029        7,533            82     5,384        6,184            2,693        3,092   

Los Angeles

    6        84.0         4,106        424        4,530            1,156        5,686            81     3,658        4,595            1,828        2,297   

Houston

    9        88.4         7,872        291        8,163            1,509        9,672            74     6,189        7,138            3,094        3,569   

Denver

    2        98.4         2,597        48        2,645            503        3,148            80     2,000        2,503            1,000        1,252   

Minneapolis

    4        93.9         1,718        812        2,530            521        3,051            100     2,530        3,051            1,265        1,526   
      62        91.0         41,377        2,694        44,071            5,235        49,306            83     36,746        40,971            18,372        20,484   

Canadian Properties

                                       

Toronto

    12        94.3         7,996        764        8,760            1,789        10,549            54     4,736        5,719            2,374        2,866   

Calgary

    8        99.8         5,340        300        5,640            896        6,536            42     2,368        2,746            1,184        1,372   

Ottawa

    6        99.7         1,708        37        1,745            1,030        2,775            21     366        583            184        293   

Vancouver

    1        97.3         493        95        588            265        853            83     488        708            245        355   

Other

    1        100.0         70        3        73                   73            99     73        73            36        36   
      28        96.8         15,607        1,199        16,806            3,980        20,786            47     8,031        9,829            4,023        4,922   

Australian Properties

                                       

Sydney

    16        98.3         4,655        432        5,087            492        5,579            56     2,847        3,129            1,924        2,120   

Melbourne

    3        98.1         2,005        67        2,072            239        2,311            74     1,548        1,716            775        859   

Brisbane

    2        96.4         520        3        523            28        551            79     413        434            414        435   

Perth

    2        96.0         597        15        612            31        643            84     516        540            335        351   

Canberra

    1        100.0         176               176            28        204            100     176        204            176        204   

New Zealand

    8        94.9         1,156        35        1,191            179        1,370            100     1,192        1,371            1,192        1,369   
      32        97.6         9,109        552        9,661            997        10,658            69     6,692        7,394            4,816        5,338   

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

    123        93.4         66,632        4,462        71,094            10,232        81,326            72     52,025        58,770            27,767        31,320   

 

(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, such as minority interests in 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.

 

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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 major tenants with over one million square feet of space in our office portfolio by leased area and their respective credit ratings and lease commitments as at March 31, 2012:

 

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

Various Government Agencies

   All markets    AA+/AAA    Various    5,985         8.4%
Bank of America/Merrill Lynch(3)    Toronto/New York/Denver/Los Angeles    A/A-    Various    4,976         7.0%

Wells Fargo/Wachovia Securities(4)

   New York    A+    2019    1,545         2.2%

CIBC World Markets(5)

   Toronto/New York/Calgary    A+    2033    1,436         2.0%

Suncor Energy

   Calgary    BBB+    2028    1,352         1.9%

Century Link

   Denver    Not Rated    2017    1,278         1.8%

Kellogg Brown & Root

   Houston    Not Rated    2030    1,268         1.8%

Royal Bank of Canada

   Vancouver/Toronto/Calgary/New York/Los Angeles/Minneapolis    AA-    2023    1,259         1.8%

Bank of Montreal

   Calgary/Toronto    A+    2024    1,143         1.6%

Total

                  20,242         28.5%

 

(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 lease(s) 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. Of this 2.7 million square feet, 1.9 million is in 4 World Financial Center, and 0.8 million square feet is in 2 World Financial Center. Of the total leased space, 3.4 million square feet will expire in 2013.
(4) Wells Fargo/Wachovia Securities 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 presents the lease expiry profile of our office properties with the associated expiring average in-place net rents by region at March 31, 2012:

 

            Expiring Leases
    Net  Rental
Area
  Currently
Available
  2012   2013   2014   2015   2016   2017   2018 &
Beyond
         (000’s
sq.ft.)
  Net
Rent
  (000’s
sq.ft.)
  Net
Rent
  (000’s
sq.ft.)
  Net
Rent
  (000’s
sq.ft.)
  Net
Rent
  (000’s
sq.ft.)
  Net
Rent
  (000’s
sq.ft.)
  Net
Rent
  (000’s
sq.ft.)
  Net
Rent

United States

  44,071   3,961   2,324   $18   5,631   $31   3,224   $23   2,717   $22   2,054   $25   2,052   $25   22,108   $33

Canada

  16,806   534   320   28   1,771   23   391   31   1,626   25   1,752   26   586   30   9,826   31

Australia

  9,661   227   307   57   647   42   857   53   1,141   61   1,003   65   1,034   51   4,445   72

Europe(1)

  556   -   -   -   -   -   262   60   -   -   -   -   -   -   294   63

Total

  71,094   4,722   2,951   $23   8,049   $30   4,734   $31   5,484   $31   4,809   $34   3,672   $33   36,673   $37

Percentage of Total

  100.0%   6.6%   4.2%       11.3%       6.7%       7.7%       6.8%       5.2%       51.5%    

 

(1) Does not include office assets held through our approximate 22% interest in Canary Wharf.

 

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The following table summarizes our leasing activity from December 31, 2011 to March 31, 2012:

 

      Dec. 31, 2011         Mar. 31, 2012
(US$)    Leasable
Area(1)
(000’s
Sq.Ft.)
   Leased(1)
(000’s
Sq.Ft.)
   Total
Expiries
(000’s
Sq. Ft.)
  Expiring
Net Rent
($ per
Sq.Ft.)
   Leasing
(000’s
Sq.Ft.)
   Year One
Leasing
Net Rent
($ per
Sq.Ft.)
   Average
Leasing
Net Rent
($ per
Sq.Ft.)
   Acq.
(Disp.)
Additions
(000’s
Sq.Ft.)
  Leasable
Area
(000’s
Sq. Ft.)
   Leased
(000’s
Sq. Ft.)

United States

   44,019    40,168    (1,840)   $18.81    1,782    $22.07    $26.46    -   44,071    40,110

Canada

   17,108    16,469    (245)   26.43    341    29.55    30.48    (293)   16,806    16,272

Australia

   9,862    9,571    (86)   37.02    150    46.97    52.68    (201)   9,661    9,434

Europe

   556    556    -   -    -    -    -    -   556    556

Total

   71,545    66,764    (2,171)   $20.39    2,273    $24.83    $28.79    (494)   71,094    66,372

 

(1) Has been restated to reflect the impact of remeasurements which are done annually in the first quarter.

As at March 31, 2012, we hold interests in centrally located office development sites with a total development pipeline of approximately 17 million square feet in the United States, Canada, Australia and Europe. We classify our office development sites into three categories: (i) active development, (ii) active planning and (iii) held for development. The only active development in our office segment is Brookfield Place (formerly City Square) in Perth, a 926,000 square foot development which achieved practical completion on May 18, 2012 for a total cost of A$945 million, or A$1,020/square foot.

The following table summarizes all office development projects in our portfolio by geographic location as at March 31, 2012:

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

US

   7    95    9,657    9,197

Canada

   5    78    4,227    3,301

Australia

   4    100    1,927    1,927

Europe

   1    50    950    475

Total/Avg

   17    89    16,761    14,900

Of the remaining 16 million square feet in our office development pipeline, 9 million square feet are in the active planning stage comprising of five development projects. Included in the active planning stage are the development rights to Manhattan West in New York City and 100 Bishopsgate in London, U.K. The development rights to Manhattan West, located on Ninth Avenue between 31st Street and 33rd Street in New York City, include 5.4 million square feet of commercial office space entitlements. We are commencing work to build the necessary foundations to position this site to be one of the first sites for office development in Manhattan in the next development cycle. We also hold an interest in 100 Bishopsgate, a well-positioned development site in London, U.K., and have begun to prepare the site for construction. As at March 31, 2012, these five developments have incurred a cost of $544 million to date and have a total planned development cost of $836 per square foot with a weighted average planned construction period of 85 months.

The remaining 7 million square feet of our office development pipeline are being held for development and are not in the active planning stage. With all our development sites, we will proceed with developing these sites when our risk adjusted return hurdles and preleasing targets are met.

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

 

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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 March 31, 2012, our retail portfolio consisted of interests in 178 well-located high quality retail properties encompassing approximately 163 million square feet of retail space.

As at March 31, 2012, our retail portfolio consisted of 166 regional malls totaling approximately 158 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 gross leasable area allocated as follows: pacific and mountain region (29%), southwest and southeast region (28%), east and west north central region (22%) and northeast and mideast region (21%). We 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 March 31, 2012, 8 malls totaling approximately 3 million square feet in Brazil, 59% of which is located in São Paolo, 33% of which is located in Rio de Janeiro and 8% 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 March 31, 2012, our portfolio consists of an economic interest in 4 retail centers totaling approximately 2 million square feet, 54% of which is located in Sydney and 46% of which is located in New Zealand.

 

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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 March 31, 2012:

 

     

Number of

Properties(1)

    

Gross Leasable
Area

(000’Sq.Ft.)

     Occupancy
Rate (%)
    

Average Annual

Tenant Sales

($/Sq. Ft.)(1)

    

Average In-Place

Rent

($/Sq. Ft.)

 

US (2)

     166         158,007         92.2         486         56.67   

Brazil

     8         2,786         96.9         804         48.73   

Australia

     4         1,965         98.3         n/a         10.18   

Total/Avg

     178         162,758         92.6         492         55.00   

 

(1) Based only on properties with respect to which tenants are contractually obligated to report this information.
(2) Includes only U.S. regional malls.
(3) Includes three industrial properties totaling approximately 1.8 million square feet.

The table below presents the following information on the assets in our retail platform by geographic location as at March 31, 2012: (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 portfolio, 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. We believe information presented as if we own 100% of each of the properties provides an appropriate basis on which to evaluate the performance of properties in the portfolio relative to each other and to other properties in the market. Our proportionate interests in the investments demonstrate our ability to manage the underlying economics of the relevant investments, including the financial performance and cash flows. Proportionate interest in the assets net of minority interests represents our economic interest in the underlying property and is relevant because it represents the net assets and operations of the underlying property that we manage that are directly attributable to us.

 

Retail Property Portfolio(1)

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

U.S. Properties

                                       

Northeast Region

    15        94.0         55        15,628        15,683                   15,683            87     13,683        13,683            2,934        2,934   

Mideast Region

    19        91.9         659        17,598        18,257                   18,257            83     15,204        15,204            3,321        3,321   

East North Central Region

    21        92.2         731        20,427        21,158                   21,158            88     18,535        18,535            4,677        4,677   

West North Central Region

    15        92.1                12,953        12,953                   12,953            92     11,905        11,905            2,560        2,560   

Southeast Region

    20        89.4         363        19,855        20,218                   20,218            82     16,510        16,510            3,587        3,587   

Southwest Region

    23        96.5         109        24,262        24,371                   24,371            86     20,904        20,904            5,023        5,023   

Mountain Region

    25        90.7         124        20,171        20,295                   20,295            94     19,072        19,072            4,515        4,515   

Pacific Region

    28        91.6         844        24,228        25,072                   25,072            87     21,913        21,913            5,503        5,503   
      166        92.2         2,885        155,122        158,007                   158,007            87     137,726        137,726            32,120        32,120   

Brazilian Properties

                                       

Rio de Janeiro

    2        96.1                923        923                   923            74     679        679            238        238   

São Paulo

    5        97.1                1,637        1,637                   1,637            49     803        803            280        280   

Belo Horizonte

    1        100.0                226        226                   226            50     113        113            40        40   
      8        96.9                2,786        2,786                   2,786            57     1,595        1,595            558        558   

Australian Properties

                                       

Sydney

    2        96.9                1,051        1,051            14        1,065            100     1,051        1,065            1,051        1,065   

New Zealand

    2        100.0                900        900                   900            100     900        900            900        900   
      4        98.3                1,951        1,951            14        1,965            100     1,951        1,965            1,951        1,965   

Total Retail Properties

    178        92.6         2,885        159,859        162,744            14        162,758            87     141,272        141,286            34,629        34,643   

 

(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.

 

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(2) Reflects our company’s interest before considering minority interests, including minority interests in 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.

The following table presents the lease expiry profile of our retail properties with the associated average expiring in-place rents by region at March 31, 2012:

 

                Expiring Leases (000’s sq. ft.)  
                2012     2013     2014     2015     2016     2017    

2018 &
Beyond

 
     Net Rental
Area
    Currently
Available
    (000’s
sq.ft.)
    Net
Rent
    (000’s
sq.ft.)
    Net
Rent
    (000’s
sq.ft.)
    Net
Rent
    (000’s
sq.ft.)
    Net
Rent
    (000’s
sq.ft.)
    Net
Rent
    (000’s
sq.ft.)
    Net
Rent
    (000’s
sq.ft.)
    Net
Rent
 

United States(1)

    61,929        4,818        3,759      $ 58        6,077      $ 54        6,308      $ 54        5,718      $ 61        5,815      $ 65        5,707      $ 66        23,727      $ 59   

Australia

    1,951        33        8        24        7        12        1        26        82        27        703        10        339        17        778        13   

Brazil

    2,786        85        728        52        338        47        294        104        405        75        241        78        118        25        577        15   

Total

    66,666        4,936        4,495      $ 57        6,422      $ 54        6,603      $ 56        6,205      $ 61        6,759      $ 60        6,164      $ 63        25,082      $ 57   

Percentage of Total

    100.0%        7.4%        6.7%                9.6%                9.9%                9.3%                10.1%                9.2%                37.6%           

 

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

The following table summarizes our leasing activity from December 31, 2011 to March 31, 2012:

 

      Dec. 31, 2011              Mar. 31, 2012  
(US $)    Leasable
Area(1)
(000’s
Sq.Ft.)
     Leased(1)
(000’s
Sq.Ft.)
     Total
Expiries
(000’s
Sq. Ft.)
    Expiring
Rent
($ per
Sq.Ft.)
     Leasing
(000’s
Sq. Ft.)
     Year
One
Leasing
Rent
($ per
Sq.Ft.)
     Average
Leasing
Rent
($ per
Sq.Ft.)
     Acq.
(Disp.)
Additions
(000’s
Sq. Ft.)
     Leasable
Area
(000’s
Sq. Ft.)
     Leased
(000’s
Sq. Ft.)
 

United States

     66,369         62,158         (5,579   $ 56.68         4,972       $ 54.86       $ 59.99         578         66,947         62,129   

Australia

     2,033         1,983         -        -         17         -         -         (82      1,951         1,937   

Brazil

     3,069         2,905         (22     44.58         101         28.36         29.51         (283      2,786         2,701   

Total

     71,471         67,046         (5,601   $ 56.64         5,090       $ 54.15       $ 59.18         213         71,684         66,767   

 

(1) Has been restated to reflect the impact of remeasurements which are done annually in the first quarter.

The following list reflects the ten largest tenants in our retail portfolio as at March 31, 2012. The largest tenant in our portfolio accounted for approximately 2.6% of minimum rents, tenant recoveries and other.

 

Top Ten Largest Tenants   Primary DBA   Percent of
Minimum
Rents, Renant
Recoveries
and Other (%)
  Size
(000’s
of Sq. Ft.)
  

Number
of

Locations

Limited Brands, Inc.

  Victoria’s Secret, Bath & Body Works, PINK   2.6%   1,771    306

Foot Locker, Inc.

  Foot Locker, Champs Sports, Footaction USA   2.6%   1,444    363

The Gap, Inc.

  Gap, Banana Republic, Old Navy   2.5%   2,372    227

Abercrombie & Fitch Stores, Inc.

  Abercrombie, Abercrombie & Fitch, Hollister, Gilly Hicks   1.9%   1,409    199

Forever 21, Inc.

  Forever 21   1.8%   2,265    107

American Eagle Outfitters, Inc.

 

American Eagle, Aerie, Martin + Osa

  1.6%      921    162

Golden Gate Capital

  Express, J. Jill, Eddie Bauer   1.4%   1,183    144

Luxottica Retail North America Inc.

  Lenscrafters, Sunglass Hut, Pearle Vision   1.4%      581    289

Macy’s Inc.

  Macy’s, Bloomingdale’s   1.1%   20,881    135

Genesco Inc.

  Journeys, Lids, Underground Station, Johnston & Murphy   1.1%      543    356

Total

      18.0%   33,370    2,288

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 March 31, 2012, the total anticipated costs of these

 

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redevelopment projects were estimated to be approximately $350 million. We are currently redeveloping two consolidated properties within our Brazil Retail Fund, the 54,000 square foot Patio Paulista Mall and the 91,000 square foot Rio Sul mall, for a total planned cost of approximately $60 million. Those redevelopment projects are expected to be completed in 2012 and 2013, respectively. As of March 31, 2012, we have incurred costs of approximately $40 million in connection with these redevelopment projects.

In addition, we continue to evaluate a number of other redevelopment prospects primarily within our retail equity accounted investments to further enhance the quality of our assets in future periods. Total planned costs of these remaining projects are approximately $290 million. Planning for these redevelopment projects is in the preliminary phase. Additional details on the properties to be redeveloped and anticipated completion dates will be available as the planning progresses.

In the year ended December 31, 2011, we completed three redevelopment projects in Brazil at the Raposo Shopping Mall, Patio Higienopolis Mall, and Patio Paulista Mall. Collectively, these projects accounted for 184,000 square feet of redeveloped retail space and were completed at a cost of approximately $90 million. The fair value of these properties of $166 million was reclassified from development properties to commercial properties upon the completion of the redevelopment in the year ended December 31, 2011. Our company did not complete any developments in the year ended December 31, 2010.

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 March 31, 2012, we owned an interest in over 12,400 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 March 31, 2012, we owned interests in several industrial properties in the United States consisting of approximately 3 million square feet of industrial space. As of March 31, 2012, our multi-family and industrial platform represented approximately 1% of our total IFRS Value.

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 March 31, 2012, we held interests in a diverse portfolio of funds with approximately $1.8 billion of invested fund capital. Through these funds, we have interests in approximately 11 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.

As at March 31, 2012, our investments in opportunity funds, which primarily invest in distressed and underperforming real estate assets and businesses, had an IFRS Value of approximately $385 million, and our

 

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investments in finance funds, which primarily invest in commercial real estate mortgages and mezzanine loans, had an IFRS Value of approximately $380 million. As of March 31, 2012, our opportunistic investment platform represented approximately 6% of our total IFRS Value.

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

 

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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.

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.

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.

 

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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 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.

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.

 

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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 81 million square foot global office portfolio:

 

   

we have 29 LEED certifications;

 

   

85% 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

 

   

80% 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. All ownership interests indicated below are 100% unless otherwise indicated. “GP Interest” denotes a general partnership interest and “LP Interest” denotes a limited partnership interest. Certain subsidiaries through which Brookfield Asset Management holds units of our company and the Redemption-Exchange Units have been omitted. This chart should be read in conjunction with the explanation of our ownership and organizational structure below.

 

LOGO

 

(1) It is currently anticipated that public holders of our units will own approximately     % of our units and Brookfield will own approximately     % of our units upon completion of the spin-off. In addition, Brookfield will also own Redemption-Exchange Units of the Property Partnership that are redeemable for cash or exchangeable for our units in accordance with the Redemption-Exchange Mechanism, which could result in Brookfield owning approximately 90% (as currently anticipated) of the units of our company issued and outstanding on a fully exchanged basis. On a fully exchanged basis, public holders of our units would own approximately 10% (as currently anticipated) of the units of our company issued and outstanding, and Brookfield would not hold any limited partnership units of the Property Partnership.
(2) Pursuant to the Voting Agreement, Brookfield has agreed that certain voting rights with respect to the Property General Partner, Property GP LP and the Property Partnership will be voted in accordance with the direction of our company.
(3)

The Property Partnership owns all of the common shares or equity interests, as applicable, of the Holding Entities. Brookfield holds $750 million of redeemable preferred shares of Brookfield BPY Holdings (US) Inc., 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 has subscribed for $5 million of preferred shares of each of the other three Holding Entities (or

 

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  wholly-owned subsidiaries thereof), which preferred shares will be entitled to vote with the common shares of the applicable Holding Entity. Brookfield 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) Certain of the operating entities and intermediate holding companies that are directly or indirectly owned by the Holding Entities and that directly or indirectly hold our real estate assets are not shown on the chart. 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 are calculated as at March 31, 2012.
(5) Our interest in Brookfield Office Properties Inc., or 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.
(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 General Growth Properties, Inc., or GGP, is comprised of an interest in approximately 21% (38% with our consortium partners) 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 March 31, 2012).
(8) Rouse Properties Inc., or Rouse, is a newly formed NYSE-listed company that GGP spun-out to its shareholders on January 12, 2012. As at March 31, 2012, we had interests of approximately 37% (54% with our consortium partners) of the outstanding shares of common stock.
(9) Our economic interest set forth above is reflected as a range because our multi-family and industrial and our opportunistic investments portfolios are held through Brookfield-sponsored private funds in which we hold varying interests.

The following table provides the percentage of voting securities owned, or controlled or directed, directly or indirectly, by us, and our economic interest in our operating entities included in our organizational chart set out above under “— Organizational Chart”.

 

Name

   Economic  Interest(1)    Voting  Interest(1)  

Office

     

Brookfield Office Properties Inc.

   50%      51 %(2) 

Australia

   100%        (3) 

Europe

   100%      100

Canary Wharf Group plc

   22%      22

Retail

     

General Growth Properties, Inc.

   21%(4)      38 %(4) 

Rouse Properties, Inc.

   37%      54 %(5) 

Brazil Retail Fund

   35%      - (6) 

Australia

   100%        (7) 

Multi-Family & Industrial

     

Multi-Family(8)

   10%-52%      - (6) 

Industrial(8)

   29%-41%      - (6) 

Opportunistic Investments

     

Opportunity Funds(8)

   29%-82%      - (6) 

Finance Funds(8)

   13%-33%      - (6) 

 

(1) All interests are rounded to the nearest one percent and are calculated as at March 31, 2012.
(2) 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, together representing an aggregate voting interest of approximately 51.3%.
(3) Our Australian office platform consists of our economic interest in certain of our Australian office properties not held through Brookfield Office Properties. This economic interest is held in the form of participating loan agreements with Brookfield, which are convertible by us at any time into direct ownership interests in the properties in the Australian portfolio or an equity interest in a holding entity that holds the direct ownership interest in the properties, as applicable. Upon conversion into an equity interest in a holding entity, we will acquire Brookfield’s voting rights in such entity.

 

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(4) We, together with our consortium partners, control approximately 38% of the outstanding shares of common stock of GGP. In addition, we are entitled to appoint three directors to GGP’s board of directors. Assumes the exercise of all outstanding warrants held by us to acquire additional shares of common stock of GGP, which warrants were “in-the-money” as at March 31, 2012.
(5) We, together with our consortium partners, control approximately 54% of the outstanding shares of common stock of Rouse.
(6) We hold our economic interest in these assets primarily through limited partnership interests in Brookfield-sponsored private funds. By their nature, limited partnership interests do not have any voting rights.
(7) Our economic interest in our Australian retail properties is held in the form of participating loan agreements with Brookfield which are convertible by us at any time into direct ownership interests in the properties in the Australian portfolio or an equity interest in a holding entity that holds the direct ownership interest in the properties, as applicable. Upon conversion into an equity interest in a holding entity, we will acquire Brookfield’s voting rights in such entity.
(8) Our economic interest set forth above is reflected as a range because our multi-family and industrial and our opportunistic investments portfolios are held through Brookfield-sponsored private funds in which we hold varying interests.

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.

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 Brookfield will own units of our company and Redemption-Exchange Units of the Property Partnership that, in aggregate, represent approximately a 90% interest in the Property Partnership and holders of our units other than Brookfield will hold the remaining interest in the Property Partnership. 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.

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. 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”.

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 $750 million 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 has subscribed for $5 million of preferred shares of each of the other three 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 investments. 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    March 31, 2012    December 31, 2011    December 31, 2010    December 31, 2009

Office

           

Brookfield Office Properties Inc.(1)

   50%    50%    50%    50%

Australia(2)

   100%    100%    100%    100%

Europe

   100%    100%    100%    100%

Canary Wharf Group plc

   22%    22%    22%    15%

Retail

           

General Growth Properties, Inc.(3)

   21%    21%    8%    -

Rouse Properties, Inc.(4)

   37%    -    -    -

Brazil Retail Fund

   35%    35%    25%    25%

Interest in Australia

   100%    100%    100%    100%

Europe

   -    -    100%    100%

Multi-Family & Industrial(5)

           

Multi-Family (through various funds)

   10%-52%    10%-52%    29%-52%    29%-52%

Industrial (through various funds)

   29%-41%    29%    -    -

 

Opportunistic Investments(5)

           

Opportunity Funds

   29%-82%    29%-82%    29%-82%    29%-82%

Finance Funds

   13%-33%    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 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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(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 economic interest in approximately 21% (38% with our consortium partners) 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 March 31, 2012).
(4) Rouse is a newly formed NYSE-listed company that GGP spun-out to its shareholders on January 12, 2012. As at March 31, 2012, we had interests of approximately 37% (54% with our consortium partners) of the outstanding shares of common stock.
(5) Our economic interest set forth in the table above is reflected as a range because we hold certain of our multi-family and industrial and opportunistic investment assets through a combination of Brookfield-sponsored private funds in which we hold varying interests.

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 March 31, 2012, Brookfield Office Properties’ portfolio consisted of interests in 108 properties totaling 78 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 March 31, 2012, this portfolio consisted of 14 office properties totaling approximately 3.2 million square feet and two office development sites totaling approximately 700 thousand 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 March 31, 2012, owned and operated 16 office and retail properties (not including our interest in the office property at 20 Canada Square) totaling approximately 7 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, a 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 January 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 38% 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 March 31, 2012). We are entitled to designate three of the nine individuals nominated for election to GGP’s board of directors. As at March 31, 2012, GGP’s portfolio consisted of 135 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, hold 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. As at March 31, 2012, Rouse owned and operated 31 retail properties totaling approximately 22 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 March 31, 2012, the Brazil Retail Fund’s portfolio consisted of 8 malls totaling approximately 3 million square feet in Brazil, 59% of which is located in São Paolo, 33% of which is located in Rio de Janeiro and 8% 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 March 31, 2012, this portfolio consisted of 4 retail centers totaling approximately 2 million square feet, 54% of which is located in Sydney and 46% of which is located in New Zealand. Brookfield acquired these retail properties in 2007.

Multi-Family and Industrial Platform

Multi-Family: As at March 31, 2012, our multi-family portfolio consisted of interests in over 12,400 multi-family units, which were held primarily through a number of Brookfield-sponsored real estate opportunity and finance funds.

Industrial: As at March 31, 2012, our industrial portfolio consisted of interests in approximately 3 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

As at March 31, 2012, our opportunistic investment portfolio consisted of interests in approximately 11 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”.

 

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ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.

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 March 31, 2012 these operations included interests in 124 office properties and 182 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.

Financial information and information with respect to number of properties, lease percentages, square footage and similar operational information presented in this MD&A include certain investment properties and loans and notes receivables within Brookfield’s Australian operations that will not be contributed to us in connection with the spin-off. See Item 4.B. “Business Overview” and Item 4.C. “Organizational Structure” and note 4(b) of the Unaudited Pro Forma Financial Statements included elsewhere in this Form 20-F.

This management’s discussion and analysis, or MD&A, covers the financial position as at March 31, 2012, December 31, 2011 and December 31, 2010 and results of operations for the three months ended March 31, 2012 and 2011, and the years ended December 31, 2011, 2010 and 2009 of the business comprising Brookfield’s commercial property operations 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, as well as the Unaudited Pro Forma Financial Statements 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 assets, liabilities and results of 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, unless otherwise

 

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specified, 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. We believe this is the most appropriate basis on which to evaluate the performance of properties in the portfolio relative to each other and others in the market. We consider the proportionate interests in our investments to be relevant in demonstrating our ability to manage the underlying economics of the relevant investments, including the financial performance and cash flows. Proportionate interest in the assets net of minority interests represents our economic interest in the underlying property and is relevant as it represents the portion of the underlying property net assets and operations that we manage that are attributable to us. 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.

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, which include all expenses attributable to the commercial property operations, such as property maintenance, utilities, insurance, realty taxes and property administration costs, and exclude interest expense, depreciation and amortization, income taxes, fair value gains (losses) and general and administrative expenses that do not relate directly to operations of a commercial property.

 

   

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 our office segment by evaluating NOI from “Existing properties”, or “same store” basis, and NOI from “Additions, dispositions and other.” NOI from existing properties compares the performance of the property portfolio by excluding the effect of current and prior period dispositions and acquisitions, including developments and “one-time items”, which for the historical periods presented consists primarily of lease termination income. NOI presented within “Additions, dispositions and other” includes the results of current and prior period acquired, developed and sold properties, as well as the one-time items excluded from the “Existing properties” portion of NOI. We do not evaluate the performance of the operating results of the retail segment on a similar basis as the majority of our investments in the retail segment are accounted for under the equity method and, as a result, are not included in NOI. Similarly, we do not evaluate the operating results of its other segments on a same store basis based on the nature of the investments. 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. Our definition of FFO includes all of the adjustments that are outlined in the NAREIT definition of funds from operations, including the exclusion of gains (or losses) from the sale of real estate property, the add back of any depreciation and amortization related to real estate assets and the adjustment for unconsolidated partnerships and joint ventures. In

 

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addition to the adjustments prescribed by NAREIT, we also exclude any unrealized fair value gains (or losses) that arise as a result of reporting under IFRS, certain other non-cash items, if any, and income taxes that arise as certain of our subsidiaries are structured as corporations as opposed to REITs. Because FFO excludes fair value gains (losses), including equity accounted fair value gains (losses), realized gains (losses) and income taxes, 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.

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 March 31, 2012, our principal business segments consist of the following:

Office

 

   

We own interests in and operate one of the highest quality commercial office portfolios in the world consisting of 124 properties containing approximately 82 million square feet of commercial office space. The properties are located in major financial, energy and government 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 base, 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.

 

   

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 19 high-quality, centrally located sites totaling approximately 18 million square feet.

 

   

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

 

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institutional investors participate in our portfolios. This gives rise to non-controlling interests in the IFRS Value, FFO and Total Return of our office property portfolio. Our European operations consist primarily of our approximate 22% interest in Canary Wharf.

Retail

 

   

Our retail portfolio consists of interests in 182 well-located high quality retail centers in target markets in the United States, Brazil and Australia encompassing approximately 164 million square feet of retail space. Similar to our office strategy, we look to maintain a meaningful presence in each of our primary markets in order to maximize the value of our tenant relationships and pursue an opportunistic strategy to take advantage of dislocations in the various markets in which we operate.

 

   

A substantial portion of our retail properties are held through our approximate 21% interest in General Growth Properties, or GGP, which we acquired during 2010 and in January 2011.

 

   

During the first quarter of 2012 GGP completed the spin-off of Rouse to its shareholders, including us. Rouse subsequently completed an equity rights offering. Following the spin-off and our participation in the rights offering, we own an approximately 37% interest in Rouse. The transaction is intended to allow the management teams of the respective companies to focus on strategies that are most appropriate for the different businesses.

Multi-Family and Industrial

 

   

Our multi-family and industrial investments are part of an expanding platform. At March 31, 2012, we had interests in over 12,400 multi-family units and approximately 3 million square feet of industrial space in North America held through Brookfield’s private funds.

 

   

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.

 

   

We have a joint venture with an industrial joint venture 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 industrial joint venture 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.

Opportunistic Investments

 

   

We have interests in Brookfield-sponsored real estate opportunity and finance funds that include investments in distressed and under-performing real estate assets and businesses and commercial real estate mortgages and mezzanine loans. Through these funds we had interests at March 31, 2012 in approximately 11 million square feet of office space, mezzanine loans and other real estate assets located in North America, Europe, Australia, Brazil and emerging markets.

 

   

The Brookfield sponsored real estate finance funds in which we have interests, invest in real estate finance transactions in risk positions senior to traditional equity and subordinate to traditional first mortgages or investment grade corporate debt. The Brookfield sponsored real estate opportunity funds in which we have interests, are focused on assets where we can make improvements or reposition the property to increase the amount and stability of cash flows with a view to monetizing our investments once such changes are realized over a medium-term time horizon. The opportunity funds also have investments and specialty finance offerings, such as commercial real estate, real estate loans, and real estate-related securities, such as commercial and residential mortgage-backed securities.

 

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Recent Initiatives

 

   

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

Since the beginning of 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, Houston, Calgary and Melbourne.

In the first four months of 2012, we signed over 2 million square feet of new leases, including a 1.2 million square foot lease with Morgan Stanley for One New York Plaza announced in April 2012 that represents the largest single-asset office lease in lower Manhattan since 2008. This led to a reduction in our 2013-2017 lease rollover exposure by 130 basis points.

In 2011, we 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 signed during the year ended December 31, 2010.

 

   

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 of our total office development pipeline of 18 million square feet. We are actively advancing planning and entitlements and seeking tenants for these sites.

Initial rents for new leases in our U.S. mall portfolio increased by 7.4% on a comparable basis and we continued to reposition the business by spinning out 30 malls into a new entity focused on these specific operations.

 

   

We simplified the ownership of our U.S. and Australian office assets 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.

Financial Highlights and Performance as at March 31, 2012 and December 31, 2011 and the three months ended March 31, 2012 and 2011

The following tables reflect the results of operations for our business for the three months ended March 31, 2012 and 2011 and as at March 31, 2012 and December 31, 2011. Further details on our operations and financial position are contained within the review of our business segments below.

 

 

(US$ Millions) Three months ended March 31,    2012      2011  

Total revenue

   $         775       $         603   

Net income

     710         532   

Net income attributable to parent company

     383         337   

Funds from operations

     141         136   

 

 

(US$ Millions)   

Mar. 31, 2012

     Dec. 31, 2011  

Investment properties

   $         28,138       $         27,594   

Equity accounted investments

     7,466         6,888   

Total assets

     41,049         40,317   

Property debt

     15,266         15,387   

Total equity

     22,599         21,494   

Equity in net assets attributable to parent company

     12,575         11,881   

 

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The following table presents NOI, FFO and Total Return for the three months ended March 31, 2012 and 2011 and IFRS Value as at March 31, 2012 and December 31, 2011 for the geographies and segments indicated:

 

      NOI           FFO           Total Return           IFRS Value  
(US$ Millions)    2012      2011           2012     2011           2012     2011           Mar. 31,
2012
    Dec. 31,
2011
 

Office

                                

United States

   $ 192       $ 106           $ 110      $ 113           $ 190      $ 191           $ 7,588      $ 7,395   

Canada

     66         64             40        44             90        47             2,149        2,044   

Australia

     76         64             53        33             64        39             2,533        2,315   

Europe

     8         8             10        1             15        137             994        958   

Developments

     -         -             -        -             -        -             589        560   

Unallocated(1)

     -         -             (117     (116 )           (117     (116 )           (6,985     (6,735
     342         242             96        75             242        298             6,868        6,537   

Retail

                                

United States

     -         -             49        56             313        57             4,272        3,938   

Australia

     5         5             2        (2 )           1        18             210        200   

Brazil

     24         20             (1     (5 )           6        (4 )           321        311   

Europe

     -         1             -        1             -        (3 )           -        -   
     29         26             50        50             320        68             4,803        4,449   

Multi-Family and Industrial

     11         12             1        2             (5     4             139        157   

Opportunistic Investments

     27         38             (6     9             23        12             765        738   
     $ 409       $ 318           $ 141      $ 136           $ 580      $ 382           $ 12,575      $ 11,881   

 

(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” in the MD&A for a reconciliation of NOI, FFO and Total Return to the most directly comparable IFRS measures.

First Quarter Performance Highlights

Net income attributable to parent company was $383 million for the three months ended March 31, 2012 compared to $337 million in 2011. The increase of $46 million of net income attributable to parent company over the prior period is largely the result of:

 

   

An increase of $91 million in property net operating income primarily due to the acquisition of four office properties since March 31, 2011 discussed below, the consolidation of the U.S. Office Fund in the fourth quarter of 2011 and currency appreciation relating to our Australian properties. This was offset by reduced occupancies in the United States and the sale of operating assets in our opportunity funds;

 

   

An increase in investment and other income of $6 million primarily as a result of a dividend received on our Canary Wharf investment in the first quarter of 2012;

 

   

An increase in net fair value gains and realized gains (losses) of $64 million, including $78 million which was realized through disposition of office properties in Calgary and Melbourne in the first quarter of 2012; and

 

   

An increase in our share of net earnings of equity accounted investments of $247 million primarily as a result of fair value gains on investment properties in GGP as a result of continued compression of capitalization rates in the United States.

 

   

The above impacts having the effect of increasing net income are offset by the following:

 

  ¡    

An increase in interest expense of $31 million primarily as a result of consolidation of the U.S. Office Fund in the fourth quarter of 2011 and incremental debt on the four office properties acquired since March 31, 2011;

 

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  ¡    

An increase in depreciation and amortization of $33 million primarily as a result of the foreclosure on a hotel and casino operating asset in March 2011 within our finance fund;

 

  ¡    

An increase in income tax expense of $168 million as a result of the increase in income before tax and the impact of a reorganization of our ownership of GGP; and

 

  ¡    

An increase in income attributable to non-controlling interests of $132 due to the increase in net income.

Equity in net assets attributable to parent company increased by $694 million during the three months ended March 31, 2012.

 

   

The increase during the quarter is primarily due to the increase in net income attributable to parent company as detailed above, as well as additional investments in our opportunistic investments platform.

Office

IFRS Value – Office

The following table presents the IFRS Value of our office portfolio by region as at March 31, 2012 and December 31, 2011:

 

(US$ Millions)   United States   Canada   Australia   Europe          Total  
  Mar. 31,
2012
    Dec. 31,
2011
         Mar. 31,
2012
    Dec. 31,
2011
         Mar. 31,
2012
    Dec. 31,
2011
         Mar. 31,
2012
    Dec. 31,
2011
         Mar. 31,
2012
    Dec. 31,
2011
 

Office properties

  $ 13,160      $ 12,959          $ 4,784      $ 4,571          $ 3,721      $ 3,739          $ 537      $ 521          $ 22,202      $ 21,790   

Equity accounted investments

    1,497        1,467            14        13            972        957            -        -            2,483        2,437   

Accounts receivable and other

    1,057        1,315            105        134            494        490            936        994            2,592        2,933   
      15,714        15,741            4,903        4,718            5,187        5,186            1,473        1,515            27,277        27,160   

Property-specific borrowings

    6,604        6,679            1,858        1,840            2,253        2,452            455        442            11,170        11,413   

Accounts payable and other

    886        1,031            437        407            204        229            24        115            1,551        1,782   

Non-controlling interests

    636        636            459        427            197        190            -        -            1,292        1,253   
    $ 7,588      $ 7,395          $ 2,149      $ 2,044          $ 2,533      $ 2,315          $ 994      $ 958          $ 13,264      $ 12,712   

Unallocated

                           

Unsecured facilities

                          $ 590      $ 381   

Capital securities

                            862        994   

Non-controlling interests

                            5,533        5,360   

IFRS Value(1)

                                                                                  $ 6,279      $ 5,977   

 

(1) Does not include office developments which are described in the table below on a geographic basis.

IFRS Value increased by $302 million during the quarter ended March 31, 2012 to $6.3 billion, excluding office development activities. This increase is a result of 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, Canadian and European 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 major variances during the first quarter of 2012 include the following:

 

   

Valuation gains were recorded on properties located in the United States primarily as a result of recent leasing activity and an improved leasing horizon. In Canada, increases were driven by terminal capitalization rate compression of 30 basis points on average as a result of market transaction activity.

 

   

Senior unsecured notes of $200 million were issued by Brookfield Office Properties, with proceeds used to pay down Australian property debt, reducing the interest rate by 300 basis points, from 7.3% to 4.3%, and extending the term by four years.

 

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Equity accounted investments as at March 31, 2012 primarily include: in the United States, 245 Park Avenue ($0.7 billion) and Grace Building ($0.6 billion); and in Australia, a variety of property funds and joint ventures interests. Our interest in Canary Wharf ($0.9 billion) is classified as a financial asset and is included in accounts receivable and other in the table above.

The following table presents the IFRS Value of our office development activities by region:

 

(US$ Millions)    Mar. 31, 2012      Dec. 31, 2011  
      Consoli-
dated
assets
     Consoli-
dated
liabilities
     Non-Controlling
interests
     IFRS
Value
     Consoli-
dated
assets
     Consoli-
dated
liabilities
     Non-Controlling
interests
     IFRS
Value
 

Australia

                         

Brookfield Place, Perth(1)

   $ 942       $ 475       $ 233       $ 234       $ 865       $ 419       $ 223       $ 223   

Other

     257         97         -         160         239         92         -         147   

North America

                         

Manhattan West, New York(2)

     315         227         44         44         315         227         44         44   

Other

     218         -         109         109         213         -         107         106   

Europe

     85         -         43         42         81         -         41         40   
                                                                         
     $ 1,817       $ 799       $ 429       $ 589       $ 1,713       $ 738       $ 415       $ 560   

 

(1) At March 31, 2012 consolidated liabilities consists of non-recourse floating rate debt bearing interest at 6.17% and maturing in 2014.
(2) At March 31, 2012 consolidated liabilities include $122 million of non-recourse fixed rate debt, bearing interest at 5.9% and maturing in 2018, and $105 million of non-recourse floating rate debt bearing interest at 6.0% and maturing in July 2012.

As at March 31, 2012, we hold interests in centrally located office development sites with a total development pipeline of approximately 18 million square feet in the United States, Canada, Australia and Europe. We classify our office development sites into three categories: (i) active development, (ii) active planning and (iii) held for development. The only active development in our office segment is Brookfield Place (formerly City Square) in Perth, a 926,000 square foot development which achieved practical completion on May 18, 2012 for a total cost of A$945 million, or A$1,020/square foot.

Of the remaining 17 million square feet in our office development pipeline, 9 million square feet are in the active planning stage comprising of five development projects. Included in the active planning stage are the development rights to Manhattan West in New York City and 100 Bishopsgate in London, U.K. The development rights to Manhattan West, located on Ninth Avenue between 31st Street and 33rd Street in New York City, include 5.4 million square feet of commercial office space entitlements. We are commencing work to build the necessary foundations to position this site to be one of the first sites for office development in Manhattan in the next development cycle. We also hold an interest in 100 Bishopsgate, a well-positioned development site in London, U.K., and have begun to prepare the site for construction. As at March 31, 2012, these five developments have incurred a cost of $544 million to date and have a total planned development cost of $836 per square foot with a weighted average planned construction period of 85 months.

The remaining 8 million square feet of our office development pipeline are being held for development and are not in the active planning stage. With all our development sites, we will proceed with developing these sites when our risk adjusted return hurdles and preleasing targets are met.

Our office property debt is secured and non-recourse to our corporate subsidiaries other than the unsecured facilities noted below. These financings are typically structured on a loan-to-appraised value basis of between 55% to 65% when the market permits. In addition, in certain circumstances where a building is leased almost exclusively to a high-credit quality tenant, a higher loan-to-value financing, based on the tenant’s credit quality, is put in place at rates commensurate with the cost of funds for the tenant. This execution reduces our equity requirement and enhances our equity returns when financing certain properties. As of March 31, 2012, we had a level of indebtedness of approximately 53% of our consolidated office properties.

 

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We attempt to match the maturity of our office property debt with the average lease term of our properties. At March 31, 2012, the average term to maturity of our property debt was 4 years, compared to our average lease term of approximately 8 years. The details of our property debt for our consolidated office properties at March 31, 2012 are as follows:

 

(US$ Millions)    Weighted Average Rate     Debt Balance  

Unsecured Facilities

    

Brookfield Office Properties revolving facility

     2.4   $ 271   

Brookfield Office Properties Canada revolving facility

     3.2     120   

Brookfield Office Properties senior notes

     4.3     199   

Secured Property Debt

    

Fixed rate

     6.1     7,159   

Variable rate

     5.7     4,798   
             $         12,547   

Current

     $ 977   

Non-current

             11,570   
             $ 12,547   

As at March 31, 2012 we had $895 million of committed corporate credit facilities in Brookfield Office Properties consisting of a $695 million revolving credit facility from a syndicate of banks and bilateral agreements between Brookfield Office Properties and a number of Canadian chartered banks for an aggregate revolving credit facility of C$200 million. The balance drawn on these facilities was $391 million (2011 – $381 million). As at March 31, 2012, we also had $30 million (2011 – $30 million) of indebtedness outstanding to Brookfield.

Capital securities includes certain Class AAA preferred shares issued by Brookfield Office Properties which are presented as liabilities on the basis that they may be settled, at the issuer’s option, in cash or the equivalent value of a variable number of Brookfield Office Properties’ common shares. These represent sources of low cost capital to our business. Brookfield Office Properties had the following capital securities outstanding as at the dates indicated:

 

(US$ Millions, except share information)    Shares
Outstanding
     Cumulative
Dividend Rate
    Mar. 31, 2012(1)      Dec. 31, 2011(1)  

Class AAA Series F

     8,000,000         6.00   $ 201       $ 196   

Class AAA Series G

     4,400,000         5.25     110         110   

Class AAA Series H

     8,000,000         5.75     201         196   

Class AAA Series I

     -         5.20     -         150   

Class AAA Series J

     8,000,000         5.00     201         196   

Class AAA Series K

     6,000,000         5.20     149         146   

Total

                    $         862       $         994   

 

(1) Net of transaction costs of nil at March 31, 2012 (2011 - $1 million).

On March 30, 2012, Brookfield Office Properties redeemed all of the outstanding Class AAA Series I shares for cash of C$25.00 per share. Capital securities includes $752 million (2011 - $884 million) repayable in Canadian dollars of C$750 million (2011 – C$903 million).

 

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Operating results – Office

The following table presents the NOI, FFO and Total Return of our office properties by region for the three months ended March 31, 2012 and 2011:

 

(US$ Millions)   United States   Canada   Australia   Europe   Total  
Three months ended Mar. 31,   2012     2011          2012     2011          2012     2011          2012     2011          2012     2011  

NOI(1)

                                   

Existing properties

  $ 97      $ 99          $ 64      $ 64          $ 68      $ 63          $ 8      $ 8          $ 237      $ 234   

Acquisitions, dispositions, and other

    95        7            2        -            8        1            -        -            105        8   
    192        106            66        64            76        64            8        8            342        242   

Equity accounted income

    20        54            1        5            14        16            -        -            35        75   

Investment and other income

    11        23            5        -            7        6            9        -            32        29   
    223        183            72        69            97        86            17        8            409        346   

Interest expense

    92        58            25        19            38        49            7        7            162        133   

Depreciation and amortization

    3        2            1        1            3        2            -        -            7        5   

Non-controlling interests

    18        10            6        5            3        2            -        -            27        17   
    110        113            40        44            53        33            10        1            213        191   

Unallocated

                                   

Interest expense

                                    (19     (18

Operating costs

                                    (21     (23

Non-controlling interests

                                                                                    (77     (75

FFO(1)

    110        113            40        44              53        33              10        1            96        75   

Fair value changes

    179        163            99        13            (4     14            5        136            279        326   

Realized gains

    1        -            25        -            16        -            -        -            42        -   

Non-controlling interests

      (100     (85           (74     (10         (1     (8         -        -            (175     (103

Total valuation gains

    80        78            50        3            11        6            5        136            146        223   

Total Return(1)

  $ 190      $ 191          $ 90      $ 47          $ 64      $ 39          $ 15      $ 137          $ 242      $ 298   

 

(1) Refer to tables under “—Reconciliation of Performance Measures to IFRS Measures” below in this MD&A for explanation of components of NOI, FFO, Total Return, and for a reconciliation to IFRS measures.

NOI generated by existing office properties (i.e. those held throughout both the current and prior period) is presented in the following table on a constant exchange rate basis, using the average exchange rate for the quarter ended March 31, 2012 for the same period in 2011. This table illustrates the stability of these cash flows that arises from the high occupancy levels and long-term lease profile.

 

(US$ Millions) Three months ended Mar. 31,    2012      2011  

United States

   $ 97       $ 99   

Canada

     64         63   

Australia

     68         66   

Europe

     8         8   

NOI relating to existing properties using normalized foreign exchange(1)

     237         236   

Currency variance

     -         (2

NOI relating to existing properties

   $ 237       $ 234   

Average in-place net rent per square foot

   $         29.38       $         28.26   

 

(1) Using the March 31, 2012 year to date average foreign exchange rates.

NOI from existing properties for the quarter ended March 31, 2012 increased by $3 million. The increase is driven by foreign currency, increased rents in Australia and Canada offset by decreased occupancy in the United States. Contributions from additions, dispositions and other since the beginning of the comparable period includes the consolidation of the U.S. Office Fund ($68 million) and acquisitions in Washington, D.C., Denver, Melbourne and Perth, partially offset by the sale of a property in Boston.

The decrease in equity accounted income primarily reflects the transfer of the U.S. Office Fund ($29 million), Four World Financial Center, and First Canadian Place to consolidated properties offset by income from the acquisition of 450 West 33rd Street in New York and increased income from other equity accounted properties. The increase in interest expense also reflects, in part, these activities, as well as the impact of foreign currency translation on borrowings in Australia and Canada.

 

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FFO for the three months ended March 31, 2012 increased by $21 million to $96 million from $75 million for the three months ended March 31, 2011. The increase is primarily a result of new acquisitions during the period and the refinancing of Australian debt which resulted in a decrease of interest expense. In addition, we recorded a $9 million dividend from our investment in Canary Wharf.

Total Return for the three months ended March 31, 2012 decreased by $56 million from $298 million to $242 million for the three months ended March 31, 2011. The decrease is primarily from fair value gains in respect of our investment in Canary Wharf offset by increased valuations in the United States and Canada in the first quarter of 2012 as a result of decreases in discount and terminal capitalization rates as detailed in the table below. In addition, we also recorded realized gains from the sale of properties in Calgary and Melbourne in the first quarter of 2012.

The key valuation metrics of our commercial office properties are presented in the following table. The valuations are most sensitive to changes in the discount rate and timing or variability of cash flows. A 100-basis point change in the discount rate and terminal capitalization rate would result in a change in our IFRS Value, after deducting non-controlling interests, of $1.6 billion.

 

     United States   Canada   Australia   Europe(1)  
     Mar. 31,
2012
    Dec. 31,
2011
         Mar. 31,
2012
    Dec. 31,
2011
         Mar. 31,
2012
    Dec. 31,
2011
         Mar. 31,
2012
    Dec. 31,
2011
 

Discount rate

    7.5     7.5         6.7     6.7         9.1     9.1         6.1     6.1

Terminal cap rate

    6.3     6.3         5.9     6.2         7.4     7.5         n/a        n/a   
Investment horizon (years)     12        12            11        11            10        10            n/a        n/a   

 

(1) The valuation method used by Europe is the direct capitalization method. The amounts presented as the discount rate relate to the implied capitalization rate. The terminal capitalization rate and investment horizon are not applicable.

The results of operations are primarily driven by occupancy and rental rates of the office properties and stability of earnings is driven by the average lease term. The following tables present key metrics relating to in-place leases of our office property portfolio:

 

     Mar. 31, 2012   Dec. 31, 2011  
(US$)   Occupancy
(%)
    Same
Store
Occupancy
(%)
    Avg.
Lease
Term
(Years)
    Avg.
“In
Place”
Net
Rent
    Market
Net
Rent
         Occupancy
(%)
    Same
Store
Occupancy
(%)
    Avg.
Lease
Term
(Years)
    Avg.
“In
Place”
Net
Rent
    Market
Net
Rent
 

United States

    91.0     91.0     7.4      $ 24.76      $ 31.33            91.3     91.3     7.0      $ 24.53      $ 31.21   

Canada

    96.8     96.8     8.6        26.06        31.34            96.3     96.3     8.7        25.48        29.87   

Australia

    97.4     97.4     5.9        52.22        52.56            96.6     96.9     6.1        48.33        48.93   

Europe

    100.0     100.0     10.2        61.13        57.38            100.0     100.0     10.3        60.47        59.87   

Average

    93.3     93.3     7.5      $ 29.38      $ 34.50            93.3     93.9     7.3      $ 28.55      $ 33.62   

The total worldwide portfolio occupancy rate in our office properties at March 31, 2012 remained flat at 93.3% from December 31, 2011. Leasing performance continues to be very strong with 2.3 million square feet of new leases signed through April 2012. This includes a 1.2 million square foot lease with Morgan Stanley in downtown Manhattan. The new lease rates were on average 41% higher than the expiring rents which led to the 3% increase in our average “in place” net rent. Currently, we have a leasing pipeline of 4 million square feet which would further improve our leasing profile.

We use in-place net rents for our office segment, as a measure of leasing performance, and calculate this as the annualized amount of cash rent receivable from leases on a per square foot basis including tenant expense reimbursements, less operating expenses being incurred for that space, but excluding the impact of straight-lining rent escalations or amortization of free rent periods. This measure represents the amount of cash generated from leases in a given period.

 

   

In North America, at March 31, 2012, average in-place net rents across our portfolio increased by 1% when compared to December 31, 2011. Net rents across this portfolio remained at a discount

 

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of approximately 25% to the average market rent of $31 per square foot. We believe that we will be able to maintain or increase our net rental income in the coming years and, together with our high overall occupancy, exercise patience in signing new leases.

 

   

In Australia, at March 31, 2012, average in-place net rents in our portfolio were approximately $52 per square foot, which represented a 1% discount to market rents. Leases in Australia typically include annual escalations, with the result that in-place lease rates tend to increase along with long-term increases in market rents.

The following table summarizes our leasing activity from December 31, 2011 to March 31, 2012:

 

     Dec. 31, 2011                                           Mar. 31, 2012  
(US$)   Leasable
Area(1)
(000’s
Sq.Ft.)
    Leased(1)
(000’s
Sq.Ft.)
         Total
Expiries
(000’s
Sq. Ft.)
    Expiring
Net Rent
($per
Sq.Ft.)
    Leasing
(000’s
Sq. Ft.)
    Year One
Leasing
Net Rent
($per
Sq.Ft.)
    Average
Leasing
Net Rent
($per
Sq.Ft.)
    Acq.
(Disp.)
Additions
(000’s
Sq. Ft.)
         Leasable
Area
(000’s
Sq. Ft.)
    Leased
(000’s
Sq. Ft.)
 

United States

    44,019        40,168          (1,840   $ 18.81        1,782      $ 22.07      $ 26.46        -            44,071        40,110   

Canada

    17,108        16,469          (245     26.43        341        29.55        30.48        (293         16,806        16,272   

Australia

    10,166        9,819          (86     37.76        175        41.52        46.56        (202         9,965        9,706   

Europe

    556        556            -        -        -        -        -        -            556        556   

Total

    71,849        67,012            (2,171   $ 20.42        2,298      $ 24.66      $ 28.59        (495         71,398        66,644   
(1) Has been restated to reflect the impact of remeasurements which are done annually in the first quarter.

Additionally, for the three months ended March 31, 2012, tenant improvements and leasing costs related to leasing activity that occurred averaged $39.86 per square foot, compared to $31.14 per square foot during the same period in 2011.

The following table presents the lease expiry profile of our office properties with the associated expiring average in-place net rents by region at March 31, 2012:

 

                Expiring Leases  

(000’s sq. ft.)

              2012     2013     2014     2015     2016     2017     2018 &
Beyond
 
  Net
Rental
Area
    Currently
Available
    (000’s
sq.ft.)
    Net
Rent
    (000’s
sq.ft.)
    Net
Rent
    (000’s
sq.ft.)
    Net
Rent
    (000’s
sq.ft.)
    Net
Rent
    (000’s
sq.ft.)
    Net
Rent
    (000’s
sq.ft.)
    Net
Rent
    (000’s
sq.ft.)
    Net
Rent
 

United States

    44,071        3,961        2,324      $ 18        5,631      $ 31        3,224      $ 23        2,717      $ 22        2,054      $ 25        2,052      $ 25        22,108      $ 33   

Canada

    16,806        534        320        28        1,771        23        391        31        1,626        25        1,752        26        586        30        9,826        31   

Australia

    9,965        259        361        53        659        43        880        54        1,183        61        1,078        65        1,050        51        4,495        72   

Europe

    556        -        -        -        -        -        262        60        -        -        -        -        -        -        294        63   

Total

    71,398        4,754        3,005      $ 23        8,061      $ 30        4,757      $ 31        5,526      $ 31        4,884      $ 34        3,688      $ 33        36,723      $ 37   

Percentage of Total

    100.0%        6.7%        4.2%                11.3%                6.7%                7.7%                6.8%                5.2%                51.4%           

 

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Retail

IFRS Value – Retail

The following table presents IFRS Value of our retail properties by region as at March 31, 2012 and December 31, 2011:

 

(US$ Millions)    United States           Australia           Brazil           Total  
      Mar. 31,
2012
     Dec. 31,
2011
          Mar. 31,
2012
    Dec. 31,
2011
          Mar. 31,
2012
     Dec. 31,
2011
          Mar. 31,
2012
     Dec. 31,
2011
 

Retail properties

   $ -       $ -           $ 377      $ 388           $ 1,902       $ 1,882           $ 2,279       $ 2,270   

Equity accounted investments

     4,656         4,099             -        -             -         87             4,656         4,186   

Accounts receivable and other

     210         183             3        19             435         461             648         663   
     4,866         4,282             380        407             2,337         2,430             7,583         7,119   

Property-specific borrowings

     -         -             184        185             863         1,011             1,047         1,196   

Accounts payable and other

     182         51             (14     -             192         175             360         226   

Non-controlling interests

     412         293             -        22             961         933             1,373         1,248   

IFRS Value

   $ 4,272       $ 3,938           $ 210      $ 200           $ 321       $ 311           $ 4,803       $ 4,449   

Specific major variances during the first quarter of 2012 included the following:

 

   

IFRS Value in our retail portfolio increased by $354 million to $4.8 billion at March 31, 2012 from $4.4 billion in December 31, 2011, reflecting valuation gains that were driven by a 20 basis-point decrease in the discount rate and terminal capitalization rates within our U.S. portfolio. In addition, the increase is also a result of the contribution of capital in connection with the Rouse rights offering.

 

   

GGP completed $2.9 billion in financings during the first four months of 2012, including a $1.4 billion secured financing of Ala Moana Center and a $1 billion unsecured corporate line of credit. The Ala Moana financing has a ten year term, with interest-only payments based on a 4.23% coupon and replaces a $1.3 billion 5.59% financing that was scheduled to mature in 2018, resulting in a meaningful lengthening in maturity profile and a decrease in interest expense.

 

   

We sold three properties in our Brazil retail fund, with the sale proceeds applied to reduce borrowings.

The details of property debt for our consolidated retail properties at March 31, 2012 are as follows:

 

(US$ Millions)    Weighted Average Rate    Debt Balance  

Secured Property Debt

     

Variable rate

   9.2%                $ 1,047   
          $ 1,047   

Current

      $ 127   

Non-current

          920   
          $ 1,047   

 

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The details of retail property debt related to our equity accounted investment in GGP at March 31, 2012 are as follows:

 

(US$ Millions)    Weighted Average Rate    Debt Balance(1)  

Unsecured Facilities

     

Junior subordinated notes

   2.0%    $ 206   

Secured Property Debt

     

Fixed rate

   5.5%      16,513   

Variable rate

   3.4%      1,972   
          $ 18,691   

Current

      $ 2,506   

Non-current

          16,185   
          $ 18,691   

 

(1) Represents GGP’s consolidated and proportionate share of unconsolidated U.S. property debt.

Operating results – Retail

The following table presents the NOI, FFO, and Total Return of our retail properties by region for the quarters ended March 31, 2012 and 2011:

 

(US$ Millions)    United States    Australia    Brazil    Europe    Total  
      2012     2011           2012     2011           2012     2011           2012      2011           2012     2011  

NOI(1)

   $ -      $ -         $ 5      $ 5         $   24      $   20         $     -       $     1         $ 29      $   26   

Equity accounted investments

     51        63           -        -           1        -           -         -           52        63   

Investment and other income

     -        2             -        -             4        1             -         -             4        3   
     51        65           5        5           29        21           -         1           85        92   

Interest expense

     -        -           3        7           29        36           -         -           32        43   

Other operating costs

     -        -           -        -           -        -           -         -           -        -   

Non-controlling interests

     2        9             -        -             1        (10          -         -             3        (1

FFO(1)

   $ 49      $ 56           $ 2      $ (2        $ (1   $ (5        $ -       $ 1           $ 50      $ 50   

Fair value changes

     290        (1        (1     20           6        (1        -         (2        295        16   

Realized gains (losses)

     -        -           -        -           4        -           -         (2        4        (2

Non-controlling interests

     (26     2             -        -             (3     2             -         -             (29     4   

Total valuation gains (losses)

     264        1             (1     20             7        1             -         (4          270        18   
                                 

Total Return(1)

   $  313      $   57           $     1      $   18           $ 6      $ (4        $ -       $ (3        $  320      $ 68   

 

(1) Refer to tables under “—Reconciliation of Performance Measures to IFRS Measures” below in this MD&A for explanation of components of NOI, FFO, Total Return, and for a reconciliation to IFRS measures.

NOI for the three months ended March 31, 2012 compared with three months ended March 31, 2011 increased by $3 million to $29 million, primarily due to an 11% increase in tenant sales in Brazil.

FFO for the three months ended March 31, 2012 remained flat when compared with the three months ended March 31, 2011.

Total Return for the three months ended March 31, 2012 increased by $252 million to $320 million from $68 million. The increase is primarily a result of changes in the fair value of our investment in GGP.

 

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The key valuation metrics of our retail properties, including those within our equity accounted investments, are presented in the following table. The valuations are most sensitive to changes in the discount rate and timing or variability of cash flows. Discount and capitalization rates have declined meaningfully in all of our principal regions, giving rise to appraisal gains.

 

      United States(1)    Australia    Brazil  
      Mar. 31,
2012
    Dec. 31,
2011
          Mar. 31,
2012
    Dec. 31,
2011
          Mar. 31,
2012
    Dec. 31,
2011
 

Discount rate

     5.8     6.0        9.7     9.8        9.5     9.6

Terminal cap rate

     n/a        n/a           8.7     8.9        7.3     7.3

Investment horizon (years)

     n/a        n/a             10        10             10        10   

 

(1) The valuation method used by United States is the direct capitalization method. The amounts presented as the discount rate relate to the implied capitalization rate. The terminal capitalization rate and investment horizon are not applicable.

The following table presents key metrics relating to in-place leases of our retail property portfolio:

 

      Mar. 31, 2012    Dec. 31, 2011  
(US$)    Occupancy
(%)
    Avg. Lease
Term (Years)
     Avg. “In Place”
Rent
     Market
Rent
          Occupancy
(%)
    Avg. Lease
Term (Years)
     Avg. “In Place”
Rent
     Market
Rent
 

United States (1)

     92.2     5.6       $ 56.67       $ 57.46           93.2     5.1       $ 56.05       $ 55.87   

Australia

     98.7     7.2         12.15         12.49           98.0     7.4         10.14         10.86   

Brazil

     96.9     6.8         53.25         53.40             94.7     6.8         52.50         51.15   

Average

     92.7     5.7       $ 54.81       $ 55.65             93.4     5.3       $ 54.08       $ 53.88   

 

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

Our retail portfolio occupancy rate as at March 31, 2012 was 92.7%, down from 93.4% at December 31, 2011. The decrease was primarily a result of tenants vacating after the holiday season.

We use in-place rents for our retail segment as a measure of leasing performance, which is calculated on a cash basis and consists of base minimum rent, plus reimbursements of common area costs, and real estate taxes.

The following table summarizes our leasing activity in the first quarter of 2012:

 

      Dec. 31, 2011                 Mar. 31, 2012  
(US$)    Leasable
Area(1)
(000’s
Sq.Ft.)
     Leased(1)
(000’s
Sq.Ft.)
          Total
Expiries
(000’s
Sq. Ft.)
    Expiring
Rent
($ per
Sq.Ft.)
     Leasing
(000’s
Sq. Ft.)
     Year One
Leasing
Rent
($ per
Sq.Ft.)
     Average
Leasing
Rent
($ per
Sq.Ft.)
     Acq.
(Disp.)
Additions
(000’s
Sq. Ft.)
          Leasable
Area
(000’s
Sq. Ft.)
     Leased
(000’s
Sq. Ft.)
 

United States

     66,369         62,158           (5,579   $ 56.68         4,972       $ 54.86       $ 59.99         578           66,947         62,129   

Australia

     2,744         2,689           -        -         -         -         -         (80        2,664         2,628   

Brazil

     3,069         2,905             (22     45.95         101         29.23         30.41         (283          2,786         2,701   

Total

     72,182         67,752             (5,601   $ 56.64         5,073       $ 54.35       $ 59.40         215             72,397         67,458   

 

(1) Has been restated to reflect the impact of remeasurements which are done annually in the first quarter.

The average initial rent on leases signed in 2012 was $59.40 per square foot, up 4.9% or $2.76 per square foot as compared to the expiring rent on comparable leases.

In addition, we incurred tenant allowances for our operating properties of $24 million for the three months ended March 31, 2012 and $27 million during the same period in 2011.

 

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The following table presents the lease expiry profile of our retail properties with the associated average expiring in-place rents by region at March 31, 2012:

 

            Expiring Leases
            2012   2013   2014   2015   2016   2017   2018 & Beyond
(000’s sq. ft.)   Net
Rental
Area
  Currently
Available
  (000’s
sq.ft.)
  In-
place
Rent
  (000’s
sq.ft.)
  In-
place
Rent
  (000’s
sq.ft.)
  In-
place
Rent
  (000’s
sq.ft.)
  In-
place
Rent
  (000’s
sq.ft.)
  In-
place
Rent
  (000’s
sq.ft.)
  In-
place
Rent
  (000’s
sq.ft.)
  In-
place
Rent

United States(1)

  61,929   4,818   3,759   $58   6,077   $54   6,308   $54   5,718   $61   5,815   $65   5,707   $66   23,727   $59

Australia

  2,664   36   26   51   23   40   31   44   122   29   729   11   344   18   1,354   13

Brazil

  2,786   85   728   52   338   47   294   104   405   75   241   78   118   25   577   15

Total

  67,379   4,939   4,513   $57   6,438   $54   6,633   $56   6,245   $61   6,785   $60   6,169   $63   25,658   $56

Percentage of Total

  100.0%   7.3%   6.7%       9.6%       9.8%       9.3%       10.1%       9.2%       38.0%    

 

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

Multi-Family and Industrial

IFRS Value – Multi-Family and Industrial

The following table presents IFRS Value of our multi-family and industrial segment:

 

(US$ Millions)    Mar. 31, 2012      Dec. 31, 2011  

Investment properties

   $ 1,023       $ 971   

Equity accounted investments

     120         84   

Accounts receivable and other

     72         57   
     1,215         1,112   

Property-specific borrowings

     723         564   

Accounts payable and other liabilities

     30         20   

Non-controlling interests

     323         371   

IFRS Value

   $ 139       $ 157   

IFRS Value decreased over the period as a result of an increase of debt in a multi-family portfolio, which was refinanced at a lower interest rate and extended the term by three years. This was offset by further investments in the platform.

Operating Results – Multi-Family and Industrial

The following table presents the NOI, FFO and Total Return of our multi-family and industrial segment for the quarters ended March 31, 2012 and 2011:

 

(US$ Millions) Three months ended Mar. 31,    2012     2011  

NOI(1)

   $ 11      $ 12   

Equity accounted investments

     1        -   
     12        12   

Interest and other expense

     8        5   

Non-controlling interests

     3        5   

FFO(1)

   $ 1      $ 2   

Fair value changes

     (16     9   

Realized gains (losses)

     (3     -   

Non-controlling interests

     13        (7

Total valuation gains (losses)

     (6     2   

Total Return(1)

   $ (5   $ 4   

 

(1) Refer to tables under “—Reconciliation of Performance Measures to IFRS Measures” below in this MD&A for explanation of components of NOI, FFO, Total Return, and for a reconciliation to IFRS measures.

 

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FFO for the three months ended March 31, 2012 decreased by $1 million from the three months ended March 31, 2011 due to the increase in borrowing costs. The decrease in total valuation gains of $8 million was driven by an increase in terminal cap rates in the United States, and realized losses from the sale of multi-family properties in the United States.

The key valuation metrics of these properties are presented in the following table. The valuations are most sensitive to changes in the discount rate and timing or variability of cash flows.

 

      United States      Canada  
       Mar. 31, 2012         Dec. 31, 2011         Mar. 31, 2012         Dec. 31, 2011   

Discount rate

     8.5%         8.6%         8.7%         8.7%   

Terminal cap rate

     8.5%         8.3%         7.4%         7.7%   

Investment horizon (years)

     8         10         10         10   

Opportunistic Investments

IFRS Value – Opportunistic Investments

The following table presents IFRS Value of our opportunistic investments segment:

 

(US$ Millions)    Mar. 31, 2012      Dec. 31, 2011  

Investment properties

   $                883       $               912   

Equity accounted investments

     142         118   

Loans and notes receivable

     971         994   

Accounts receivable and other

     1,161         1,189   
     3,157         3,213   

Property-specific borrowings

     949         1,094   

Accounts payable and other liabilities

     369         415   

Non-controlling interests

     1,074         966   

IFRS Value

   $ 765       $ 738   

IFRS Value increased by $27 million to $765 million at March 31, 2012 from $738 million at December 31, 2011. This was a result of further investments along with fair value and realized gains in our opportunity and finance funds.

As at March 31, 2012, our investment properties consist primarily of operating assets within the Brookfield sponsored real estate opportunity funds. Accounts receivable and other includes a hotel operating property. A summary of loans and notes receivable by collateral asset class, which primarily reside in our real estate finance funds, is as follows:

 

(US$ Millions)  

Interest Rate as at

Mar. 31, 2012

      

Maturity as at

Mar. 31, 2012

       Mar. 31, 2012     Dec. 31, 2011  
    

Range

 

Weighted

Average

       Range   Weighted
Average
      

Unpaid

Principal

Balance

     Percentage of
Portfolio
   

Unpaid

Principal
Balance

    Percentage of
Portfolio
 

Asset Class

                      
Hotel  

LIBOR plus 2.23%

to 12.01%

  5.2%     2011 to 2014   2012     $             332         34%      $             401        40%   
Office  

LIBOR plus 2.00%

to 11.00%

  4.7%     2012 to 2014   2013       613         63%        593        60%   
Retail   LIBOR plus 14.0%   14.2%     2014   2014       26         3%        -        -   

Total

                          $ 971         100%      $ 994        100%   

 

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Our loan portfolio is comprised of real estate mortgages and mezzanine loans. As the portfolio is comprised of a discrete number of loans we evaluate the credit quality of each loan and note individually rather than through grouping the portfolio by credit quality indicators. Accordingly, we manage the credit risk associated with the portfolio by continually monitoring and performing a comprehensive review of the collateral properties underlying each individual loan and our security position in respect of that collateral. The review involves, but is not limited to, a detailed analysis of recent operating statements, in addition to rent rolls and other occupancy reports obtained from borrowers or loan reviewers. Further, we typically communicate directly with third party sale, leasing or financing brokers to gather the latest information on local markets or current market trends. Although a portion of our loan investments relates to distressed debt, by reviewing the above information, we are able to make an informed assessment regarding the expected future performance of underlying collateral properties and, therefore, reach a conclusion about our ability to recover our investment through realization of the collateral.

Property debt related to our opportunistic investments segment totaled $949 million at March 31, 2012 and had a weighted average interest rate of 4.04% and an average term to maturity of 6.3 years.

Other liabilities consists primarily of obligations relating to our real estate finance funds which are secured by loans and notes receivable having a carrying value of $0.3 billion (2011 - $0.7 billion).

Operating Results – Opportunistic Investments

The following table presents the NOI, FFO, and Total Return of our opportunistic investments business for the three months ended March 31, 2012 and 2011:

 

(US$ Millions) Three months ended Mar. 31,    2012     2011  

NOI(1)

   $             27      $             38   

Investment and other income

     2        -   
     29        38   

Interest and other expense

     23        16   

Depreciation and amortization

     32        -   

Non-controlling interests

     (20     13   

FFO(1)

   $ (6   $ 9   

Fair value changes

     81        8   

Realized gains

     35        -   

Non-controlling interests

     (87     (5

Total valuation gains

     29        3   

Total Return(1)

   $ 23      $ 12   

 

(1) 

Refer to tables under “— Reconciliation of Performance Measures to IFRS Measures” below in this MD&A for explanation of components of NOI, FFO, Total Return, and for a reconciliation to IFRS measures.

NOI for the three months ended March 31, 2012 decreased by $11 million compared to the three months ended March 31, 2011 as a result of the sale of operating assets in the current period. FFO for the three months ended March 31, 2012 decreased by $15 million when compared with the three months ended March 31, 2011. This was a result of the decrease in NOI as well as depreciation and amortization and interest expense of a hotel asset we acquired at the end of the first quarter of 2011. The decrease was partially offset by an increase in investment and other income which is a result of income received from distressed loan portfolios that were acquired by our opportunity funds.

Total Return for the three months ended March 31, 2012 increased by $11 million when compared to the three months ended March 31, 2011 as a result of an increase in realized gains from the disposition of assets and valuation gains in our opportunity and finance funds, net of non-controlling interests therein.

 

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The key valuation metrics of these properties are presented in the following table. The valuations are most sensitive to changes in the discount rate and timing or variability of cash flows.

 

      United States  
      Mar. 31, 2012      Dec. 31, 2011  

Discount rate

     8.6%         8.2%   

Terminal cap rate

     7.4%         8.1%   

Investment horizon (years)

     10         10   

Financial Highlights and Performance as at December 31, 2011 and 2010 and the years ended December 31, 2011, 2010 and 2009

The following tables reflect the results for our business for each of the years ended December 31, 2011, 2010 and 2009 and as at December 31, 2011 and 2010. 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

     3,745         2,109         (734

Net income attributable to parent company

     2,323         1,026         (477

FFO

     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 attributable to parent company

     11,881         7,464   

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 (loss) attributable to parent company was income of $2.3 billion for the year ended December 31, 2011 compared to income of $1.0 billion and a loss of $477 million for the years ended December 30, 2010 and 2009, respectively. The increase of $1.3 billion and $1.5 billion of net income (loss) attributable to parent company over the respective prior period is largely the result of:

 

   

An increase in property net operating income of $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 the U.S. In addition, the consolidation of the U.S. Office Fund, and 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;

 

   

An increase in net fair value gains (losses) and realized gains of $653 million 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 higher projected cash flows and lower discount rates across our office portfolio which is detailed below under “— Office”; and

 

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An increase in our share of net earnings (losses) of equity accounted investments of $1.2 billion and $1.3 billion during the years ended December 31, 2011 and 2010, respectively, compared to their prior periods. The increase during 2011 is primarily due to our investments in GGP which were acquired in November 2010 and January 2011 which had significant fair value gains as a result of compression of the capitalization rates in the United States, partially offset by the consolidation of the U.S. Office Fund. The increase during 2010 is primarily related to an increase in fair value gains due to higher projected cash flows and lower discount rates across our office portfolio.

 

   

The above impacts having the effect of increasing net income are offset by the following:

 

  ¡    

An increase in interest expense of $187 million and $155 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 consolidation of the U.S. Office Fund, as well as acquisitions during the period. The increase during 2010 is primarily attributable to property acquisitions and the completion of development projects;

 

  ¡    

An increase in income tax expense of $361 million and $213 million during the years ended December 31, 2011 and 2010, respectively, compared to their prior periods. The increase during 2011 and 2010 is to due to the increase in income (loss) before income taxes; and

 

  ¡    

An increase in income attributable to non-controlling interests of $339 million and $1.3 billion during the years ended December 31, 2011 and 2010, respectively, compared to their prior periods. The increase during 2011 and 2010 is to due to the increase in net income (loss). In addition, the transfer of economic interests in 16 directly owned Australian assets in September 2010 to the 50% owned Brookfield Office Properties also increased income (loss) attributable to non-controlling interests.

Equity in net assets attributable to parent company increased by $4.4 billion during the year ended December 31, 2011.

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

 

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Office

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        1,253        134        193        490        387        994        831        2,933        2,664   
    15,741        10,540        4,718        4,393        5,186        4,684        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        94        115        123        1,782        1,344   

Non-controlling interests

    636        407        427        270        190        126        -        -        1,253        803   
      7,395        5,677        2,044        2,081        2,315        2,030        958        782        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.

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 in Canary Wharf ($0.9 billion) is classified as a financial asset and is included in accounts receivable and other in the table above.

 

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The following table presents the IFRS Value of our office development activities by region:

 

(US$ Millions)    Dec. 31, 2011      Dec. 31, 2010  
      Consoli-
dated
assets
     Consoli-
dated
liabilities
    

Non-

Controlling
interests

     IFRS
Value
     Consoli-
dated
assets
     Consoli-
dated
liabilities
    

Non-

Controlling
interests

     IFRS
Value
 

Australia

                         

Brookfield Place, Perth(1)

   $ 865       $ 419       $ 223       $ 223       $ 597       $ 203       $ 197       $ 197   

Other

     239         92         -         147         244         100         -         144   

North America

                         

Manhattan West, New York(2)

     315         227         44         44         280         227         27         26   

Other

     213         -         107         106         209         -         104         105   

Europe

     81         -         41         40         74         -         37         37   
     $ 1,713       $   738       $       415       $       560       $   1,404       $       530       $       365       $   509   

 

(1) At December 31, 2011 consolidated liabilities consists of non-recourse floating rate debt bearing interest at 6.50% and maturing in 2014.
(2) At December 31, 2011 consolidated liabilities include $122 million of non-recourse fixed rate debt, bearing interest at 5.9% and maturing in 2018, and $105 million of non-recourse floating rate debt bearing interest at 6.0% and maturing in 2012.

As at December 31, 2011, we held interests in centrally located office development sites with a total development pipeline of approximately 18 million square feet in the United States, Canada, Australia, and Europe. We classify our office development sites into three categories: (i) active development (ii) active planning and (iii) held for development. The only active development in our office segment is Brookfield Place (formerly City Square) in Perth, a 926,000 square foot development which achieved practical completion on May 18, 2012 for a total cost of A$945 million, or A$1,020/square foot. As of December 31, 2011, costs incurred on the Brookfield Place development were A$823 million.

Of the remaining 17 million square feet in our office development pipeline, 9 million square feet are in the active planning stage comprising of five development projects. Included in the active planning stage are the development rights to Manhattan West in New York City and 100 Bishopsgate in London, U.K. The development rights to Manhattan West, located on Ninth Avenue between 31st Street and 33rd Street in New York City, include 5.4 million square feet of commercial office space entitlements. We are commencing work to build the necessary foundations to position this site to be one of the first sites for office development in Manhattan in the next development cycle. We also hold an interest in 100 Bishopsgate, a well-positioned development site in London, U.K., and have begun to prepare the site for construction. As at December 31, 2011, these five developments have incurred a cost of $522 million to date and have a total planned development cost of $836 per square foot with a weighted average planned construction period of 85 months.

The remaining 8 million square feet of our office development pipeline are being held for development and are not in the active planning stage. With all our development sites, we will proceed with developing these sites when our risk adjusted return hurdles and preleasing targets are met.

As of December 31, 2011, we had a level of indebtedness of approximately 54% of our consolidated office properties.

We attempt to match the maturity of our office property debt with the average lease term of our properties. At December 31, 2011, the average term to maturity of our property debt was 5 years, compared to our average lease term of 7 years. The details of our property debt for our consolidated office properties at December 31, 2011 are as follows:

 

(US$ Millions)    Weighted Average Rate        Debt Balance  

Unsecured Facilities

       

BOP revolving facility

     2.4      $ 264   

BPO Canada revolving facility

     3.3        117   

Secured Property Debt

       

Fixed rate

     6.0        7,694   

Variable rate

     6.2        4,457   
                $         12,532   

Current

        $ 1,022   

Non-current

                11,510   
                $ 12,532   

 

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As at December 31, 2011 we had $782 million of committed corporate credit facilities in Brookfield Office Properties consisting of a $660 million revolving credit facility from a syndicate of banks and bilateral agreements between Brookfield Canada Office Properties and a number of Canadian chartered banks for an aggregate revolving credit facility of C$125 million. The balance drawn on these facilities was $381 million (2010 – nil). As at December 31, 2011, we also had $30 million (2010 – $30 million) of indebtedness outstanding to Brookfield.

Capital securities includes certain of Brookfield Office Properties’ Class AAA preferred shares issued by Brookfield Office Properties which are presented as liabilities on the basis that they may be settled, at the issuer’s option, in cash or the equivalent value of a variable number of Brookfield Office Properties’ common shares. These represent sources of low cost capital to our business. Brookfield Office Properties had the following capital securities outstanding as at the dates indicated:

 

(US$ Millions, except share information)    Shares
Outstanding
     Cumulative
Dividend Rate
     Dec. 31, 2011(1)      Dec. 31, 2010(1)  

Class AAA Series F

     8,000,000         6.00%       $ 196       $ 200   

Class AAA Series G

     4,400,000         5.25%         110         110   

Class AAA Series H

     8,000,000         5.75%         196         200   

Class AAA Series I

     6,130,022         5.20%         150         179   

Class AAA Series J

     8,000,000         5.00%         196         200   

Class AAA Series K

     6,000,000         5.20%         146         149   

Total

                     $                 994       $             1,038   

 

(1) Net of transaction costs of $1 million and $2 million at December 31, 2011 and December 31, 2010, respectively.

Operating results – Office

The following table presents the NOI, FFO and Total Return of our office properties by region for the years ended December 31, 2011, 2010 and 2009:

 

(US$ Millions)   United States   Canada   Australia   Europe          Total  
     2011     2010     2009          2011     2010     2009          2011     2010     2009          2011     2010     2009          2011     2010     2009  

NOI(1)

                                             

Existing properties

  $ 362      $ 386      $ 380          $ 218      $ 210      $ 192          $ 136      $ 120      $ 125          $ 32      $ 31      $ 31          $ 748      $ 747      $ 728   

Additions, dispositions and other

    199        32        79            41        33        10            128        94        29            -        -        -            368        159        118   
    561        418        459            259        243        202            264        214        154            32        31        31            1,116        906        846   

Equity accounted income

    172        232        237            17        18        -            62        56        12            -        -        -            251        306        249   

Investment and other income

    81        48        34            44        65        34            32        5        5            17        24        15            174        142        88   
    814        698        730            320        326        236            358        275        171            49        55        46            1,541        1,354        1,183   

Interest expense

    319        229        239            82        78        56            207        173        91            29        28        28            637        508        414   

Depreciation and amortization

    7        8        6            2        5        5            10        7        5            -        -        -            19        20        16   

Non-controlling interests

    53        34        22            23        16        13            7        4        -            -        -        -            83        54        35   
    435        427        463            213        227        162            134        91        75            20        27        18            802        772        718   

Unallocated

                                             

Interest expense

                                            (70)        (67)        (71)   

Operating costs

                                            (83)        (79)        (99)   

Non-controlling interests

                                                                                                                    (337)        (259)        (225)   

FFO(1)

    435        427        463            213        227        162            134        91        75            20        27        18            312        367        323   

Fair value changes

    860        732        (626)            211        125        (357)            74        94        (280)            174        49        (52)            1,319        1,000        (1,315)   

Realized gains

    318        35        50            -        28        -            -        50        -            -        -        -            318        113        50   

Non-controlling interests

    (628)        (452)        308            (127)        (78)        182            (56)        (33)        (6)            -        -        -            (811)        (563)        484   

Total valuation gains (losses)

    550        315        (268)            84        75        (175)            18        111        (286)            174        49        (52)            826        550        (781)   

Total Return(1)

  $ 985      $ 742      $ 195          $ 297      $ 302      $ (13)          $ 152      $ 202      $ (211)          $ 194      $ 76      $ (34)          $ 1,138      $ 917      $ (458)   

 

(1) Refer to tables under “—Reconciliation of Performance Measures to IFRS Measures” below in this MD&A for reconciliation of NOI, FFO and Total Return to IFRS measures.

 

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NOI generated by existing office properties since the beginning of 2009 (i.e. those held throughout both the current and prior period) is presented in the following table on a constant exchange rate basis, using the average exchange rate for the year ended December 31, 2011 for the same period in 2010 and 2009. This table illustrates the stability of these cash flows that arises from the high occupancy levels and long-term lease profile.

 

(US$ Millions)    2011      2010      2009  

United States

   $ 362       $ 386       $ 380   

Canada

     218         219         221   

Australia

     136         135         163   

Europe

     32         32         32   

NOI using normalized foreign exchange (1)

     748         772         796   

Currency variance

     -         (25)         (68)   
   $ 748       $ 747       $ 728   

Average in-place net rent per square foot

   $         28.55       $         28.05       $         26.90   

 

(1) Using the 2011 year to date average foreign exchange rates.

NOI for the year ended December 31, 2011 was in line with the prior year, although NOI decreased in the United States. The decrease in the United States was driven by occupancy reductions due to the expiry of leases in New York and Boston. Contributions from additions, dispositions and other since the beginning of the comparable period includes the consolidation of the U.S. Office Fund ($127 million) and the New Zealand Property Fund, as well as acquisitions in Houston, Washington, D.C., Denver, Melbourne and Perth, partially offset by the sale of properties in Boston and New Jersey.

The decrease in equity accounted income reflects the transfer of the U.S. Office Fund to consolidated properties ($70 million) offset by income from the acquisition of interests in a new equity accounted property in New York and increased income from other equity accounted properties. The increase in interest expense also reflects, in part, these activities, as well as the impact of foreign currency translation on borrowings in Australia and Canada.

NOI for the year ended December 31, 2010 compared with the prior year increased by 3% to $747 million but decreased by 3% when excluding the effect of currency depreciation. Contractual increases in existing leases and new leasing activity which led to higher in-place net rents were offset by reduced occupancy following the expiry of leases in New York and Boston. Contributions from additions, dispositions and other since the beginning of the comparable period includes acquisitions in Houston and Washington, D.C., the consolidation of the New Zealand Property Fund and the completion of the Bay Adelaide Centre development in late 2009. The increase in interest expense reflects these activities as well as the impact of foreign currency translation on borrowings in Australia and Canada.

FFO for the year ended December 31, 2011 decreased by $55 million to $312 million from $367 million in the prior period. The decrease is primarily due to the increase of unallocated non-controlling interest which is a result of the transfer of interests in the Australian assets to Brookfield Office Properties. In addition, the Canary Wharf dividend was $16 million in 2011 compared to $26 million in 2010, which was offset by income earned by newly acquired properties in the period.

FFO for the year ended December 31, 2010 increased by $44 million to $367 million from $323 million in the prior year. The increase is a result of favorable foreign currency fluctuation in Canada and Australia and a $26 million dividend from Canary Wharf (2009—nil) offset by an increase in unallocated non-controlling interest, which was a result of the transfer of Australian economic interests to Brookfield Office Properties.

 

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Total Return for the year ended December 31, 2011 increased by $221 million to $1.1 billion from $917 million in the prior year. The increase in valuation gains is a result of decrease in discount and terminal capitalization rates as detailed in the table below, we also recorded realized gains in the United States as a result of the sale of properties in New Jersey, Boston, and Houston. This was offset by the decrease in FFO as mentioned above.

Total Return for the year ended December 31, 2010 increased by $1.4 billion to $917 million from $(458) million in the prior year. The increase in valuation gains is a result of decrease in discount and terminal capitalization rates as detailed in the table below. We also recorded realized gains in the United States, Canada and Australia as a result of the sale of properties in Washington, D.C, Edmonton and New Zealand. In addition, we also had an increase in FFO as mentioned above. The loss in 2009 is related to the increase of discount and terminal capitalization rates from 2008.

The key valuation metrics of our commercial office properties are presented in the following table. The valuations are most sensitive to changes in the discount rate and timing or variability of cash flows. A 100-basis point change in the discount rate and terminal capitalization rate would result in a change in our 2011 IFRS Value, after deducting non-controlling interests, of $1.6 billion. Discount and capitalization rates have declined meaningfully in all of our principal regions since 2009, giving rise to valuation gains.

 

     United States   Canada   Australia   Europe(1)  
     Dec. 31,
2011
    Dec. 31,
2010
    Dec. 31,
2009
         Dec. 31,
2011
    Dec. 31,
2010
    Dec. 31,
2009
         Dec. 31,
2011
    Dec. 31,
2010
    Dec. 31,
2009
         Dec. 31,
2011
    Dec. 31,
2010
    Dec. 31,
2009
 
     

Discount rate

    7.5%        8.1%        8.8%            6.7%        6.9%        7.4%            9.1%        9.2%        9.3%            6.1%        6.5%        6.9%   

Terminal cap rate

    6.3%        6.7%        6.9%            6.2%        6.3%        6.7%            7.5%        7.7%        7.7%            n/a        n/a        n/a   
Investment horizon (years)     12        10        10            11        11        10            10        10        10            n/a        n/a        n/a   
(1) The valuation method used by Europe is the direct capitalization method. The amounts presented as the discount rate relate to the implied capitalization rate. The terminal capitalization rate and investment horizon are not applicable.

The results of operations are primarily driven by occupancy and rental rates of the office properties and stability of earnings is driven by the average lease term. The following tables present key metrics relating to in-place leases of our office property portfolio:

 

     December 31, 2011   December 31, 2010   December 31, 2009  
(US$)   Occupancy
(%)
    Same
Store
Occupancy
(%)
    Avg.
Lease
Term
(Years)
   

Avg. 

“In
Place”
Net
Rent

   
Market
Net
Rent
         Occupancy
(%)
    Same
Store
Occupancy
(%)
    Avg.
Lease
Term
(Years)
    Avg.
“In
Place”
Net
Rent
   
Market
Net
Rent
         Occupancy
(%)
    Same
Store
Occupancy
(%)
    Avg.
Lease
Term
(Years)
    Avg.
“In
Place”
Net
Rent
   
Market
Net
Rent
 

United States

    91.3%        91.9%        7.0        $24.53      $ 31.21            94.0%        94.8%        7.1      $ 24.54      $ 29.20            93.5%        93.7%        7.1      $ 24.18      $ 27.83   

Canada

    96.3%        96.6%        8.7        25.48        29.87            96.0%        97.0%        7.6        25.99        24.52            98.6%        98.7%        6.8        24.09        24.52   

Australia

    96.6%        97.7%        6.1        48.33        48.93            98.4%        98.2%        7.1        47.44        48.03            97.7%        97.6%        7.6        42.70        49.10   

Europe

    100.0%        100.0%        10.3        60.47        59.87            100.0%        100.0%        10.0        61.05        60.04            100.0%        100.0%        17.1        60.00        57.00   

Average

    93.3%        93.9%        7.3      $ 28.55      $ 33.62            95.1%        95.9%        7.2      $ 28.05      $ 30.67            95.3%        95.5%        7.2      $ 26.90      $ 30.02   

The worldwide portfolio occupancy rate in our office properties at December 31, 2011 was 93.3%, down from 95.1% at December 31, 2010. The decrease in occupancy levels from prior periods is primarily due to a decline in the United States to 91.3% from 94.0% at December 31, 2010. The decline is due to the sale of 1400 Smith Street in Houston, which was 100% leased, lease expirations in New York and Boston, and the acquisition of underleased properties at attractive values. Occupancy levels elsewhere in our portfolio remain favorable. In 2011, we leased approximately 11 million square feet and currently have a leasing pipeline of 5 million square feet, which would further improve our leasing profile.

We use in-place net rents for our office segment, as a measure of leasing performance, and calculate this as the annualized amount of cash rent receivable from leases on a per square foot basis including tenant expense

 

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reimbursements, less operating expenses being incurred for that space, but excluding the impact of straight-lining rent escalations or amortization of free rent periods. This measure represents the amount of cash generated from leases in a given period.

 

   

In North America, at December 31, 2011, average in-place net rents across our portfolio remained flat compared to December 31, 2010. Net rents across this portfolio remained at a discount of approximately 24% to the average market rent of $31 per square foot. This gives us confidence that we will be able to maintain or increase our net rental income in the coming years and, together with our high overall occupancy, to exercise patience in signing new leases.

 

   

In Australia, at December 31, 2011, average in-place net rents in our portfolio was approximately $48 per square foot, which represented a 2% discount to market rents. Leases in Australia typically include annual escalations, with the result that in-place lease rates tend to increase along with long-term increases in market rents.

The following table presents our leasing activity from December 31, 2010 to December 31, 2011:

 

     Dec. 31, 2010        Dec. 31, 2011  
(US$)   Leasable
Area(1)
(000’s Sq.Ft.)
    Leased(1)
(000’s  Sq.Ft.)
         Total
Expiries
(000’s Sq. Ft.)
    Expiring
Net Rent
($per Sq.Ft.)
    Leasing
(000’s Sq. Ft.)
    Year One
Leasing
Net Rent
($per Sq.Ft.)
    Average
Leasing
Net Rent
($per Sq.Ft.)
    Acq.
(Disp.)
Additions
(000’s Sq. Ft.)
         Leasable
Area
(000’s Sq. Ft.)
    Leased
(000’s Sq. Ft.)
 
United States (2)     44,106        41,457            (7,161   $ 24.96        5,688      $ 24.58      $ 26.98        184            44,019        40,168   
Canada     17,161        16,474            (3,857     27.53        3,889        28.41        29.45        (37         17,108        16,469   

Australia

    10,310        9,869            (1,259     39.43        1,354        39.66        45.01        (144         10,166        9,819   

Europe

    556        556            -        -        -        -        -        -            556        556   

Total

    72,133        68,356            (12,277   $ 27.25        10,931      $ 27.81      $ 30.09        3            71,849        67,012   

 

(1) Has been restated to reflect the impact of remeasurements which are done annually in the first quarter.
(2) Excludes non-managed properties in the U.S. Office Fund and includes unconsolidated joint ventures.

Additionally, for the year ended December 31, 2011, tenant improvements and leasing costs related to leasing activity that occurred averaged $38.12 per square foot, compared to $30.37 per square foot 2010.

The following table presents the lease expiry profile of our office properties with the associated expiring average in-place net rents by region at December 31, 2011:

 

                Expiring Leases  
    Net           2012            2013            2014            2015            2016            2017            2018 &
Beyond
        
(000’s sq. ft.)   Rental
Area
    Currently
Available
    (000’s
sq. ft.)
    Net
Rent
    (000’s
sq. ft.)
    Net
Rent
    (000’s
sq. ft.)
    Net
Rent
    (000’s
sq. ft.)
    Net
Rent
    (000’s
sq. ft.)
    Net
Rent
    (000’s
sq. ft.)
    Net
Rent
    (000’s
sq. ft.)
    Net
Rent
 

United States

    44,019        3,851        3,027      $ 18        5,810      $ 31        3,171      $ 24        3,849      $ 20        2,036      $ 25        1,773      $ 26        20,502      $ 33   

Canada

    17,108        639        435        28        1,798        23        439        31        1,680        26        1,809        26        625        29        9,683        29   

Australia

    10,166        347        378        51        670        42        851        53        1,227        59        1,017        62        1,038        51        4,638        68   

Europe(1)

    556        -        -        -        -        -        262        58        -        -        -        -        -        -        294        62   

Total

    71,849        4,837        3,840      $ 22        8,278      $ 30        4,723      $ 32        6,756      $ 29        4,862      $ 33        3,436      $ 34        35,117      $ 37   

Percentage of Total

    100.0     6.7     5.3             11.5             6.6             9.4             6.8             4.8             48.9        

 

(1) Does not include office assets held through interest in Canary Wharf.

 

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Retail

IFRS Value – Retail

The following table presents IFRS Value of our retail properties by region as at December 31, 2011 and 2010:

 

(US$ Millions)   United States          Australia          Brazil          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
 

Retail properties

  $ -      $            $ 388      $ 420          $ 1,882      $ 1,983          $ -      $ 279          $ 2,270      $ 2,682   

Equity accounted investments

    4,099        1,014            -        -            87        99            -        14            4,186        1,127   

Accounts receivable and other

    183        178            19        21            461        330            -        22            663        551   
    4,282        1,192            407        441            2,430        2,412            -        315            7,119        4,360   

Property-specific borrowings

    -        -            185        194            1,011        1,262            -        254            1,196        1,710   

Accounts payable and other

    51        1            -        -            175        170            -        18            226        189   

Non-controlling interests

    293        211            22        -            933        821            -        -            1,248        1,032   

IFRS Value

  $ 3,938      $ 980          $   200      $   247          $ 311      $ 159          $   -      $ 43          $   4,449      $   1,429   

Specific 2011 major variances included the following:

 

   

IFRS Value in our retail portfolio increased by $3.0 billion to $4.4 billion at December 31, 2011 from December 31, 2010, reflecting the investment of a further $1.7 billion in GGP in January 2011, which increased our ownership to approximately 21%, as well as our share of increases in the fair value of GGP’s mall portfolio.

 

   

GGP opened 28 new anchor/big box stores in the United States totaling approximately 920,000 square feet, three department stores totaling approximately 402,000 square feet, and had an additional four department stores totaling approximately 516,000 square feet scheduled to open in 2012 and 2013.

 

   

We invested approximately $170 million in our Brazilian retail operations in the second quarter of 2011, increasing our ownership from 25% to 39%. In the fourth quarter of 2011, we sold approximately 4% interest in the Brazilian retail operations for $39 million, after several assets were sold. Additionally, during 2011, we recognized a fair value gain of $202 million reflecting better than expected leasing market conditions and a 40-basis points decrease in discount rates across the portfolio. Carrying values in Brazil also reflect a 13% reduction in the currency exchange rate from the end of 2010.

 

   

We disposed of our U.K. retail assets and two properties in New Zealand in the first quarter of 2011.

The details of property debt for our consolidated retail properties at December 31, 2011 are as follows:

 

(US$ Millions)    Weighted Average Rate         Debt Balance  

Secured Property Debt

     

Variable rate

     12.9%       $ 1,196   
              $ 1,196   

Current

      $ 171   

Non-current

              1,025   
              $ 1,196   

 

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The details of retail property debt related to our equity accounted investment in GGP at December 31, 2011 are as follows:

 

(US$ Millions)    Weighted Average Rate         Debt Balance(1)  

Secured Property Debt

     

Fixed rate

     5.5%         17,386   

Variable rate

     3.3%         2,556   
       5.2%       $ 19,942   

Current

      $ 1,886   

Non-current

        18,056   
              $ 19,942   

 

(1) Represents GGP’s consolidated and proportionate share of unconsolidated U.S. property debt.

Operating results – Retail

The following table presents the NOI, FFO, and Total Return of our retail properties by region for the years ended December 31, 2011, 2010 and 2009:

 

(US$ Millions)   United States   Australia   Brazil   Europe   Total  
     2011     2010     2009          2011     2010     2009          2011     2010     2009          2011     2010     2009          2011     2010     2009  

NOI(1)

  $ -      $ -      $ -          $ 26      $ 24      $ 22          $ 111      $ 94      $ 67          $ 1      $ 12      $ 13          $ 138      $ 130      $ 102   

Equity accounted investments

    224        -        -            -        -        -            7        1        -            -        -        -            231        1        -   

Investment and other income

    -        (5)        -            -        -        -            5        3        6            -        -        -            5        (2)        6   
    224        (5)        -            26        24        22            123        98        73            1        12        13            374        129        108   

Interest expense

    -        -        -            15        13        4            144        108        78            -        14        15            159        135        97   

Other operating costs

    -        -        -            -        -        -            -        -        11            -        -        -            -        -        11   

Non-controlling interests

    18        6        -            -        -        -            (13)        (7)        (19)            2        -        -            7        (1)        (19)   

FFO(1)

    206        (11)        -            11        11        18            (8)        (3)        3            (1)        (2)        (2)            208        (5)        19   

Fair value changes

    1,189        127        -            15        14        (71)            202        40        (62)            (4)        11        (61)            1,402        192        (194)   

Realized gains

    -        -        -            -        -        -            47        -        -            -        -        -            47        -        -   

Non-controlling interests

    (93)        (45)        -            -        -        -            (158)        (35)        47            1        -        -            (250)        (80)        47   

Total valuation gains (losses)

    1,096        82        -            15        14        (71)            91        5        (15)            (3)        11        (61)            1,199        112        (147)   

Total Return(1)

  $ 1,302      $ 71      $     -          $   26      $   25      $   (53)          $ 83      $ 2      $   (12)          $   (4)      $ 9      $   (63)          $ 1,407      $   107      $   (128)   
(1) Refer to tables under “—Reconciliation of Performance Measures to IFRS Measures” below in this MD&A for reconciliation of NOI, FFO and Total Return to IFRS measures.

NOI for the year ended December 31, 2011 compared with the prior year increased by 6%, primarily due to the consolidation of the New Zealand Property Fund and income from Brazilian mall expansions.

NOI for the year ended December 31, 2010 compared with the prior year increased by 27% as a result of an increase in tenant sales and currency appreciation in Brazil which was offset by the disposition of an asset in Australia.

FFO for the year ended December 31, 2011 compared with the prior year increased by $213 million which is primarily due to the company’s investment in GGP.

FFO for the year ended December 31, 2010 compared with the prior year decreased by $24 million due to an increase in interest rates in Brazil and Australia and costs related to the recapitalization of GGP.

Total Return for the year ended December 31, 2011 increased by $1.3 billion to $1.4 billion from $107 million in the prior year. The increase is a result of increase in FFO as mentioned above and increase in valuation gains which is primarily a result of compression of implied capitalization rates in the United States and

 

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the decrease in discount and terminal capitalization rates in Brazil, as detailed in the table below. In addition we recorded realized gains from the sale of three properties in Brazil.

Total Return for the year ended December 31, 2010 increased by $235 million to $107 million from ($128) million in the prior year. The increase in valuation gains is a result of decrease in discount and terminal capitalization rates as detailed in the table below. This was offset by the decrease in FFO as mentioned above.

The key valuation metrics of our retail properties, including those within our equity accounted investments, are presented in the following table. The valuations are most sensitive to changes in the discount rate and timing or variability of cash flows. A 100-basis point change in the discount rate and terminal capitalization rate would result in a change in our IFRS Value, as at December 31, 2011 after deducting non-controlling interests, of $681 million. Discount and capitalization rates have declined meaningfully in all of our principal regions, giving rise to appraisal gains.

 

     United States(1)          Australia          Brazil          Europe(1)  
(US$ Millions)   Dec. 31,
2011
    Dec. 31,
2010
    Dec. 31,
2009
         Dec. 31,
2011
    Dec. 31,
2010
    Dec. 31,
2009
         Dec. 31,
2011
    Dec. 31,
2010
    Dec. 31,
2009
         Dec. 31,
2011
    Dec. 31,
2010
    Dec. 31,
2009
 
     

Discount rate

    6.0%        6.7%        -            9.8%        9.8%        9.8%            9.6%        10.0%        10.3%            -        8.1%        8.1%   

Terminal cap rate

    n/a        n/a        -            8.9%        9.0%        9.1%            7.3%        7.3%        7.4%            -        n/a        n/a   

Investment horizon (years)

    n/a        n/a        -            10        10        10            10        10        10            -        n/a        n/a   

 

(1) The valuation method used by the United States and Europe is the direct capitalization method. The amounts presented as the discount rate relate to the implied capitalization rate. The terminal capitalization rate and investment horizon are not applicable.

The following table presents key metrics relating to in-place leases of our retail property portfolio:

 

     December 31, 2011               December 31, 2010          December 31, 2009  
(US$)   Occupancy
(%)
   

Avg. Lease
Term

(Years)

   

Avg.

“In Place”
Rent

    Market
Rent
              Occupancy
(%)
   

Avg. Lease
Term

(Years)

   

Avg.

“In Place”
Rent

   

Market

Rent

         Occupancy
(%)
    Avg. Lease
Term (Years)
   

Avg.

“In Place”
Rent

   

Market

Rent

 

United States (1)

    93.2 %      5.1      $ 56.05      $ 55.87              92.9     3.9      $ 55.09      $ 52.24            -        -      $ -      $ -   

Australia

    98.0 %      7.4        10.14        10.86              96.7     6.4        9.28        10.78            98.8     7.4        8.97        10.28   

Europe

    -        -        -        -              80.1     12.1        23.57        12.52            91.0     15.4        22.63        12.33   

Brazil

    94.7 %      6.8        52.50        51.15              94.3     5.0        45.74        43.98            94.4     5.0        37.13        35.97   

Average

    93.4 %      5.3      $ 54.08      $ 53.88                92.9     4.2      $ 52.61      $ 49.80            95.2     7.5      $ 14.20      $ 11.06   

 

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

Our retail portfolio occupancy rate at December 31, 2011 was 93.4%, up from 92.9% at December 31, 2010. Occupancy levels in our U.S. portfolio increased by 30 basis points from 92.9% at December 31, 2010 to 93.2%, and the average initial rent on leases signed in 2011 was $61.45 per square foot, up 11.3% or $6.22 per square foot as compared to the expiring rent on comparable leases.

We use in-place rents for our retail segment as a measure of leasing performance, which is calculated on a cash basis and consists of base minimum rent, plus reimbursements of common area costs, and real estate taxes.

The following table presents leasing activity from December 31, 2010 to December 31, 2011:

 

      Dec. 31, 2010                        Dec. 31, 2011  
(US$)    Leasable
Area(1)
(000’s
Sq.Ft.)
     Leased(1)
(000’s
Sq.Ft.)
          Total
Expiries
(000’s
Sq. Ft.)
    Expiring
Rent
($per
Sq.Ft.)
     Leasing
(000’s
Sq. Ft.)
     Year One
Leasing
Rent
($per
Sq.Ft.)
    

Average
Leasing

Rent
($per
Sq.Ft.)

     Acq. (Disp.)
Additions
(000’s
Sq. Ft.)
          Leasable
Area
(000’s
Sq. Ft.)
     Leased
(000’s
Sq. Ft.)
 

United States

     67,237         62,463             (3,519   $ 56.68         4,082       $ 57.57       $ 63.22         (868          66,369         62,158   

Australia

     3,003         2,913             (49     36.89         84         16.07         17.80         (259          2,744         2,689   

Brazil

     3,608         3,400             (390     44.41         434         51.15         53.22         (539          3,069         2,905   

Total

     73,848         68,776             (3,958   $ 55.23         4,600       $ 56.21       $ 61.45         (1,666          72,182         67,752   

 

(1) Has been restated to reflect the impact of remeasurements which are done annually in the first quarter.

 

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In addition, we incurred tenant allowances for our operating properties of $125 million for the year ended December 31, 2011 and $9 million during 2010.

The following table presents the lease expiry profile of our retail properties with the associated expiring average in-place rents by region at December 31, 2011:

 

                Expiring Leases  
    Net
Rental
Area
    Currently
Available
    2012     2013     2014     2015     2016     2017     2018 & Beyond  
(000’s
sq. ft.)
      (000’s
sq. ft.)
    In-place
Rent
    (000’s
sq. ft.)
    In-place
Rent
    (000’s
sq. ft.)
    In-place
Rent
    (000’s
sq. ft.)
    In-place
Rent
    (000’s
sq. ft.)
    In-place
Rent
    (000’s
sq. ft.)
    In-place
Rent
    (000’s
sq. ft.)
    In-place
Rent
 

United States(1)

    61,638        4,211        6,509      $ 54        6,334      $ 53        5,906      $ 53        5,363      $ 61        5,684      $ 64        5,076      $ 66        22,555      $ 59   

Australia

    2,744        55        33        39        20        41        31        43        122        19        719        11        336        18        1,428        12   

Brazil

    3,069        164        675        69        376        47        470        87        433        73        218        68        109        22        624        15   

Total

    67,451        4,430        7,217      $ 55        6,730      $ 53        6,407      $ 55        5,918      $ 61        6,621      $ 58        5,521      $ 62        24,607      $ 55   

Percentage of Total

    100.0     6.6     10.7             10.0             9.5             8.8             9.8             8.2             36.4        

 

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

Multi-Family and Industrial

IFRS Value – Multi-Family and Industrial

The following table presents IFRS Value of our multi-family and industrial segment:

 

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

Investment properties

   $ 971       $ 956   

Equity accounted investments

     84         34   

Loans and notes receivable

     -         89   

Accounts receivable and other

     57         69   
     1,112         1,148   

Property-specific borrowings

     564         606   

Accounts payable and other liabilities

     20         19   

Non-controlling interests

     371         359   

IFRS Value

   $ 157       $ 164   

IFRS Value decreased over the period as a result of asset sales which was offset by further investments and fair value gains.

 

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Operating Results – Multi-Family and Industrial

The following table presents the NOI, FFO and Total Return of our multi-family and industrial segment for the years ended December 31, 2011, 2010 and 2009:

 

(US$ Millions)      2011      2010      2009  

NOI(1)

     $ 46       $ 22       $ 13   

Equity accounted investments

       (2 )       -         -   

Investment and other income

       -         (3      2   
       44         19         15   

Interest and other expense

       44         7         7   

Non-controlling interests

       5         9         -   

FFO(1)

     $ (5 )     $ 3       $ 8   

Fair value changes

       28         63         -   

Realized gains

       11         52         -   

Non-controlling interests

       (22 )       (83      -   

Total valuation gains

       17         32         -   

Total Return(1)

     $             12       $             35       $             8   
(1) Refer to tables under “—Reconciliation of Performance Measures to IFRS Measures” below in this MD&A for reconciliation of NOI, FFO and Total Return to IFRS measures.

NOI increased over the periods due to increased investments in income producing assets, which was offset by increased borrowing costs. The decrease in total valuation was driven largely by an increase in the discount rate and terminal cap rate and a reduction in realized gains from the sale of multi-family properties in the United States.

The key valuation metrics of these properties are presented in the following table. The valuations are most sensitive to changes in the discount rate and timing or variability of cash flows.

 

      United States      Canada  

(US$ Millions)

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

Discount rate

     8.6 %      8.4     8.5%         8.7 %      9.0     -   

Terminal cap rate

     8.3 %      6.6     7.4%         7.7 %      7.6     -   

Investment horizon (years)

     10        10        10         10        10        -   

Opportunistic Investments

IFRS Value – Opportunistic Investments

The following table presents IFRS Value of our opportunistic investments business:

 

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

Investment properties

   $ 912       $ 891   

Equity accounted investments

     118         1   

Loans and notes receivable

     994         1,450   

Accounts receivable and other

     1,189         348   
     3,213         2,690   

Property-specific borrowings

     1,094         453   

Accounts payable and other liabilities

     415         858   

Non-controlling interests

     966         800   

IFRS Value

   $ 738       $ 579   

 

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IFRS Value increased over the periods as a result of further investments and fair value gains in our opportunity and finance funds.

Our investment properties consist primarily of operating assets within the Brookfield sponsored real estate opportunity and finance funds. Accounts receivable and other includes a hotel operating property as at December 31, 2011.

Loans and notes receivable reside primarily in our real estate finance funds. Included in loans and notes receivable is $107 million (2010 - $110 million) of loans receivable in Euros of €83 million (2010 - €83 million). A summary of loans and notes receivable by collateral asset class is as follows:

 

(US$ Millions)    December 31, 2011      December 31, 2010  
      Unpaid Principal
Balance
     Percentage of
Portfolio  (1)
     Unpaid Principal
Balance
     Percentage of
Portfolio  (1)
 

Asset Class

             

Hotel

   $ 401         40%       $ 474         33%   

Office

     593         60%         745         51%   

Retail

     -         -         13         1%   

Nursing homes

     -         -         166         11%   

Residential

     -         -         52         4%   

Total collateralized

   $ 994         100%       $ 1,450         100%   

 

(1) Represents percentage of collateralized loans.

Our loan portfolio is comprised of real estate mortgages and mezzanine loans. As the portfolio is comprised of a discrete number of loans we evaluate the credit quality of each loan and note individually rather than through grouping the portfolio by credit quality indicators. Accordingly, we manage the credit risk associated with the portfolio by continually monitoring and performing a comprehensive review of the collateral properties underlying each individual loan and our security position in respect of that collateral. The review involves, but is not limited to, a detailed analysis of recent operating statements, in addition to rent rolls and other occupancy reports obtained from borrowers or loan reviewers. Further, we typically communicate directly with third party sale, leasing or financing brokers to gather the latest information on local markets or current market trends. Although a portion of our loan investments relates to distressed debt, by reviewing the above information, we are able to make an informed assessment regarding the expected future performance of underlying collateral properties and, therefore, reach a conclusion about our ability to recover our investment through realization of the collateral.

Property debt related to our opportunistic investments segment totaled $1.1 billion at December 31, 2011 and had a weighted average interest rate of 3.9% and an average term to maturity of 4.7 years.

Other liabilities consists primarily of obligations relating to our real estate finance funds which are secured by loans and notes receivable having a carrying value of $0.7 billion (2010 - $1.0 billion).

 

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Operating Results – Opportunistic investments

The following table presents the NOI, FFO, and Total Return of our opportunistic investments business for the years ended December 31, 2011, 2010 and 2009:

 

(US$ Millions)    2011     2010     2009  

NOI(1)

   $         207      $         192      $         163   

Equity accounted investments

     13        1        -   

Investment and other income

     (2     4        1   
     218        197        164   

Interest and other expense

     69        82        65   

Non-controlling interests

     88        54        58   

FFO(1)

   $ 61      $ 61      $ 41   

Fair value changes

     (24     (120     (89

Realized gains (losses)

     (11     85        (11

Non-controlling interests

     17        -        54   

Total valuation gains (losses)

     (18     (35     (46

Total Return(1)

   $ 43      $ 26      $ (5

 

(1)

Refer to tables under “—Reconciliation of Performance Measures to IFRS Measures” below in this MD&A for reconciliation of NOI, FFO and Total Return to IFRS measures.

NOI increased over the periods due to increased investments in income producing assets. FFO for the year ended December 31, 2011 remained consistent compared with the prior year. FFO for the year ended December 31, 2010 compared with the same period in the prior year increased by $20 million to $61 million due the an increase of cash flows from our opportunity and finance funds as a result of an increase in income producing assets purchased in the period.

In 2011 the increase in Total Return resulted from a decrease in the discount rate and terminal cap rate. In addition, 2010 included an impairment of $54 million from investments in our finance funds.

In 2010, the increase in Total Return resulted from realized gains from the sale of assets in the opportunity funds which was offset by an increase in the discount rate and terminal cap rate.

The key valuation metrics of these properties are presented in the following table. The valuations are most sensitive to changes in the discount rate and timing or variability of cash flows.

 

      United States  
(US$ Millions)      Dec. 31, 2011         Dec. 31, 2010         Dec. 31, 2009   
Discount rate      8.2%         8.7%         8.6%   
Terminal cap rate      8.1%         8.1%         7.7%   
Investment horizon (years)      10          10         10   

Income Taxes

The major components of income tax (expense) benefit include the following:

 

(US$ Millions) Three months ended Mar. 31,    2012      2011  

Current income tax

     $                (56)         $                 (26)   

Deferred income tax

     (183)         (45)   

Income tax expense

     $               (239)         $                  (71)   

 

(US$ Millions) Year ended Dec. 31,    2011      2010      2009  
Current income tax      $                (164)         $              (117)         $                (60)   
Deferred income tax      (275)         39         195   

 

Income tax (expense) benefit

     $                (439)         $                (78)         $                135   

 

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Our effective tax rate is different from Brookfield’s domestic statutory income tax rate due to the differences set out below:

 

(US$ Millions) Three months ended Mar. 31,    2012            2011  

Statutory income tax rate

     26%            28%   

Increase (reduction) in rate resulting from:

        

Portion of income not subject to tax

     (14)            (2)   

International operations subject to different tax rates

     13            (13)   

Other

     -            (1)   

Effective income tax rate

     25%              12%   

 

(US$ Millions) Year ended Dec. 31,    2011            2010            2009  
Statutory income tax rate      28%            31%            33%   
Increase (reduction) in rate resulting from:               
Portion of income not subject to tax      (12)            (3)            -   
International operations subject to different tax rates      (4)            (12)            (20)   
Change in tax rates on temporary differences      -            -            3   
Increase in tax basis within flow through joint venture      -            (7)            -   
Foreign exchange gains and losses      -            -            1   
Tax asset previously not recognized      -            (3)            -   

Other

     (2 )          (2         (2
Effective income tax rate      10%              4%              15%   

Risk Management

The financial results of our business are impacted by the performance of our properties and various external factors influencing the specific sectors and geographic locations in which we operate; macro-economic factors such as economic growth, changes in currency, inflation and interest rates; regulatory requirements and initiatives; and litigation and claims that arise in the normal course of business.

Our property investments are generally subject to varying degrees of risk depending on the nature of the property. These risks include changes in general economic conditions (including the availability and costs of mortgage funds), local conditions (including an oversupply of space or a reduction in demand for real estate in the markets in which we operate), the attractiveness of the properties to tenants, competition from other landlords with competitive space and our ability to provide adequate maintenance at an economical cost.

Certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges, must be made regardless of whether a property is producing sufficient income to service these expenses. Certain properties are subject to mortgages which require substantial debt service payments. If we become unable or unwilling to meet mortgage payments on any property, losses could be sustained as a result of the mortgagee’s exercise of its rights of foreclosure or of sale. We believe the stability and long-term nature of our contractual revenues effectively mitigates these risks.

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, Australia, Brazil and Europe. A prolonged downturn in the economies of these regions 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.

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, consumer confidence,

 

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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.

The strategy of our opportunistic investment segment depends, in part, upon our ability to syndicate or sell participations in senior interests in our investments, either through capital markets collateralized debt obligation transactions or otherwise. If we cannot do so on terms that are favorable to us, we may not make the returns we anticipate.

Interest Rate and Financing Risk

We attempt to stagger the maturities of our mortgage portfolio, to the extent possible, evenly over a 10-year time horizon. We believe that this strategy will allow us to manage interest rate risk most effectively. We have an on-going need to access debt markets to refinance maturing debt as it comes due. There is a risk that lenders will not refinance such maturing debt on terms and conditions acceptable to us or on any terms at all. Our strategy to stagger the maturities of our mortgage portfolio attempts to mitigate our exposure to excessive amounts of debt maturing in any one year.

Approximately 51% of our outstanding commercial property debt at March 31, 2012 is floating rate debt compared to 48% at December 31, 2011. This debt is subject to fluctuations in interest rates. A 100 basis point increase in interest rates on interest expense relating to our corporate and commercial floating rate debt would result in an increase in an annual interest expense of $80 million. A 100 basis point increase in interest rates on interest expense relating to fixed rate property debt due within one year would result in an increase in an annual interest expense of $5 million. In addition, we have exposure to interest rates within our equity accounted investments. We have mitigated, to some extent, the exposure to interest rate fluctuations through interest rate derivative contracts. See “Derivative Financial Instruments” below in this MD&A.

At March 31, 2012 we have a level of indebtedness of 54% of fair value of our portfolio of properties (2011 – 56%). It is our view that such level of indebtedness is conservative given the lending parameters currently existing in the real estate marketplace and the fair value of our assets, and based on this, we believe that all debts will be financed or refinanced as they come due in the foreseeable future.

Credit Risk

Credit risk arises from the possibility that tenants may be unable to fulfill their lease commitments. We mitigate this risk by ensuring that our tenant mix is diversified and by limiting our exposure to any one tenant. We also maintain a portfolio that is diversified by property type so that exposure to a business sector is lessened. As at March 31, 2012 no one office tenant represented more than 7.0% of total leasable area in our office segment.

 

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The following list shows major tenants with over one million square feet of space in our office portfolio by leased area and their respective credit ratings and lease commitments as at March 31, 2012:

 

Tenant    Primary Location    Credit
Rating(1)
  

Year of

Expiry(2)

   Total
(000’s
Sq. Ft.)
   Sq. Ft.
(%)
Various Government Agencies    All markets    AA+/AAA    Various    5,985    8.4%
Bank of America/Merrill Lynch(3)    Toronto/New York/Denver/Los Angeles    A/A-    Various    4,976    7.0%
Wells Fargo/Wachovia Securities(4)    New York    A+    2019    1,545    2.2%
CIBC World Markets(5)    Toronto/New York/Calgary    A+    2033    1,436    2.0%
Suncor Energy    Calgary    BBB+    2028    1,352    1.9%
Century Link    Denver    Not Rated    2017    1,278    1.8%
Kellogg Brown & Root    Houston    Not Rated    2030    1,268    1.8%
Royal Bank of Canada    Vancouver/Toronto/Calgary/New York/Los Angeles/Minneapolis    AA-    2023    1,259    1.8%
Bank of Montreal    Calgary/Toronto    A+    2024    1,143    1.6%
Total                   20,242    28.5%

 

(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 lease(s) 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. Of this 2.7 million square feet, 1.9 million is in 4 World Financial Center, and 0.8 million square feet is in 2 World Financial Center. Of the total leased space, 3.4 million square feet will expire in 2013.
(4) Wells Fargo/Wachovia Securities 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.

The following list reflects the ten largest tenants in our retail portfolio as at March 31, 2012. The largest tenant in our portfolio accounted for approximately 2.6% of minimum rents, tenant recoveries and other.

 

Top Ten Largest Tenants   Primary DBA  

Percent of Minimum
Rents, Tenant
Recoveries and

Other (%)

  Total (000’s
Sq. Ft.)
    Number of
Locations
 
Limited Brands, Inc.   Victoria’s Secret, Bath & Body Works, PINK   2.6%     1,771        306   
Foot Locker, Inc.   Foot Locker, Champs Sports, Footaction USA   2.6%     1,444        363   
The Gap, Inc.   Gap, Banana Republic, Old Navy   2.5%     2,372        227   

Abercrombie & Fitch Stores,

Inc.

  Abercrombie, Abercrombie & Fitch, Hollister, Gilly Hicks   1.9%     1,409        199   
Forever 21, Inc.   Forever 21   1.8%     2,265        107   
Golden Gate Capital   Express, J. Jill, Eddie Bauer   1.4%     1,183        144   
American Eagle Outfitters, Inc.   American Eagle, Aerie, Martin + Osa   1.6%     921        162   

Luxottica Retail North

America Inc.

  Lenscrafters, Sunglass Hut, Pearle Vision   1.4%     581        289   
Macy’s Inc.   Macy’s, Bloomingdale’s   1.1%     20,881        135   
Genesco Inc.   Journeys, Lids, Underground Station, Johnston & Murphy   1.1%     543        356   
Total       18.0%     33,370        2,288   

Our exposure to credit risk in respect of our other investments relates primarily to counterparty obligations regarding loans and notes receivable. We assess the credit worthiness of each counterparty before entering into contracts and ensure that counterparties meet minimum credit quality requirements. We also endeavor to minimize counterparty credit risk through diversification, collateral arrangements, and other credit risk mitigation techniques.

 

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Lease Roll-Over Risk

Lease roll-over risk arises from the possibility that we may experience difficulty renewing leases as they expire or in releasing space vacated by tenants upon early lease expiry. We attempt to stagger the lease expiry profile so that we are not faced with disproportionate amounts of space expiring in any one year; approximately 7.3% of our office leases and 9.1% of our retail leases mature annually over the next five years Excluding Bank of America/Merrill Lynch, our single largest office tenant, as of December 31, 2011 less than 7.3% of our office leases mature annually over the next five years. We further mitigate this risk by maintaining a diversified portfolio mix by geographic location and by proactively leasing space in advance of its contractual expiry.

Details of our lease expiry profile for our office and retail properties, by geography and in aggregate, are included elsewhere in this MD&A.

Environmental Risks

As an owner of real property, we are subject to various federal, provincial, state and municipal laws relating to environmental matters. Such laws provide that we could be liable for the costs of removing certain hazardous substances and remediating certain hazardous locations. The failure to remove or remediate such substances or locations, if any, could adversely affect our ability to sell such real estate or to borrow using such real estate as collateral and could potentially result in claims against us. We are not aware of any material noncompliance with environmental laws at any of our properties nor are we aware of any pending or threatened investigations or actions by environmental regulatory authorities in connection with any of our properties or any pending or threatened claims relating to environmental conditions at our properties.

We will continue to make the necessary capital and operating expenditures to ensure that we are compliant with environmental laws and regulations. Although there can be no assurances, we do not believe that costs relating to environmental matters will have a materially adverse effect on our business, financial condition or results of operations. However, environmental laws and regulations can change and we may become subject to more stringent environmental laws and regulations in the future, which could have an adverse effect on our business, financial condition or results of operations.

Economic Risk

Real estate is relatively illiquid. Such illiquidity may limit our ability to vary our portfolio promptly in response to changing economic or investment conditions. Also, financial difficulties of other property owners resulting in distressed sales could depress real estate values in the markets in which we operate.

Our commercial properties generate a relatively stable source of income from contractual tenant rent payments. Continued growth of rental income is dependent on strong leasing markets to ensure expiring leases are renewed and new tenants are found promptly to fill vacancies.

Taking into account the current state of the economy, 2012 may not provide the same level of increases in rental rates on renewal as compared to prior years. We are, however, substantially protected against short-term market conditions, as most of our leases are long-term in nature with an average term of seven years.

Insurance Risk

We maintain insurance on our properties in amounts and with deductibles that we believe are in line with what owners of similar properties carry. We maintain all risk property insurance and rental value coverage (including coverage for the perils of flood, earthquake and named windstorm).

 

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Foreign Exchange Fluctuations

For the year ended December 31, 2011, approximately 39% of our assets and 43% of our revenues originated outside the United States and consequently are subject to foreign currency risk due to potential fluctuations in exchange rates between these currencies and the U.S. dollar. To mitigate this risk, we attempt to maintain a natural hedged position with respect to the carrying value of assets through debt agreements denominated in local currencies and, from time to time, supplemented through the use of derivative contracts as discussed under “—Derivative Financial Instruments”.

The following table shows the impact of a 10% decrease in foreign exchange rates on net income and other comprehensive income:

 

      December 31, 2011      December 31, 2010      December 31, 2009  
(Millions)      IFRS Value        OCI        Net Income         IFRS Value         OCI         Net Income         IFRS Value         OCI         Net Income   
Canadian Dollar    C$ 935      $         (84)      $ -       C$ 820       $         (74)       $ -       C$ 1,032         $            (89)       $ -   
Australian Dollar    A$ 2,005        (186)        -       A$ 1,863         (173)         -       A$ 1,997         (163)         -   
British Pound    £ 641        (90)        -       £ 482         (69)         -       £ 255         (37)         -   
Euro    83        -        (10)       83         -         (10)       83         -         (11)   
Brazilian Real    R$ 586        (28)        -       R$ 265         (14)         -       R$ 223         (12)         -   
Total            $ (388)      $ (10)                $ (330)       $ (10)                  $            (301)       $ (11)   

Derivative Financial Instruments

Our operating entities use derivative and non-derivative instruments to manage financial risks, including interest rate, commodity, equity price and foreign exchange risks. The use of derivative contracts is governed by documented risk management policies and approved limits. We do not use derivatives for speculative purposes. Our operating entities use the following derivative instruments to manage these risks:

 

   

foreign currency forward contracts to hedge exposures to Canadian Dollar, Australian Dollar and British Pound denominated investments in foreign subsidiaries and foreign currency denominated financial assets;

 

   

interest rate swaps to manage interest rate risk associated with planned refinancings and existing variable rate debt;

 

   

interest rate caps to hedge interest rate risk on certain variable rate debt; and

 

   

total return swaps on Brookfield Office Properties’ shares to economically hedge exposure to variability in its share price under its deferred share unit plan.

We also designate Canadian Dollar financial liabilities of certain of our operating entities as hedges of our net investments in our Canadian operations.

Interest Rate Hedging

We have derivatives outstanding that are designated as cash flow hedges of variability in interest rates associated with forecasted fixed rate financings and existing variable rate debt.

As at March 31, 2012, we had derivatives with a notional amount of $1,241 million in place to fix rates on forecasted fixed rate financings with maturities between 2022 and 2024 at rates between 2.6% and 4.7%. As at December 31, 2011, we had derivatives with a notional amount of $1,599 million in place to fix rates on forecasted fixed rate financings with a maturity between 2014 and 2024. The hedged forecasted fixed rate financings are denominated in U.S. Dollars and Canadian Dollars.

As at March 31, 2012, we had derivatives with a notional amount of $6,139 million in place to fix rates on existing variable rate debt at between 0.3% and 10.4% for debt maturities between 2012 and 2016. As at

 

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December 31, 2011, we had derivatives with a notional amount of $5,343 million in place to fix rates on existing variable rate debt at between 0.3% and 9.9% for debt maturities between 2012 and 2016.

The fair value of our outstanding interest rate derivative positions as at March 31, 2012 was a loss of $255 million (2011 – loss of $271 million). For the three months ended March 31, 2012 the amount of hedge ineffectiveness recorded in interest expense in connection with our interest rate hedging activities was not significant.

Foreign Currency Hedging

We have derivatives designated as net investment hedges of our investments in foreign operating entities. As at March 31, 2012, we had hedged a notional amount of £45 million at £0.63/US$ and A$135 million at A$0.95/US$ using foreign currency forward contracts maturing between April and June of 2012. As at December 31, 2011, we had hedged a notional amount of £45 million at £0.64/US$ and A$135 million at A$0.98/US$ using foreign currency forward contracts maturing between January and March of 2012.

The fair value of our outstanding foreign currency forwards as at March 31, 2012 is a gain of $3 million (2011 – loss of $4 million).

In addition, as of March 31, 2012, we had designated C$750 million (2011 – C$903 million) of Canadian dollar financial liabilities as hedges of our net investment in Canadian operations.

For the three months ended March 31, 2012, the amount of hedge ineffectiveness recorded in earnings in connection with the company’s foreign currency hedging activities was not significant.

Other Derivatives

The following other derivatives have been entered into to manage financial risks and have not been designated as hedges for accounting purposes.

At March 31, 2012, we had a total return swap under which we received the return on a notional amount of 1.3 million BPO common shares in connection with BPO’s deferred share unit plan. The fair value of the total return swap at March 31, 2012 was a gain of $4 million (2011 – gain of $2 million) and a gain of $2 million in connection with the total return swap was recognized in general and administrative expense in the three months then ended (2011 – loss of $17 million).

At March 31, 2012, we had foreign exchange contracts outstanding to swap a €83 million notional amount to GBP (2011 – €83 million). The fair value of these contracts as at March 31, 2012 was nil (2011 – nil).

 

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Related Party Transactions

In the normal course of operations, we enter into various transactions on market terms with related parties, which have been measured at exchange value and are recognized in the financial statements. The following table summarizes transactions with related parties:

 

(US$ Millions) Three months ended Mar. 31,    2012      2011  
Lease revenue      $                  1         $                  1   
Interest income      13         18   
Management fees paid      5         9   

 

(US$ Millions) Year ended Dec. 31,    2011      2010      2009  
Lease revenue      $                2         $                2         $                2   
Interest income      101         71         17   
Interest expense      41         7         1   
Management fees paid      30         52         43   
Management fees received      15         5         -   

 

(US$ Millions) Balances outstanding as at    Mar. 31, 2012      Dec. 31, 2011      Dec. 31, 2010  

BRPI promissory notes (1)

   $           481       $ 470       $           –   

Loans receivable designated as FVTPL (2)

     143         138           

Loans and notes receivable (3)

     382         452         1,221   

Other current receivables

     8         57         13   

Capitalized interest paid to Brookfield

     5         40         39   

Property debt payable

     30         79         128   

Other liabilities (4)

     30         22         476   

 

(1) Included in notes receivable is $481 million (2011 - $470 million) related to unsecured promissory notes of C$480 million receivable from Brookfield Residential Properties Inc. (“BRPI”), a subsidiary of the parent company. Under the terms of a put agreement, the Business has the right to put up to $365 million of the promissory notes, at various dates beginning December 31, 2012, to Brookfield for cash proceeds equal to the outstanding principal amount.
(2) Includes a senior unsecured note receivable from a subsidiary of Brookfield that matures on December 19, 2014. The principal and interest payments on the note receivable are based on the returns of a reference debenture which is, in turn, secured by an equity interest in a publicly traded real estate entity based in Australia. The debenture was not repaid on its scheduled maturity date and a default notice was issued to the borrower demanding full repayment.
(3) Includes Brookfield Office Properties’ $147 million receivable from Brookfield upon the earlier of Brookfield Office Properties’ exercise of its option to convert its participating loan interests into direct ownership of the Australian portfolio or the maturity of the participating loan notes. Also included is Brookfield Office Properties’ $200 million loan receivable related to Brookfield’s ownership of Brookfield Office Properties’ Class AAA Series E capital securities earning a rate of 108% of bank prime. In 2010, the balance also included Brookfield Office Properties’ $504 million loan receivable in cash collateralized total return swaps entered into with Brookfield bearing interest at a weighted average rate of LIBOR plus 2.9% and BREF’s $262 million loan receivable related to its ownership of Trizec debt bearing a weight average rate of LIBOR plus 2.8%.
(4) In 2010, other liabilities included Brookfield Office Properties’ bridge facility payable to Brookfield which matured in November 2011.

Critical Accounting Policies, Estimates and Judgments

The discussion and analysis of our financial condition and results of operations is based upon the carve-out financial statements, which have been prepared in accordance with IFRS. The preparation of financial statements, in conformity with IFRS, requires management to make estimates and assumptions that affect the carrying amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Our most critical accounting policies are those that we believe are the most important in portraying our financial condition and results of operations, and require the most subjectivity and estimates by our management.

 

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Investment Properties

Investment properties include commercial properties held to earn rental income and properties that are being constructed or developed for future use as investment properties. Commercial properties and commercial developments are recorded at fair value, determined based on available market evidence, at the balance sheet date. We determine the fair value of each investment property based upon, among other things, rental income from current leases and assumptions about rental income from future leases reflecting market conditions at the balance sheet date, less future cash flows in respect of such leases. Fair values are primarily determined by discounting the expected future cash flows, generally over a term of 10 years including a terminal value based on the application of a capitalization rate to estimated year 11 cash flows. Active developments are measured using a discounted cash flow model, net of costs to complete, as of the balance sheet date. Development sites in the planning phases are measured using comparable market values for similar assets. Valuations of investment properties are most sensitive to changes in the discount rate and timing or variability of cash flows.

The cost of commercial developments includes direct development costs, realty taxes and borrowing costs directly attributable to the development. Borrowing costs associated with direct expenditures on properties under development or redevelopment are capitalized. Borrowing costs are also capitalized on the purchase cost of a site or property acquired specifically for development or redevelopment in the short-term but only where activities necessary to prepare the asset for development or redevelopment are in progress. The amount of borrowing costs capitalized is determined first by reference to borrowings specific to the project, where relevant, and otherwise by applying a weighted average cost of borrowings to eligible expenditures after adjusting for borrowings associated with other specific developments. Where borrowings are associated with specific developments, the amount capitalized is the gross cost incurred on those borrowings less any investment income arising on their temporary investment. Borrowing costs are capitalized from the commencement of the development until the date of practical completion. The capitalization of borrowing costs is suspended if there are prolonged periods when development activity is interrupted. We consider practical completion to have occurred when the property is capable of operating in the manner intended by management. Generally this occurs upon completion of construction and receipt of all necessary occupancy and other material permits. Where we have pre-leased space as of or prior to the start of the development and the lease requires us to construct tenant improvements which enhance the value of the property, practical completion is considered to occur on completion of such improvements.

Initial direct leasing costs we incur in negotiating and arranging tenant leases are added to the carrying amount of investment properties.

U.S. Office Fund

Our interest in the U.S. Office Fund is held through an indirect interest in TRZ Holdings, an entity we originally established along with our joint venture partner, or the JV Partner, to acquire Trizec Properties Inc. Under the terms of a joint venture agreement, the JV Partner held an option, commencing January 2011 for nine months, to call certain properties sub-managed by the JV Partner in exchange for its equity interest in TRZ Holdings; in the event the JV Partner did not first exercise its option, we had an option, commencing in 2013 for a period of 14 months, to put the JV Partner sub-managed properties to the JV Partner in redemption of its interest in TRZ Holdings, all of which we refer to as the U.S. Office Fund Option.

On August 9, 2011, the JV Partner exercised its option, redeeming its equity interest in TRZ Holdings in exchange for its sub-managed properties, and repaid the debt associated with those properties. Prior to the exercise of the U.S. Office Fund Option, we and the JV Partner had joint control over the strategic financial and operating policy decisions of TRZ Holdings and it was accounted for as a jointly controlled entity following the equity method of accounting. Following the exercise of the U.S. Office Fund Option, we held an 82.72% equity interest in TRZ Holdings and obtained control over the strategic financial and operating policy decisions of the entity. Accordingly, we have consolidated our interest in TRZ Holdings effective August 9, 2011 and recognized

 

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the assets, liabilities and non-controlling interests in TRZ Holdings at fair value as at that date in accordance with IFRS 3, “Business Combinations”.

Canary Wharf Group plc

We have determined that, notwithstanding our 22% common equity interest, we do not exercise significant influence over Canary Wharf as we are not able to elect board members or otherwise influence the financial and operating decisions.

General Growth Properties, Inc.

We acquired an indirect interest in GGP together with a consortium of institutional investors through a series of parallel investment vehicles. As of March 31, 2012, we held an indirect 21% interest in GGP and were entitled to appoint three of the nine directors to GGP’s board. Brookfield and the consortium members have entered into a voting agreement governing the combined investment in GGP wherein the members have joint control over such investment and the consortium as a whole exercises significant influence over GGP. Accordingly, we accounted for the investment following the equity method of accounting.

Taxation

We apply judgment in determining the tax rate applicable to our REIT operating entities and identifying the temporary differences related to such operating entities with respect to which deferred income taxes are recognized. Deferred taxes related to temporary differences arising in the company’s REIT operating entities, joint ventures and associates are measured based on the tax rates applicable to distributions received by the investor entity on the basis that REITs can deduct dividends or distributions paid such that their liability for income taxes is substantially reduced or eliminated for the year, and we intend that these entities will continue to distribute their taxable income and continue to qualify as REITs for the foreseeable future.

We measure deferred income taxes associated with our investment properties based on our specific intention with respect to each asset at the end of the reporting period. Where we have a specific intention to sell a property in the foreseeable future, deferred taxes on the building portion of the investment property are measured based on the tax consequences following from the disposition of the property. Otherwise, deferred taxes are measured on the basis the carrying value of the investment property will be recovered substantially through use. Judgment is required in determining the manner in which the carrying amount of each investment property will be recovered.

We also make judgments with respect to the taxation of gains inherent in our investments in foreign subsidiaries and joint ventures. While we believe that the recovery of our original investment in these foreign subsidiaries and joint ventures will not result in additional taxes, certain unremitted gains inherent in those entities could be subject to foreign taxes depending on the manner of realization.

Financial Instruments

We classify our financial instruments into categories based on the purpose for which the instrument was acquired or issued, its characteristics and our designation of the instrument. The category into which we classify financial instruments determines its measurement basis (e.g., fair value, amortized cost) subsequent to initial recognition. We hold financial instruments that represent secured debt and equity interests in commercial properties that are measured at fair value. Estimation of the fair value of these instruments is subject to the estimates and assumptions associated with valuation of investment properties. When designating derivatives in cash flow hedging relationships, we make assumptions about the timing and amount of forecasted transactions, including anticipated financings and refinancings.

 

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Fair value is the amount that willing parties would accept to exchange a financial instrument based on the current market for instruments with the same risk, principal and remaining maturity. The fair value of interest bearing financial assets and liabilities is determined by discounting the contractual principal and interest payments at estimated current market interest rates for the instrument. Current market rates are determined by reference to current benchmark rates for a similar term and current credit spreads for debt with similar terms and risk.

Use of Estimates

The company makes estimates and assumptions that affect carried amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amount of earnings for the period. Actual results could differ from estimates. The estimates and assumptions that are critical to the determination of the amounts reported in the financial statements relate to the following:

 

  (i) Investment property

We determine the fair value of each operating property based upon, among other things, rental income from current leases and assumptions about rental income from future leases reflecting market conditions at the applicable balance sheet dates, less future cash outflows in respect of such leases. Fair values are primarily determined by discounting the expected future cashflows, generally over a term of 10 years including a terminal value based on the application of a capitalization rate to estimated year 11 cashflows. Certain operating properties are valued using a direct capitalization approach whereby a capitalization rate is applied to estimated current year cashflows. Developments properties under active development are also measured using a discounted cashflow model, net of costs to complete, as of the balance sheet date. Development sites in the planning phases are measured using comparable market values for similar assets. In accordance with our policy, we measure our operating properties and development properties using valuations prepared by management. From time to time, we obtain valuations of selected operating properties and development properties prepared by qualified external valuation professionals in connection with financing transactions or for other purposes, and while management considers the results of such valuations they do not form the basis of the company’s reported values.

 

  (ii) Financial instruments

We determine the fair value of our warrants to acquire common shares of GGP using a Black-Scholes option pricing model wherein we are required to make estimates and assumptions regarding expected future volatility of GGP’s shares and the term of the warrants.

We have certain financial assets and liabilities with embedded participation features related to the values of investment properties whose fair values are based on the fair values of the related properties.

We hold other financial instruments that represent equity interests in investment property entities that are measured at fair value as these financial instruments are designated as fair value through profit or loss or available- for-sale. Estimation of the fair value of these instruments is also subject to the estimates and assumptions associated with investment properties.

The fair value of interest rate caps is determined based on generally accepted pricing models using quoted market interest rates for the appropriate term. Interest rate swaps are valued at the present value of estimated future cash flows and discounted based on applicable yield curves derived from market interest rates.

Application of the effective interest method to certain financial instruments involves estimates and assumptions about the timing and amount of future principal and interest payments.

 

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Future Accounting Policy Changes

We anticipate adopting each of the accounting policy changes below in the first quarter of the year for which the standard is applicable and are currently evaluating the impact of each.

Financial Instruments

IFRS 9, “Financial Instruments”, or IFRS 9, is a multi-phase project to replace IAS 39. IFRS 9 introduces new requirements for classifying and measuring financial assets. In October 2010 the IASB reissued IFRS 9, incorporating new requirements on accounting for financial liabilities and carrying over from IAS 39 the requirements for de-recognition of financial assets and financial liabilities. In December 2011, the IASB issued “Mandatory Effective Date of IFRS 9 and Transition Disclosures”, which amended the effective date of IFRS 9 to annual periods beginning on or after January 1, 2015, and modified the relief from restating comparative periods and the associated disclosures in IFRS 7. Early adoption is permitted. The IASB intends to expand IFRS 9 to add new requirements for impairment of financial assets measured at amortized cost and hedge accounting. On completion of these various phases, IFRS 9 will be a complete replacement of IAS 39.

Consolidated Financial Statements

IFRS 10, “Consolidated Financial Statements”, or IFRS 10, establishes principles for the preparation of an entity’s financial statements when it controls one or more other entities. The standard defines the principle of control and establishes control as the basis for determining which entities are consolidated in the financial statements of the reporting entity. The standard also sets out the accounting requirements for the preparation of consolidated financial statements.

Joint Arrangements

IFRS 11, “Joint Arrangements”, or IFRS 11, replaces the existing IAS 31, “Interests in Joint Ventures” (“IAS 31”). IFRS 11 requires that reporting entities consider whether a joint arrangement is structured through a separate vehicle, as well as the terms of the contractual arrangement and other relevant facts and circumstances, to assess whether the venture is entitled to only the net assets of the joint arrangement (a “joint venture”) or to its share of the assets and liabilities of the joint arrangement (a “joint operation”). Joint ventures are accounted for using the equity method, whereas joint operations are accounted for using proportionate consolidation.

Disclosure Of Interests In Other Entities

IFRS 12, “Disclosure of Interests in Other Entities”, or IFRS 12, applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. The standard requires disclosure of information that enables users of financial statements to evaluate: (i) the nature of, and risks associated with interests in other entities; and (ii) the effects of those interests on our financial position, financial performance and cash flows.

Fair Value Measurement

IFRS 13, “Fair Value Measurement”, or IFRS 13, replaces the current guidance on fair value measurement in IFRS with a single standard. The standard defines fair value, provides guidance on its determination and requires disclosures about fair value measurements but does not change the requirements about the items that should be measured and disclosed at fair value.

Income Taxes

Amendments to IAS 12, “Income Taxes”, or IAS 12 effective January 1, 2012 are applicable to the measurement of deferred tax liabilities and deferred tax assets where investment property is measured using the

 

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fair value model in IAS 40, “Investment Property”. The amendments introduce a rebuttable presumption that, for purposes of determining deferred tax consequences associated with temporary differences relating to investment properties, the carrying amount of an investment property is recovered entirely through sale. This presumption is rebutted if the investment property is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale. The parent company has determined that based on its business model, the rebuttable presumption introduced by the amendments to IAS 12 has been overcome and has continued to measure deferred taxes on the basis that the carrying amount of investment properties will be recovered through use except where there is a specific plan to sell a property in the foreseeable future. Therefore, the amendments to IAS 12 did not have an impact on the measurement of the company’s deferred tax liabilities.

Reconciliation of Performance Measures to IFRS Measures

The following table provides a reconciliation of net income attributable to Brookfield to Total Return and FFO for the three months ended March 31, 2012 and 2011:

 

(US$ Millions) Three months ended Mar. 31,    2012     2011  

Net income attributable to parent company

   $ 383      $ 337   

Add (deduct):

    

Income tax expense (benefit)

     439        78   

Non-controlling interest in the above

     (242     (33

Total Return

     580        382   

Add (deduct):

    

Fair value (gains) losses

     (287     (303

Realized gains

     (78     2   

Share of equity accounted fair value adjustments(1)

     (353     (57

Income tax expense

     (200     (7

Non-controlling interest in the above

     479        119   

FFO

   $ 141      $ 136   

 

(1) Represents fair value gains (losses) related to equity accounted investments.

The following table provides a reconciliation of net income attributable to Brookfield to Total Return and FFO for the years ended December 31, 2011, 2010 and 2009:

 

(US$ Millions) Year ended December 31,    2011     2010     2009  

Net income attributable to parent company

   $ 2,323      $ 1,026      $ (477

Add (deduct):

      

Income tax expense (benefit)

     439        78        (135

Non-controlling interest in the above

     (162     (19     29   

Total Return

     2,600        1,085        (583

Add (deduct):

      

Fair value (gains) losses

     (1,112     (574     887   

Realized gains

     (365     (250     (39

Share of equity accounted fair value adjustments(1)

     (1,612     (561     710   

Non-controlling interest in the above

     1,065        726        (584

FFO

   $ 576      $ 426      $ 391   

 

(1) Represents fair value gains (losses) related to equity accounted investments.

 

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The components of NOI for the three months ended March 31, 2012 and 2011 are as follows:

 

Three months ended Mar. 31,    2012      2011  
  

 

 

 
(US$ Millions)     
 
 
Revenue
from
operations
  
  
  
    
 
Operating
expenses
  
  
    
 
Property
NOI
  
  
    
 
 
Revenue
from
operations
  
  
  
    
 
Operating
expenses
  
  
    
 
Property
NOI
  
  

Office

   $     572       $     230       $     342       $     409       $     167       $     242   

Retail

     42         13         29         46         20         26   

Multi-Family and Industrial

     19         8         11         39         27         12   

Opportunistic Investments

     90         63         27         70         32         38   
     $ 723       $ 314       $ 409       $ 564       $ 246       $ 318   

The components of NOI for the years ended December 31, 2011, 2010 and 2009 are as follows:

 

Year ended Dec. 31,   2011     2010     2009  
 

 

 

 
(US$ Millions)   Revenue
from
operations
    Operating
expenses
    Property
NOI
    Revenue
from
operations
    Operating
expenses
    Property
NOI
    Revenue
from
operations
    Operating
expenses
    Property
NOI
 

Office

  $     1,909      $ 793      $ 1,116      $ 1,521      $ 615      $ 906      $ 1,456      $ 610      $ 846   

Retail

    193        55        138        199        69        130        187        85        102   
Multi-Family and Industrial     108        62        46        54        32        22        25        12        13   
Opportunistic Investments     379        172        207        328        136        192        251        88        163   
    $ 2,589      $     1,082      $     1,507      $     2,102      $     852      $     1,250      $     1,919      $     795      $     1,124   

Proportionate Summary Financial Information

We use the proportionate share of our interests in GGP and other jointly controlled entities and equity accounted investments as a key performance measure. Management views this measure as relevant in demonstrating the company’s ability to manage the underlying economics of the related investments, including the financial performance and cash flows. This presentation also depicts the extent to which the underlying assets are leveraged, which is an important component of risk management and enhancing shareholder returns. The following tables present our condensed carve-out balance sheet and income statement on a consolidated and on a proportionate basis. The proportionate financial information represents our carve-out financial statements on an adjusted basis to present our equity accounted investments and our share of net earnings (losses) from equity accounted investments on a proportionately consolidated basis at our ownership percentage of the related investment (referred to as “proportionate interest”). We present our 21% proportionate interest in GGP as a separate column in the following tables.

 

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The following table presents a reconciliation of our condensed consolidated balance sheet to our condensed proportionate balance sheet as at March 31, 2012:

 

 

            Proportionate     

Less: Equity

        
(US$ Millions)    Consolidated      GGP      Other JVs      Accounted Investments      Total  

Assets

              

Investment properties

   $     28,138       $     8,265       $     4,515       $ -       $     40,918   

Equity accounted investments

     7,466         -         -         (7,466)         -   

Other assets

     5,445         882         355         -         6,682   

Total assets

   $ 41,049       $ 9,147       $ 4,870       $ (7,466)       $ 47,600   

Liabilities

              

Property debt

   $ 15,266       $ 4,267       $ 1,614       $ -       $ 21,147   

Other liabilities

     3,184         578         92         -         3,854   

Total liabilities

     18,450         4,845         1,706         -         25,001   

Equity in net assets

              

Non-controlling interests

     10,024         323         54         (377)         10,024   

IFRS Value

     12,575         3,979         3,110         (7,089)         12,575   

Total equity in net assets

     22,599         4,302         3,164         (7,466)         22,599   

Total liabilities and equity in net assets

   $ 41,049       $ 9,147       $ 4,870       $                     (7,466)       $ 47,600   

 

The following table presents our condensed proportionate balance sheet by segment as at March 31, 2012:

 

 

(US$ Millions)    Office      Retail      Multi-Family
& Industrial
     Opportunistic
Investments
     Total  

Assets

              

Investment properties

   $     27,438       $     11,312       $             1,143       $             1,025       $     40,918   

Other assets

     2,836         1,642         72         2,132         6,682   

Total assets

   $ 30,274       $ 12,954       $ 1,215       $ 3,157       $ 47,600   

Liabilities

              

Property debt

   $ 13,654       $ 5,821       $ 723       $ 949       $ 21,147   

Other liabilities

     2,497         958         30         369         3,854   

Total liabilities

     16,151         6,779         753         1,318         25,001   

Equity in net assets

              

Other non-controlling interests

     7,255         1,372         323         1,074         10,024   

IFRS Value

     6,868         4,803         139         765         12,575   

Total equity in net assets

     14,123         6,175         462         1,839         22,599   

Total liabilities and equity in net assets

   $ 30,274       $ 12,954       $ 1,215       $ 3,157       $ 47,600   

 

The following table presents a reconciliation of our condensed consolidated income statement to our condensed proportionate income statement for the three months ended March 31, 2012:

 

 

(US$ Millions) Three months ended Mar. 31, 2012          Proportionate     

Less: Equity

        
   Consolidated     GGP      Other JVs      Accounted Investments      Total  

NOI

   $             409      $   123       $           59       $                                      -       $     591   

Equity accounted FFO

     89        -         -         (89)         -   

Investment and other income

     39        -         -         -         39   
     537        123         59         (89)         630   

Expenses

     306        71         22         -         399   

Non-controlling interests in above

     90        3         -         (3)         90   

FFO

     141        49         37         (86)         141   

Total fair value changes, net

     718        285         62         (347)         718   

Income tax expense

     (239     -         -         -         (239)   

Other non-controlling interests in above

     (237     7         -         (7)         (237)   

Net income attributable to parent company

   $ 383      $ 341       $ 99       $ (440)       $ 383   

 

 

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The following table presents our condensed proportionate income statement by segment for the three months ended March 31, 2012:

 

 

(US$ Millions) Three months ended Mar. 31, 2012    Office     Retail    

Multi-Family

& Industrial

   

Opportunistic

Investments

    Total  

NOI

   $     385      $     167      $     12      $     27      $     591   

Investment and other income

     33        4        -        2        39   
     418        171        12        29        630   

Expenses

     220        115        8        56        399   

Other non-controlling interests in above

     102        6        3        (21     90   

FFO

     96        50        1        (6     141   

Total fair value changes, net

     322        299        (19     116        718   

Income tax expense

     (78     (138     -        (23     (239

Other non-controlling interests in above

     (134     (31     13        (85     (237

Net income (loss) attributable to parent company

   $ 206      $ 180      $ (5   $ 2      $ 383   

 

The following table presents a reconciliation of our condensed consolidated income statement to our condensed proportionate income statement for the year ended December 31, 2011:

 

 

    

Consolidated

     Proportionate     

Less: Equity
Accounted Investments

    

Total

 

(US$ Millions) Year ended Dec. 31, 2011

      GGP      Other JVs        

NOI

   $             1,507       $   544       $           408       $                                      -       $     2,459   

Equity accounted FFO

     492         -         -         (492)         -   

Investment and other income

     177         15         1         -         193   
     2,176         559         409         (492)         2,652   

Expenses

     1,081         335         141         -         1,557   

Non-controlling interests in above

     519         19         -         (19)         519   

FFO

     576         205         268         (473)         576   

Total fair value changes, net

     3,089         1,171         435         (1,605)         3,090   

Income tax expense

     (439)         (1)         -         -         (440)   

Non-controlling interests in above

     (903)         93         -         (93)         (903)   

Net income attributable to parent company

   $ 2,323       $ 1,468       $ 703       $ (2,171)       $ 2,323   

 

The following table presents our condensed proportionate income statement by segment for the year ended December 31, 2011:

 

 

(US$ Millions) Year ended Dec. 31, 2011    Office      Retail     

Multi-Family

& Industrial

     Opportunistic
Investments
     Total  

NOI

   $     1,507       $     690       $                 43       $     219       $     2,459   

Investment and other income

     173         22         -         (2)         193   
     1,680         712         43         217         2,652   

Expenses

     949         497         43         68         1,557   

Non-controlling interests in above

     419         7         5         88         519   

FFO

     312         208         (5)         61         576   

Total Fair value changes, net

     1,636         1,450         39         (35)         3,090   

Income tax expense

     (335)         (86)         -         (19)         (440)   

Non-controlling interests in above

     (656)         (251)         (22)         26         (903)   

Net income attributable to parent company

   $ 957       $ 1,321       $ 12       $ 33       $ 2,323   

 

5.B. LIQUIDITY AND CAPITAL RESOURCES

The capital of our business consists of property debt, capital securities, other secured and unsecured debt and equity. Our objectives when managing this capital are to maintain an appropriate balance between holding a sufficient amount of capital to support our operations and to reduce our weighted average cost of capital, and to improve the returns on equity through value enhancement initiatives and the consistent monitoring

 

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of the balance between debt and equity financing. As at March 31, 2012, the recorded values of capital totaled $39 billion (December 31, 2011 - $38 billion). Our principal liquidity needs for the next year are to:

 

   

fund recurring expenses;

 

   

meet debt service requirements;

 

   

fund those capital expenditures deemed mandatory, including tenant improvements;

 

   

fund current development costs not covered under construction loans;

 

   

fund investing activities which could include discretionary capital expenditures; and

 

   

fund property acquisitions.

We plan to meet these needs with one or more of the following:

 

   

cash flows from operations;

 

   

construction loans;

 

   

creation of new funds;

 

   

proceeds from sales of assets;

 

   

proceeds from sale of non-controlling interests in subsidiaries; and

 

   

credit facilities and refinancing opportunities.

We attempt to maintain a level of liquidity to ensure we are able to react to investment opportunities quickly and on a value basis. Our primary sources of liquidity consist of cash and undrawn committed credit facilities, as well as cash flow from operating activities. In addition, we structure our affairs to facilitate monetization of longer-duration assets through financings, co-investor participations or refinancings. Our operating entities also generate liquidity by accessing capital markets on an opportunistic basis. The following table summarizes the various sources of cash flows of our operating entities which supplement our liquidity.

 

(US$ Millions) Three months ended Mar. 31,    2012      2011  

Cash flow from operating activities

   $         211       $         163   

Borrowings

     782         466   

Proceeds from asset sales

     393         432   

Loans and notes receivable collected

     115         92   

Contributions from parent company

     169         20   

Loan receivable collected from parent company

     108         2   

Contributions from non-controlling interest

     104         115   
     $ 1,882       $ 1,290   

 

(US$ Millions) Year ended Dec. 31,    2011      2010      2009  

Cash flow from operating activities

   $         1,611       $         810       $         166   

Borrowings

     2,976         1,635         2,374   

Proceeds from asset sales

     1,638         913         98   

Loans and notes receivable collected

     744         302         228   

Proceeds from equity installment receivable

     121         -         -   

Contributions from parent company

     307         358         769   

Loan receivable collected from parent company

     658         -         -   

Distributions from equity accounted investments

     -         316         -   

Contributions from non-controlling interest

     667         1,038         1,024   
     $ 8,722       $ 5,372       $ 4,659   

We seek to increase income from our existing properties by maintaining quality standards for our properties that promote high occupancy rates and support increases in rental rates while reducing tenant turnover

 

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and related retenanting costs, and by controlling operating expenses. Consequently, we believe our revenue, along with proceeds from financing activities, will continue to provide the necessary funds to cover our short-term liquidity needs. However, material changes in the factors described above may adversely affect our net cash flows.

Most of our borrowings are in the form of long term asset-specific financings with recourse only to the specific assets. Limiting recourse to specific assets ensures that poor performance within one area should not compromise our ability in and of itself to finance the balance of our operations. A summary of our debt profile for each of our office and retail segments are included elsewhere in this MD&A.

At March 31, 2012, Brookfield Office Properties had a floating rate bank credit facility of $660 million which matures in March 2014. Additionally, one of its subsidiaries has bilateral agreements with a number of Canadian chartered banks for an aggregate floating rate bank credit facility of C$125 million, the terms of which extend to June 2014. At March 31, 2012, the balances drawn on these facilities totaled $381 million.

Our operating entities are subject to limited covenants in respect of their corporate debt and were in compliance with all such covenants at March 31, 2012. Our operating subsidiaries are also in compliance with all covenants and other capital requirements related to regulatory or contractual obligations of material consequence to us.

In addition, see Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield — Preferred Shares of Certain Holding Entities”>. For a description of our <distribution policy, see Item 10.B. “Memorandum and Articles of Association — Description of the Property Partnership Limited Partnership Agreement — Distributions”, Item 10.F. “Dividends and Paying Agents — Distribution Policy” and Item 3.B. “Capitalization and Indebtedness”.

A summary of our contractual obligations is included in Item 5.F. “Tabular Disclosure of Contractual Obligations”.

5.C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

Not applicable.

5.D. TREND INFORMATION

We will seek to increase the cash flows from our office and retail property activities through continued leasing activity as described below. In particular, we are operating below our historical office occupancy level in the United States, which provides the opportunity to expand cash flows through higher occupancy. In addition, we believe that most of our markets have favorable outlooks (see Item 4.B. “Information on the Company — Business Overview — Market Overview and Opportunities”), which we believe also provides an opportunity for 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 future. Our beliefs as to the opportunities for our company to increase its occupancy levels, lease rates and cash flows are based on assumptions about our business and markets that management believes are reasonable in the circumstances. There can be no assurance as to growth in occupancy levels, lease rates or cash flows. See “Special Note Regarding Forward-Looking Statements”.

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 30 properties into the newly formed Rouse Properties, or Rouse, the shares of which were distributed to its shareholders, including Brookfield, in line with the objective to focus GGP on its highest performing malls, which generate tenant sales over $500 per square foot.

 

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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. 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.

5.E. OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

5.F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table summarizes our significant contractual obligations as of December 31, 2011:

 

(US$ Millions)            Payments Due By Period  
       Total         Less than 1 Year         2 –3 years         4 – 5 Years         After 5 Years   
Property and other secured debt      $        15,598         $        1,433         $        6,812         $        2,063         $        5,290   
Capital securities      994         150         392         452         -   
Other financial liabilities      1,170         1,170         -         -         -   
Interest expense(1)               

Property and other secured debt

     4,746         984         1,820         1,015         927   

Capital securities

     152         49         72         31         -   

 

(1) Represents aggregate interest expense expected to be paid over the term of the obligations. Variable interest rate payments have been calculated based on current rates.

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

6.A. DIRECTORS AND SENIOR MANAGEMENT

Governance

As required by law, our limited partnership agreement provides for the management and control of our company by a general partner rather than a board of directors and officers. The BPY General Partner serves as our company’s general partner and has a board of directors. The BPY General Partner has no executive officers. The BPY General Partner has sole responsibility and authority for the central management and control of our company, which is exercised through its board of directors.

 

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The following table presents certain information concerning the current board of directors of the BPY General Partner:

 

Name, Municipality of Residence and

Independence(1)

   Age    Position with the
BPY General Partner
   Principal Occupation

Richard B. Clark, Larchmont, United States

(Not Independent)

   52    Director    Chief Executive Officer of Brookfield’s global property group

Steven J. Douglas, Mississauga, Canada

(Not Independent)

   45    Director    Chief Financial Officer of Brookfield’s global property group

Jeffrey M. Blidner, Toronto, Canada

(Not Independent)

   64    Director    Senior Managing Partner of Brookfield Asset Management

Brett M. Fox, Old Bethpage, United States

(Not Independent)

   40    Director    General Counsel of Brookfield’s global property group

 

(1) The mailing addresses for the directors are set forth under Item 7.A. “Major Shareholders and Related Party Transactions — Major Shareholders”.

Set forth below is biographical information for the BPY General Partner’s current directors.

Richard B. Clark. Mr. Clark is the Chief Executive Officer of Brookfield’s global property group and Chairman of Brookfield Office Properties. He was Chief Executive Officer of Brookfield Office Properties from 2002 to 2012 and was President and Chief Executive Officer of Brookfield Office Properties’ U.S. operations from 2000-2002; and prior to that held senior management positions for Brookfield Office Properties and its predecessor companies including Chief Operating Officer, Executive Vice President and Director of Leasing. Mr. Clark is on the Executive Committee of the National Association of Real Estate Trusts and the Real Estate Board of New York and is the Former Chairman of the Real Estate Roundtable Tax Policy Advisory Committee. Mr. Clark sits on the board of directors of GGP on behalf of Brookfield Asset Management.

Steven J. Douglas. Mr. Douglas is the Chief Financial Officer of Brookfield’s global property group. Mr. Douglas was GGP’s Executive Vice President and Chief Financial Officer from July 2010 to December 2011. From 2009 to July 2010, Mr. Douglas served as president of Brookfield Office Properties. Mr. Douglas has been a key member of the Brookfield team for more than 16 years, serving in a variety of senior positions at Brookfield Office Properties and Brookfield Asset Management. From 2003 to 2006, he was Chief Financial Officer of Falconbridge Limited. From 1996 until 2003, Mr. Douglas served as Chief Financial Officer of Brookfield Office Properties. Mr. Douglas joined Brookfield Office Properties from Ernst & Young. Mr. Douglas received his Bachelor of Commerce degree from Laurentian University and is a Chartered Accountant.

Jeffrey M. Blidner. Mr. Blidner is a Senior Managing Partner of Brookfield Asset Management and is responsible for strategic planning and transaction execution. Mr. Blidner is also a director of Brookfield Infrastructure Partners L.P., Chairman and a director of Brookfield Renewable Energy Partners L.P. and Chairman and a director of Rouse.

Brett M. Fox. Mr. Fox is General Counsel of Brookfield’s global property group and is responsible for certain corporate operations, compliance, administrative and legal functions. Mr. Fox has held various legal and corporate roles since joining Brookfield in 2002. Prior to joining Brookfield, Mr. Fox was an associate at the law firm of Cahill Gordon & Reindel LLP. He holds a law degree from Fordham University School of Law and an undergraduate degree from Cornell University.

Prior to completion of the spin-off, the BPY General Partner’s board of directors will be expanded to seven members, a majority of whom will be independent of the BPY General Partner and Brookfield. The seven members of the board of directors are expected to be Gordon E. Arnell, Omar Carneiro da Cunha, Stephen DeNardo, J. Bruce Flatt, Lou Maroun, Lars Rodert and José Ramón Valente Vías. Set forth below is biographical information for these proposed directors.

 

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Bruce Flatt. Mr. Flatt is a Senior Managing Partner and Chief Executive Officer and a director of Brookfield Asset Management and a number of its affiliates. Mr. Flatt previously served on the Board of Directors of Brookfield Office Properties and prior to 2000, Mr. Flatt held a number of executive positions with Brookfield Office Properties, including Chief Executive Officer. Mr. Flatt sits on the Board of Directors of General Growth Properties, Inc. on behalf of Brookfield Asset Management.

Gordon Arnell. Mr. Arnell was Chairman of Brookfield Office Properties from October 1995 to July 2012. Mr. Arnell was President of Brookfield Office Properties from 1990 to 1995 and Chief Executive Officer from 1990 to 2000. He has also previously held senior executive roles at Oxford Development Group Ltd. and Trizec Corporation Ltd.

Stephen DeNardo. Mr. DeNardo is currently managing director and president and CEO of RiverOak Investment Corp., LLC and has held this position since 1999. From 1997 to 1999 he was Partner and Senior Vice President of ING Realty Partners, where he managed a $1 billion portfolio. Prior to his employment with ING Realty Partners, he was President of ARES Realty Capital from 1991 to 1997, where he managed a $5 billion portfolio of diversified debt and equity assets. Before joining ARES Realty Capital, he was a Partner at First Winthrop Corporation. Mr. DeNardo has held a license as a Certified Public Accountant since 1978 and has a B.S. in Accounting from Fairleigh Dickinson University.

Lou Maroun. Mr. Maroun is the Founder and Executive Chairman of Sigma Real Estate Advisors/Sigma Capital Corporation, which specializes in international real estate advisory services. Prior to this role, Mr. Maroun was the Executive Chairman of ING Real Estate Canada, and held executive positions in a number of real estate companies where he was responsible for overseeing operations, real estate transactions, asset and property management, as well as many other related functions. Mr. Maroun also is on the board of directors of Brookfield Infrastructure Partners L.P., Brookfield Renewable Energy Partners L.P., Acadian Timber Corp. and Partners REIT. Mr. Maroun graduated from the University of New Brunswick in 1972 with a Bachelor’s degree followed by a series of post graduate studies and in January of 2007, after a long and successful career in investment real estate, Mr. Maroun was elected to the position of Fellow of the Royal Institute of Chartered Surveyors.

Omar da Cunha. Mr. Cunha is a Senior Partner with Dealmaker Ltd., a consultancy and M&A advisory firm, with a focus in telecommunications, information technology, oil & gas and retail, and has also been a Senior Partner of BOND Consultoria Empresarial e Participacoes since 1994. He was the Chairman of “Bob’s”, a Brazilian fast food company, from 1995 to 2008, a director of the Energisa Group since 1996, and a director of Grupo Libra since 2010. In 2005, Mr. Cunha was the Deputy Chairman and Chief Executive Officer of VARIG Brazilian Airline. From 1995 to 1998, Mr. Cunha was the President of AT&T Brasil and a member of the Management Committee of AT&T International. Prior to that, Mr. Cunha worked for 27 years in Brazil and abroad for the Royal Dutch/Shell Group, and was President of Shell Brasil, Billiton Metals and Shell Quimica from 1991 to 1994. Mr. Cunha is currently a member of the board of Acao Communitaria do Brasil, Cultura Inglesa S/A, and of the American Chamber of Commerce for Brazil.

Lars Rodert. Mr. Rodert is a Senior Portfolio Manager for Inter IKEA Treasury in North America and Europe. Prior to this role, he was most recently Chief Investment Officer, North America, at SEB Asset Management and prior to that he was Head of International Equities at the same firm. Based in Belgium, Mr. Rodert has an in depth knowledge of continental European markets and is seasoned in analyzing investment opportunities. Mr. Rodert holds a Bachelor of Arts degree from Stockholm University, with a major in finance.

José Ramón Valente Vías. Mr. Valente is a partner and executive director of ECONSULT. Mr. Valente is the representative in Chile of Fidelity Investments (U.S.A.) and was a founding partner and director of Duff and Phelps Rating Agency in Chile, Argentina and Peru between 1989 and 2000. Mr. Valente was a Finance and Macroeconomics professor in Universidad de Chile and Universidad Gabriela Mistral between 1989 and 1993. Mr. Valente is currently a member of the board of several companies, such as Transelec Chile S.A., Indura

 

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S.A. and Cementos Bío Bío S.A. Mr. Valente is currently a director of the SEP (Public Companies System of the Chilean State). Mr. Valente holds a Commercial Engineering degree from Universidad de Chile and Master in Business Administration from the University of Chicago.

Additional Information About Directors and Officers

Mr. Blidner was a director of AT&T Canada Inc. from August 2002 to January 2003. On October 15, 2002, AT&T Canada Inc. filed under the Companies’ Creditors Arrangement Act (Canada) in connection with a capital restructuring process. The order was in effect until February 28, 2003.

Mr. da Cunha was a director of Varig S.A. — Vição Aérea Rio-Grandense from February 2005 to October 2005. On June 17, 2005, Varig S.A. — Vição Aérea Rio-Grandense applied for a grant of judicial recovery with a view to restructuring payments to its creditors. On August 20, 2010, Varig S.A. — Vição Aérea Rio-Grandense was declared bankrupt. The bankruptcy proceedings are still underway.

Our Management

The Managers, wholly-owned subsidiaries of Brookfield Asset Management, will provide management services to us pursuant to our Master Services Agreement. Brookfield has built its property platform through the integration of formative portfolio acquisitions and single asset transactions over several decades and throughout all phases of the real estate investment cycle. Having invested over $19 billion of equity capital through real estate transactions since 1987, Brookfield has a track record of delivering compelling, risk-adjusted returns to investors through a variety of publicly-listed company and private partnership vehicles. The Managers’ investment and asset management professionals are complemented by the depth of real estate investment and operational expertise throughout our operating platforms which specialize in office, retail, multi-family and industrial assets, generating significant and stable operating cash flows. Members of Brookfield’s senior management and other individuals from Brookfield’s global affiliates are drawn upon to fulfill the Managers’ obligations to provide us with management services under our Master Services Agreement.

The following table presents certain information concerning the Chief Executive Officer and the Chief Financial Officer of our Managers:

 

Name

   Age    Years of
Experience
   Years at
Brookfield
   Position
with one  of the Managers
 

Richard B. Clark

   52    31    28      Chief Executive Officer   

Steven J. Douglas

   45    18    18      Chief Financial Officer   

Messrs. Clark and Douglas have substantial operational and transaction origination and execution expertise, having put together numerous consortiums, partnerships and joint ventures for large complex transactions. They have also been integral in building and developing Brookfield’s real property platform. See above for their biographical information.

Immediately following the spin-off, it is anticipated that the directors and officers of the BPY General Partner and our Managers and their associates, as a group, will beneficially own, directly or indirectly, or exercise control and direction over, our units representing in the aggregate less than 1% of our issued and outstanding units on a fully exchanged basis.

    6.B. COMPENSATION

Because our company is a newly formed partnership, the BPY General Partner has not previously provided any compensation to its directors. Following the spin-off, the BPY General Partner plans to pay each of its independent directors $100,000 per year for serving on its board of directors and various board committees.

 

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The BPY General Partner’s other directors are not expected to be compensated in connection with their board service. The BPY General Partner plans to pay the chairman of the audit committee an additional $20,000 per year and the other members of the audit committee an additional $10,000 for serving in such positions.

The BPY General Partner currently does not have any employees. Pursuant to the Master Services Agreement, the Managers will provide or arrange for other service providers to provide day-to-day management and administrative services for our company, the Property Partnership and the Holding Entities. The fees payable to the Managers under our Master Services Agreement are set forth under Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Our Master Services Agreement — Management Fee”.

Pursuant to our Master Services Agreement, members of Brookfield’s senior management and other individuals from Brookfield’s global affiliates are drawn upon to fulfill obligations under the Master Services Agreement. However, these individuals, including the Brookfield employees identified in the table under Item 6.A. “Directors, Senior Management and Employees — Directors and Senior Management — Our Management”, will not be compensated by our company or the BPY General Partner. Instead, they will continue to be compensated by Brookfield.

    6.C. BOARD PRACTICES

Board Structure, Practices and Committees

The structure, practices and committees of the BPY General Partner’s board of directors, including matters relating to the size and composition of the board of directors, the election and removal of directors, requirements relating to board action and the powers delegated to board committees, are governed by the BPY General Partner’s bye-laws. The BPY General Partner’s board of directors is responsible for supervising the management, control, power and authority of the BPY General Partner except as required by applicable law or the bye-laws of the BPY General Partner. The following is a summary of certain provisions of those bye-laws that affect our company’s governance.

Size, Independence and Composition of the Board of Directors

The BPY General Partner’s board of directors may consist of between 3 and 11 directors or such other number of directors as may be determined from time to time by a resolution of the BPY General Partner’s shareholders and subject to its bye-laws. The board is currently set at four directors and prior to completion of the spin-off, the board will be increased to seven directors and a majority of the directors of the BPY General Partner’s board of directors will be independent. In addition, the BPY General Partner’s bye-laws provide that not more than 50% of the directors (as a group) or the independent directors (as a group) may be residents of any one jurisdiction (other than Bermuda and any other jurisdiction designated by the board of directors from time to time).

Election and Removal of Directors

The BPY General Partner’s board of directors is appointed by its shareholders and each of its current directors will serve until the earlier of his or her death, resignation or removal from office. Vacancies on the board of directors may be filled and additional directors may be added by a resolution of the BPY General Partner’s shareholders or a vote of the directors then in office. A director may be removed from office by a resolution duly passed by the BPY General Partner’s shareholders. A director will be automatically removed from the board of directors if he or she becomes bankrupt, insolvent or suspends payments to his or her creditors, or becomes prohibited by law from acting as a director.

 

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Action by the Board of Directors

The BPY General Partner’s board of directors may take action in a duly convened meeting at which a quorum is present or by a written resolution signed by all directors then holding office. The BPY General Partner’s board of directors will hold a minimum of four meetings per year. When action is to be taken at a meeting of the board of directors, the affirmative vote of a majority of the votes cast is required for any action to be taken.

Transactions Requiring Approval by the Nominating and Governance Committee

The BPY General Partner’s nominating and governance committee has approved a conflicts policy which addresses the approval and other requirements for transactions in which there is greater potential for a conflict of interest to arise. These transactions include:

 

   

the dissolution of our partnership;

 

   

any material amendment to our Master Services Agreement, our limited partnership agreement or the Property Partnership’s limited partnership agreement;

 

   

any material service agreement or other arrangement pursuant to which Brookfield will be paid a fee, or other consideration other than any agreement or arrangement contemplated by our Master Services Agreement;

 

   

co-investments by us with Brookfield;

 

   

acquisitions by us from, and dispositions by us to, Brookfield;

 

   

any other material transaction involving us and Brookfield; and

 

   

termination of, or any determinations regarding indemnification under, our Master Services Agreement.

Our conflicts policy requires the transactions described above to be approved by the BPY General Partner’s nominating and governance committee. Pursuant to our conflicts policy, the BPY General Partner’s nominating and governance committee may grant approvals for any of the transactions described above in the form of general guidelines, policies or procedures in which case no further special approval will be required in connection with a particular transaction or matter permitted thereby. The conflicts policy can be amended at the discretion of the BPY General Partner’s nominating and governance committee. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield — Conflicts of Interest and Fiduciary Duties”.

Service Contracts

There are no service contracts with directors that provide benefit upon termination of office or services.

Transactions in which a Director has an Interest

A director who directly or indirectly has an interest in a contract, transaction or arrangement with the BPY General Partner, our company or certain of our affiliates is required to disclose the nature of his or her interest to the full board of directors. Such disclosure may generally take the form of a general notice given to the board of directors to the effect that the director has an interest in a specified company or firm and is to be regarded as interested in any contract, transaction or arrangement with that company or firm or its affiliates. A director may participate in any meeting called to discuss or any vote called to approve the transaction in which the director has an interest and no transaction approved by the board of directors will be void or voidable solely because the director was present at or participates in the meeting in which the approval was given provided that the board of directors or a board committee authorizes the transaction in good faith after the director’s interest has been disclosed or the transaction is fair to the BPY General Partner and our company at the time it is approved.

 

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Audit Committee

The BPY General Partner’s board of directors is required to maintain an audit committee that operates pursuant to a written charter. The audit committee will consist solely of independent directors and each member must be financially literate. Not more than 50% of the audit committee members may be residents of any one jurisdiction (other than Bermuda and any other jurisdiction designated by the board of directors from time to time).

The audit committee is responsible for assisting and advising the BPY General Partner’s board of directors with respect to:

 

   

our accounting and financial reporting processes;

 

   

the integrity and audits of our financial statements;

 

   

our compliance with legal and regulatory requirements; and

 

   

the qualifications, performance and independence of our independent accountants.

The audit committee is responsible for engaging our independent auditors, reviewing the plans and results of each audit engagement with our independent auditors, approving professional services provided by our independent accountants, considering the range of audit and non-audit fees charged by our independent auditors and reviewing the adequacy of our internal accounting controls.

Nominating and Governance Committee

The BPY General Partner’s board of directors is required to maintain at all times following the spin-off a nominating and governance committee that operates pursuant to a written charter. The nominating and governance committee will consist solely of independent directors and not more than 50% of the nominating and governance committee members may be residents of any one jurisdiction (other than Bermuda and any other jurisdiction designated by the board of directors from time to time).

The nominating and governance committee has approved a conflicts policy which addresses the approval and other requirements for transactions in which there is a greater potential for a conflict of interest to arise. The nominating and governance committee may be required to approve any such transactions. See “— Transactions Requiring Approval by the Nominating and Governance Committee”.

The nominating and governance committee is responsible for approving the appointment by the sitting directors of a person to the office of director and for recommending a slate of nominees for election as directors by the BPY General Partner’s shareholders. The nominating and governance committee is responsible for assisting and advising the BPY General Partner’s board of directors with respect to matters relating to the general operation of the board of directors, our company’s governance, the governance of the BPY General Partner and the performance of its board of directors. The nominating and governance committee is responsible for reviewing and making recommendations to the board of directors of the BPY General Partner concerning the remuneration of directors and committee members and any changes in the fees to be paid pursuant to our Master Services Agreement.

Indemnification and Limitations on Liability

Our Limited Partnership Agreement

The laws of Bermuda permit the partnership agreement of a limited partnership, such as our company, to provide for the indemnification of a partner, the officers and directors of a partner and any other person against any and all claims and demands whatsoever, except to the extent that the indemnification may be held by the courts of Bermuda to be contrary to public policy or to the extent that the laws of Bermuda prohibit indemnification against personal liability that may be imposed under specific provisions of the laws of Bermuda.

 

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The laws of Bermuda also permit a partnership to pay or reimburse an indemnified person’s expenses in advance of a final disposition of a proceeding for which indemnification is sought. See Item 10.B. “Additional Information — Memorandum and Articles of Association — Description of Our Units and Our Limited Partnership Agreement — Indemnification; Limitations on Liability” for a description of the indemnification arrangements in place under our limited partnership agreement.

The BPY General Partner’s Bye-laws

The laws of Bermuda permit the bye-laws of an exempted company, such as the BPY General Partner, to provide for the indemnification of its officers, directors and shareholders and any other person designated by the company against any and all claims and demands whatsoever, except to the extent that the indemnification may be held by the courts of Bermuda to be contrary to public policy or to the extent that the laws of Bermuda prohibit indemnification against personal liability that may be imposed under specific provisions of Bermuda law, such as the prohibition under the Bermuda Companies Act 1981 to indemnify liabilities arising from fraud or dishonesty. The BPY General Partner’s bye-laws provide that, as permitted by the laws of Bermuda, it will pay or reimburse an indemnified person’s expenses in advance of a final disposition of a proceeding for which indemnification is sought.

Under the BPY General Partner’s bye-laws, the BPY General Partner is required to indemnify, to the fullest extent permitted by law, its affiliates, directors, officers, resident representative, shareholders and employees, any person who serves on a governing body of the Property Partnership or any of its subsidiaries and certain others against any and all losses, claims, damages, liabilities, costs or expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements or other amounts arising from any and all claims, demands, actions, suits or proceedings, incurred by an indemnified person in connection with our company’s investments and activities or in respect of or arising from their holding such positions, except to the extent that the claims, liabilities, losses, damages, costs or expenses are determined to have resulted from the indemnified person’s bad faith, fraud or willful misconduct, or in the case of a criminal matter, action that the indemnified person knew to have been unlawful. In addition, under the BPY General Partner’s bye-laws: (i) the liability of such persons has been limited to the fullest extent permitted by law and except to the extent that their conduct involves bad faith, fraud or willful misconduct, or in the case of a criminal matter, action that the indemnified person knew to have been unlawful; and (ii) any matter that is approved by the independent directors will not constitute a breach of any duties stated or implied by law or equity, including fiduciary duties. The BPY General Partner’s bye-laws require it to advance funds to pay the expenses of an indemnified person in connection with a matter in which indemnification may be sought until it is determined that the indemnified person is not entitled to indemnification.

Insurance

Prior to the completion of the spin-off, we intend to obtain insurance coverage under which the directors of the BPY General Partner will be insured, subject to the limits of the policy, against certain losses arising from claims made against such directors by reason of any acts or omissions covered under the policy in their respective capacities as directors of the BPY General Partner, including certain liabilities under securities laws. The insurance will apply in certain circumstances where we may not indemnify the BPY General Partner’s directors and officers for their acts or omissions.

Governance of the Property Partnership

Initially the board of directors of the Property General Partner will be identical to the board of directors of the BPY General Partner. It has substantially similar governance arrangements as the BPY General Partner although it will not establish an audit committee or a nominating and governance committee. However, the Property General Partner’s bye-laws allow for alternate directors. A director of the Property General Partner may by written notice to the secretary of the Property General Partner appoint any person, including another director,

 

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who meets any minimum standards that are required by applicable law to serve as an alternate director and to attend and vote in such director’s place at any meeting of the Property General Partner’s board of directors at which such director is not personally present and to perform any duties and functions and exercise any rights that such director could perform or exercise personally.

    6.D. EMPLOYEES

As at December 31, 2011, our operating entities had approximately 6,000 employees. Our company does not currently have any senior management who carry out the management and activities of our company. The Managers, wholly-owned subsidiaries of Brookfield Asset Management, will provide management services to us pursuant to our Master Services Agreement.

    6.E. SHARE OWNERSHIP

See Item 7.A. “Major Shareholders and Related Party Transactions — Major Shareholders”.

 

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ITEM 7.         MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

    7.A. MAJOR SHAREHOLDERS

The following table presents information regarding the beneficial ownership of our units prior to and immediately after completion of the spin-off by each person or entity that we know beneficially owns or will beneficially own 5% or more of our units, each director of the BPY General Partner and all of the BPY General Partner’s directors as a group.

 

      Units Outstanding
Prior to the
Spin-Off and
Related Transactions
     Units Outstanding
Immediately After the
Spin-Off and
Related Transactions
 

Name and Address

   Units Owned      Percentage      Units Owned      Percentage  

Brookfield Asset Management Inc.

Suite 300, Brookfield Place, 181 Bay

Street, Toronto, Ontario M5J 2T3

     900(1)         100%        
 
(1)
 
  
  
     %   

BAM Investments Corp.

Suite 300, Brookfield Place, 181 Bay

Street, Toronto, Ontario M5J 2T3

     —           —              %   

Partners Limited

Suite 300, Brookfield Place, 181 Bay

Street, Toronto, Ontario M5J 2T3

     —           —              %   

Richard B. Clark

c/o Brookfield Asset Management Inc.

Three World Financial Center, 11th Floor

New York, NY 10281-1021

     —           —           *         *%   

Steven J. Douglas

c/o Brookfield Asset Management Inc.

Suite 300, Brookfield Place, 181 Bay

Street, Toronto, Ontario M5J 2T3

     —           —           *         *%   

Jeffrey M. Blidner

c/o Brookfield Asset Management Inc.

Suite 300, Brookfield Place, 181 Bay Street

Toronto, Ontario M5J 2T3

     —           —           *         *%   

Brett M. Fox

c/o Brookfield Asset Management Inc.

Three World Financial Center, 11th Floor

New York, NY 10281-1021

     —           —           *         *%   

All directors as a group

(4 persons)

     —           —           *         *%   

 

 

(1) Approximation assuming Brookfield exercises its redemption right attached to the Redemption-Exchange Units and our company elects to purchase those Redemption-Exchange Units in exchange for units of our company.
* Less than 1%.

 

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    7.B. RELATED PARTY TRANSACTIONS

RELATIONSHIP WITH BROOKFIELD

Brookfield Asset Management

Brookfield Asset Management is a global alternative asset manager with approximately $150 billion in assets under management. It has over a 100-year history of owning and operating assets with a focus on property, renewable power, infrastructure and private equity. Brookfield has a range of public and private investment products and services. Brookfield Asset Management is listed on the NYSE under the symbol “BAM”, on the TSX under the symbol “BAM.A” and on the NYSE Euronext under the symbol “BAMA”.

Brookfield believes its operating experience is an essential differentiating factor in its past ability to generate significant risk-adjusted returns. In addition, Brookfield has demonstrated particular expertise in sourcing and executing large-scale transactions across a wide spectrum of real estate sectors and geographies.

As a global alternative asset manager, Brookfield brings a strong and proven corporate platform supporting legal, tax, operations oversight, investor reporting, portfolio administration and other client services functions. Brookfield’s management team is multi-disciplinary, comprising investment and operations professionals, each with significant expertise in evaluating and executing investment opportunities and investing on behalf of itself and institutional investors.

Following the spin-off, we will continue to be an affiliate of Brookfield and have a number of agreements and arrangements with Brookfield.

While we believe that our ongoing relationship with Brookfield provides us with a unique competitive advantage as well as access to opportunities that would otherwise not be available to us, we operate very differently from an independent, stand-alone entity. We describe below this relationship as well as potential conflicts of interest (and the methods for resolving them) and other material considerations arising from our relationship with Brookfield.

Relationship Agreement

Our company, the Property Partnership, the Holding Entities, the Managers and Brookfield Asset Management have entered into an agreement, referred to as the Relationship Agreement, that governs aspects of the relationship among them. Pursuant to the Relationship Agreement, Brookfield Asset Management has agreed that we will serve as the primary entity through which acquisitions of commercial property will be made by Brookfield Asset Management and its affiliates on a global basis.

In the commercial property industry, it is common for assets to be owned through consortiums and partnerships of institutional equity investors and owner/operators such as ourselves. Accordingly, 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 Asset Management has a strong track record of leading such consortiums and partnerships and actively managing underlying assets to improve performance. Brookfield has also 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. Nothing in the Relationship Agreement will limit or restrict Brookfield from establishing or advising these or similar entities or limit or restrict any such entities from carrying out any investment. Brookfield Asset Management has agreed that it will offer our company the opportunity to take up Brookfield’s share of any investment through these consortium arrangements or by one of these entities that involves the acquisition of commercial property that is suitable for us, subject to certain limitations.

 

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Under the terms of the Relationship Agreement, our company, the Property Partnership and the Holding Entities have acknowledged and agreed that Brookfield carries on a diverse range of businesses worldwide, including the development, ownership and/or management of commercial property, and investing (and advising on investing) in commercial property, or loans, debt instruments and other securities with underlying collateral or exposure to commercial property and that except as explicitly provided in the Relationship Agreement, the Relationship Agreement does not in any way limit or restrict Brookfield from carrying on its business.

Our ability to grow depends in part on Brookfield identifying and presenting us with acquisition opportunities. Brookfield’s commitment to us and our ability to take advantage of opportunities is subject to a number of limitations such as our financial capacity, the suitability of the acquisition in terms of the underlying asset characteristics and its fit with our strategy, limitations arising from the tax and regulatory regimes that govern our affairs and certain other restrictions. See Item 3.D. “Key Information — Risk Factors — Risks Relating to Our Relationship with Brookfield”. Under the terms of the Relationship Agreement, our company, the Property Partnership and the Holding Entities have acknowledged and agreed that, subject to providing us the opportunity to participate on the basis described above, Brookfield may pursue other business activities and provide services to third parties that compete directly or indirectly with us. In addition, Brookfield has established or advised, and may continue to establish or advise, other entities that rely on the diligence, skill and business contacts of Brookfield’s professionals and the information and acquisition opportunities they generate during the normal course of their activities. Our company, the Property Partnership and the Holding Entities have acknowledged and agreed that some of these entities may have objectives that overlap with our objectives or may acquire commercial property that could be considered appropriate acquisitions for us, and that Brookfield may have financial incentives to assist those other entities over us. If any of the Managers determines that an opportunity is not suitable for us, Brookfield may still pursue such opportunity on its own behalf. Our company, the Property Partnership and the Holding Entities have further acknowledged and agreed that nothing in the Relationship Agreement will limit or restrict: (i) Brookfield’s ability to make any investment recommendation or take any other action in connection with its public securities business; (ii) Brookfield from investing in any loans or debt securities or from taking any action in connection with any loan or debt security notwithstanding that the underlying collateral is comprised of or includes commercial property provided that the original purpose of the investment was not to acquire a controlling interest in such property; or (iii) Brookfield from acquiring or holding an investment of less than 5% of the outstanding shares of a publicly traded company or from carrying out any other investment in a company or real estate portfolio where the underlying assets do not principally constitute commercial property. Due to the foregoing, we expect to compete from time to time with other affiliates of Brookfield Asset Management or other third parties for access to the benefits that we expect to realize from Brookfield Asset Management’s involvement in our business.

In the event of the termination of our Master Services Agreement, the Relationship Agreement would also terminate, including Brookfield’s commitments to provide us with acquisition opportunities, as described above.

Under the Relationship Agreement, our company, the Property Partnership and the Holding Entities have agreed that none of Brookfield nor any affiliate, director, officer, employee, contractor, agent, advisor, member, partner, shareholder or other representative of Brookfield, will be liable to us for any claims, liabilities, losses, damages, costs or expenses (including legal fees) arising in connection with the business, investments and activities in respect of or arising from the Relationship Agreement, except to the extent that the claims, liabilities, losses, damages, costs or expenses are determined to have resulted from the person’s bad faith, fraud, willful misconduct or gross negligence, or in the case of a criminal matter, action that the person knew to have been unlawful. The maximum amount of the aggregate liability of Brookfield, or any of its affiliates, or of any director, officer, employee, contractor, agent, advisor, member, partner, shareholder or other representative of Brookfield, will be equal to the amounts previously paid in the two most recent calendar years by the Service Recipients pursuant to our Master Services Agreement.

 

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Other Services

Brookfield may provide services to our operating entities which are outside the scope of our Master Services Agreement under arrangements that are on market terms and conditions and pursuant to which Brookfield will receive fees. The services that may be provided under these arrangements include financial advisory, property management, facilities management, development, relocation services, construction activities, marketing or other services.

Preferred Shares of Certain Holding Entities

Brookfield holds $750 million of redeemable and retractable preferred shares of one of our Holding Entities newly formed under the laws of the Province of Ontario, which it received as partial consideration for causing the Property Partnership to acquire substantially all of Brookfield Asset Management’s commercial property operations. The preferred shares are entitled to receive a cumulative preferential dividend equal to 5.75% of their redemption value as and when declared by the board of directors of the Holding Entity until the fifth anniversary of their issuance, after which the preferred shares will be entitled to receive a cumulative preferential dividend equal to 5.0% plus the prevailing yield for 5-year U.S. Treasury Notes. We are not permitted to draw on our credit facility with Brookfield in order to fund a redemption or retraction of the preferred shares. The preferred shares will be entitled to vote with the common shares of the Holding Entity and will have an aggregate of 1% of the votes to be cast in respect of the Holding Entity

In addition, Brookfield has provided $5 million of working capital to each of the other three Holding Entities (or wholly-owned subsidiaries thereof), for a total of $15 million, through a subscription for preferred shares of such Holding Entities or subsidiaries, as applicable. These preferred shares are entitled to receive a cumulative preferential cash dividend equal to 5% as and when declared by the board of directors of the applicable Holding Entity or subsidiary and are redeemable at the option of the applicable Holding Entity or subsidiary, subject to certain limitations, at any time after the twentieth anniversary of their issuance. The preferred shares will be entitled to vote with the common shares of the applicable Holding Entity or subsidiary and will have an aggregate of 1% of the votes to be cast in respect of any applicable Holding Entity or subsidiary.

Credit Facility

Prior to the consummation of the spin-off, we expect to enter into a three-year unsecured revolving credit facility with Brookfield that will provide borrowings on a revolving basis of up to $500 million, which will be used for working capital purposes. The credit facility will be guaranteed by our company, the Property Partnership and each of the Holding Entities. We expect that no amounts will be drawn as of the date of the spin-off. The credit facility is expected to bear interest at a rate per annum equal to LIBOR plus 2.75%. The credit facility will require us to maintain compliance with a ratio of total debt to total capitalization as well as maintain a minimum tangible net worth and will contain other restrictions on the ability of the borrowers and the guarantors to, among other things, incur liens, engage in certain mergers and consolidations, transact with affiliates, enter into hedging arrangements, and incur guarantees in respect of such hedging arrangements.

Brookfield intends to syndicate the commitments under such facility to other lenders and, in connection with the syndication of such commitments, the terms of such facility may change.

Redemption-Exchange Mechanism

At any time after two years from the date of the spin-off, the holders of Redemption-Exchange Units of the Property Partnership will have the right to require the Property Partnership to redeem all or a portion of the Redemption-Exchange Units for either (a) cash in an amount equal to the market value of one of our units multiplied by the number of units to be redeemed (subject to certain adjustments) or (b) such other amount of cash may be agreed by the relevant holder and the Property Partnership, subject to our company’s right to acquire

 

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such interests (in lieu of redemption) in exchange for our units. See Item 10.B. “Additional Information — Memorandum and Articles of Association — Description of the Property Partnership Limited Partnership Agreement — Redemption-Exchange Mechanism”. Taken together, the effect of the redemption right and the right of exchange is that the holders of Redemption-Exchange Units will receive our units, or the value of such units, at the election of our company. Should we determine not to exercise our right of exchange, cash required to fund a redemption of Redemption-Exchange Units will likely be financed by a public offering of our units.

Registration Rights Agreement

Our company has entered into a customary registration rights agreement with Brookfield pursuant to which we have agreed that, upon the request of Brookfield, our company will file one or more registration statements to register for sale under the U.S. Securities Act of 1933, as amended, or one or more prospectuses to qualify the distribution in Canada of, any of our units held by Brookfield (including units of our company acquired pursuant to the Redemption-Exchange Mechanism). Under the registration rights agreement, our company will not be required to file a U.S. registration statement or a Canadian prospectus unless Brookfield requests that units having a value of at least $50 million be registered or qualified. In the registration rights agreement, we have agreed to pay expenses in connection with such registration and sales, except for any underwriting discounts or commissions, which will be borne by the selling unitholder, and to indemnify Brookfield for material misstatements or omissions in the registration statement and/or prospectus.

Equity Enhancement and Incentive Distributions

Property GP LP, a wholly-owned subsidiary of Brookfield Asset Management, is entitled to receive equity enhancement distributions and incentive distributions from the Property Partnership as a result of its ownership of the general partnership interest in the Property Partnership. Property GP LP will receive quarterly equity enhancement distributions equal to 0.3125% of the amount by which our company’s total capitalization value exceeds an initial reference value determined based on the market capitalization immediately following the spin-off, subject to adjustment as described under “Additional Information — Memorandum and Articles of Association — Description of the Property Partnership Limited Partnership Agreement — Distributions”.

In addition, the Property GP LP will receive incentive distributions calculated in increments based on the amount by which quarterly distributions on the limited partnership units of the Property Partnership exceed specified target levels as set forth in the Property Partnership’s limited partnership agreement. See Item 10.B. “Additional Information — Memorandum and Articles of Association — Description of the Property Partnership Limited Partnership Agreement — Distributions”.

The Property GP LP may, at its sole discretion, elect to reinvest equity enhancement distributions and incentive distributions in exchange for Redemption-Exchange Units.

To the extent that any Holding Entity or any operating entity pays to Brookfield any comparable performance or incentive distribution, the amount of any future incentive distributions will be reduced in an equitable manner to avoid duplication of distributions.

General Partner Distributions

Pursuant to our limited partnership agreement, the BPY General Partner is entitled to receive a general partner distribution equal to 0.2% of the total distributions of our company.

Pursuant to the limited partnership agreement of the Property Partnership, Property GP LP is entitled to receive a general partner distribution from the Property Partnership equal to a share of the total distributions of the Property Partnership in proportion to the Property GP LP’s percentage interest in the Property Partnership which, immediately following the spin-off, will be equal to 1% of the total distributions of the Property

 

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Partnership. See Item 10.B. “Additional Information — Memorandum and Articles of Association — Description of the Property Partnership Limited Partnership Agreement — Distributions”.

Distribution Reinvestment Plan

Following the spin-off, we intend to adopt a distribution reinvestment plan for holders of our units resident in Canada. We may in the future expand our distribution reinvestment plan to include holders of our units resident in the United States. The Property Partnership will also have a distribution reinvestment plan. Brookfield has advised our company that it may from time to time reinvest distributions it receives from the Property Partnership in the Property Partnership’s distribution reinvestment plan. See Item 10.F. “Additional Information — Dividends and Paying Agents — Distribution Reinvestment Plan”.

Indemnification Arrangements

Subject to certain limitations, Brookfield and its directors, officers, agents, subcontractors, contractors, delegates, members, partners, shareholders and employees generally benefit from indemnification provisions and limitations on liability are included in our limited partnership agreement, the BPY General Partner’s bye-laws, the Property Partnership’s limited partnership agreement, our Master Services Agreement and other arrangements with Brookfield. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Our Master Services Agreement”, Item 10.B. “Additional Information — Memorandum and Articles of Association — Description of Our Units and Our Limited Partnership Agreement — Indemnification; Limitations of Liability” and Item 10.B. “Additional Information — Memorandum and Articles of Association — Description of the Property Partnership Limited Partnership Agreement — Indemnification; Limitations of Liability”.

Licensing Agreement

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 Asset Management may terminate the licensing agreement immediately upon termination of our Master Services Agreement and it may be terminated in the circumstances described under Item 4.B. “Information on the Company — Business Overview — Intellectual Property”.

Conflicts of Interest and Fiduciary Duties

Our organizational and ownership structure and strategy involve a number of relationships that may give rise to conflicts of interest between our company and our unitholders, on the one hand, and Brookfield, on the other hand. In particular, conflicts of interest could arise, among other reasons, because:

 

   

in originating and recommending acquisition opportunities, Brookfield has significant discretion to determine the suitability of opportunities for us and to allocate such opportunities to us or to itself or third parties;

 

   

because of the scale of typical commercial property acquisitions and because our strategy includes completing acquisitions through consortium or partnership arrangements with pension funds and other financial sponsors, we will likely make co-investments with Brookfield and Brookfield-sponsored funds or Brookfield-sponsored or co-sponsored consortiums and partnerships involving third party investors to whom Brookfield will owe fiduciary duties, which it does not owe to us;

 

   

the same professionals within Brookfield’s organization who are involved in acquisitions that are suitable for us are responsible for the consortiums and partnerships referred to above, as well as having 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;

 

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there may be circumstances where Brookfield will determine that an acquisition opportunity is not suitable for us because of the fit with our acquisition strategy, limits arising due to regulatory or tax considerations, limits on our financial capacity or because of the immaturity of the target assets and Brookfield is entitled to pursue the acquisition on its own behalf rather than offering us the opportunity to make the acquisition;

 

   

where Brookfield has made an acquisition, it may transfer it to us at a later date after the assets have been developed or we have obtained sufficient financing;

 

   

our relationship with Brookfield involves a number of arrangements pursuant to which Brookfield provides various services, access to financing arrangements and originates acquisition opportunities, and circumstances may arise in which these arrangements will need to be amended or new arrangements will need to be entered into;

 

   

as our arrangements with Brookfield were effectively determined by Brookfield in the context of the spin-off, they may contain terms that are less favorable than those which otherwise might have been negotiated between unrelated parties;

 

   

Brookfield is generally entitled to share in the returns generated by our operations, which could create an incentive for it to assume greater risks when making decisions than it otherwise would in the absence of such arrangements;

 

   

Brookfield is permitted to pursue other business activities and provide services to third parties that compete directly with our business and activities without providing us with an opportunity to participate, which could result in the allocation of Brookfield’s resources, personnel and acquisition opportunities to others who compete with us;

 

   

Brookfield does not owe our company or our unitholders any fiduciary duties, which may limit our recourse against it; and

 

   

the liability of Brookfield and its directors is limited under our arrangements with them, and we have agreed to indemnify Brookfield and its directors against claims, liabilities, losses, damages, costs or expenses which they may face in connection with those arrangements, which may lead them to assume greater risks when making decisions than they otherwise would if such decisions were being made solely for its own account, or may give rise to legal claims for indemnification that are adverse to the interests of our unitholders.

With respect to transactions in which there is greater potential for a conflict of interest to arise, the BPY General Partner may be required to seek the prior approval of its nominating and governance committee pursuant to a conflicts policy that has been approved by its nominating and governance committee. These transactions include: (i) the dissolution of our partnership; (ii) any material amendment to our Master Services Agreement, our limited partnership agreement or the Property Partnership’s limited partnership agreement; (iii) any material service agreement or other arrangement pursuant to which Brookfield will be paid a fee, or other consideration other than any agreement or arrangement contemplated by our Master Services Agreement; (iv) co-investments by us with Brookfield; (v) acquisitions by us from, and dispositions by us to, Brookfield; (vi) any other material transaction involving us and Brookfield; and (vii) termination of, or any determinations regarding indemnification under, our Master Services Agreement. Pursuant to our conflicts policy, the BPY General Partner’s nominating and governance committee may grant prior approvals for any of these transactions in the form of general guidelines, policies or procedures in which case no further special approval will be required in connection with a particular transaction or matter permitted thereby. In certain circumstances, these transactions may be related party transactions for the purposes of, and subject to certain requirements of, Multilateral Instrument 61-101 — Protection of Minority Security Holders in Special Transactions, or MI 61-101. MI 61-101 provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. See “Canadian Securities Law Exemptions” below for application of MI 61-101 to our company.

 

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The conflicts policy states that conflicts be resolved based on the principles of transparency, third-party validation and approvals. The policy recognizes the benefit to us of our relationship with Brookfield and our intent to pursue a strategy that seeks to maximize the benefits from this relationship. The policy also recognizes that the principal areas of potential application of the policy on an ongoing basis will be in connection with our acquisitions and our participation in Brookfield led consortiums and partnership arrangements, together with any management or service arrangements entered into in connection therewith or the ongoing operations of the underlying operating entities.

In general, the policy provides that acquisitions that are carried out jointly by us and Brookfield, or in the context of a Brookfield-led or co-led consortium or partnership be carried out on the basis that the consideration paid by us be no more, on a per share or proportionate basis, than the consideration paid by Brookfield or other participants, as applicable. The policy also provides that any fees or carried interest payable in respect of our proportionate investment, or in respect of an acquisition made solely by us, must be credited in the manner contemplated by the Property Partnership’s limited partnership agreement, where applicable, or that such fees or carried interest must either have been negotiated with another arm’s length participant or otherwise demonstrated to be on market terms (or better). The policy generally provides that if the acquisition involves the purchase by us of an asset from Brookfield, or the participation in a transaction involving the purchase by us and Brookfield of different assets, that a fairness opinion or, in some circumstances, a valuation or appraisal by a qualified expert be obtained. These requirements provided for in the conflicts policy are in addition to any disclosure, approval, or valuation requirements that may arise under applicable law.

Our limited partnership agreement and the limited partnership agreement of the Property Partnership contain various provisions that modify the fiduciary duties that might otherwise be owed to us and our unitholders. These duties include the duties of care and loyalty. In the absence of provisions in the limited partnership agreements of our company and the Property Partnership to the contrary, the duty of loyalty would generally prohibit the BPY General Partner and the Property General Partner from taking any action or engaging in any transaction as to which it has a conflict of interest. The limited partnership agreements of our company and the Property Partnership each prohibit the limited partners from advancing claims that otherwise might raise issues as to compliance with fiduciary duties or applicable law. For example, the agreements provide that the BPY General Partner, the Property General Partner and their affiliates do not have any obligation under the limited partnership agreements of our company or the Property Partnership, or as a result of any duties stated or implied by law or equity, including fiduciary duties, to present business or investment opportunities to our company, the Property Partnership, any Holding Entity or any other holding entity established by us. They also allow affiliates of the BPY General Partner and Property General Partner to engage in activities that may compete with us or our activities. In addition, the agreements permit the BPY General Partner and the Property General Partner to take into account the interests of third parties, including Brookfield, when resolving conflicts of interest.

These modifications to the fiduciary duties are detrimental to our unitholders because they restrict the remedies available for actions that might otherwise constitute a breach of fiduciary duty and permit conflicts of interest to be resolved in a manner that is not always in the best interests of our company or the best interests of our unitholders. We believe it is necessary to modify the fiduciary duties that might otherwise be owed to us and our unitholders, as described above, due to our organizational and ownership structure and the potential conflicts of interest created thereby. Without modifying those duties, the ability of the BPY General Partner and the Property General Partner to attract and retain experienced and capable directors and to take actions that we believe are necessary for the carrying out of our business would be unduly limited due to their concern about potential liability.

Canadian Securities Law Exemptions

MI 61-101 provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. An exemption from such requirements is

 

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available when the fair market value of the transaction is not more than 25% of the market capitalization of the issuer. Our company intends to apply for exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, would permit it to be exempt from the minority approval and valuation requirements for transactions that would have a value of less than 25% of our company’s market capitalization if Brookfield’s indirect equity interest in our company, through its ownership of Redemption-Exchange Units, were included in the calculation of our company’s market capitalization. As a result, the 25% threshold above which the minority approval and valuation requirements would apply would be increased to include the indirect interest in our company held by Brookfield through its ownership of the Redemption-Exchange Units of the Property Partnership. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield — Conflicts of Interest and Fiduciary Duties” above.

OUR MASTER SERVICES AGREEMENT

The Service Recipients have entered into a Master Services Agreement pursuant to which the Managers have agreed to provide or arrange for other service providers to provide management and administration services to our company and the other Service Recipients.

The following is a summary of certain provisions of our Master Services Agreement and is qualified in its entirety by reference to all of the provisions of the agreement. Because this description is only a summary of our Master Services Agreement, it does not necessarily contain all of the information that you may find useful. We therefore urge you to review our Master Services Agreement in its entirety. Copies of our Master Services Agreement will be available electronically on the website of the SEC at www.sec.gov and on 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”.

Appointment of the Managers and Services Rendered

Under our Master Services Agreement, the Service Recipients have appointed the Managers, as the service providers, to provide or arrange for the provision by an appropriate service provider of the following services:

 

   

supervising the carrying out of all day-to-day management, secretarial, accounting, banking, treasury, administrative, liaison, representative, regulatory and reporting functions and obligations;

 

   

providing overall strategic advice to the Holding Entities including advising with respect to the expansion of their business into new markets;

 

   

supervising the establishment and maintenance of books and records;

 

   

identifying and recommending to the Holding Entities acquisitions or dispositions from time to time and, where requested to do so, assisting in negotiating the terms of such acquisitions or dispositions;

 

   

recommending and, where requested to do so, assisting in the raising of funds whether by way of debt, equity or otherwise, including the preparation, review or distribution of any prospectus or offering memorandum in respect thereof and assisting with communications support in connection therewith;

 

   

recommending to the Holding Entities suitable candidates to serve on the boards of directors or the equivalent governing bodies of our operating entities;

 

   

making recommendations with respect to the exercise of any voting rights to which the Holding Entities are entitled in respect of our operating entities;

 

   

making recommendations with respect to the payment of dividends by the Holding Entities or any other distributions by the Service Recipients, including distributions by our company to our unitholders;

 

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monitoring and/or oversight of the applicable Service Recipient’s accountants, legal counsel and other accounting, financial or legal advisors and technical, commercial, marketing and other independent experts, and managing litigation in which a Service Recipient is sued or commencing litigation after consulting with, and subject to the approval of, the relevant board of directors or its equivalent;

 

   

attending to all matters necessary for any reorganization, bankruptcy proceedings, dissolution or winding up of a Service Recipient, subject to approval by the relevant board of directors or its equivalent;

 

   

supervising the making of all tax elections, determinations and designations, the timely calculation and payment of taxes payable and the filing of all tax returns due, by each Service Recipient;

 

   

supervising the preparation of the Service Recipients’ annual consolidated financial statements, quarterly interim financial statements and other public disclosure;

 

   

making recommendations in relation to and effecting the entry into insurance of each Service Recipient’s assets, together with other insurances against other risks, including directors and officers insurance as the relevant service provider and the relevant board of directors or its equivalent may from time to time agree;

 

   

arranging for individuals to carry out the functions of principal executive, accounting and financial officers for our company only for purposes of applicable securities laws;

 

   

providing individuals to act as senior officers of the Holding Entities as agreed from time to time, subject to the approval of the relevant board of directors or its equivalent;

 

   

providing advice, when requested, to the Service Recipients regarding the maintenance of compliance with applicable laws and other obligations; and

 

   

providing all such other services as may from time to time be agreed with the Service Recipients that are reasonably related to the Service Recipient’s day-to-day operations.

The Managers’ activities are subject to the supervision of the board of directors or equivalent governing body of the BPY General Partner and of each of the other Service Recipients, as applicable.

The Managers may, from time to time, appoint an affiliate of Brookfield to act as a new Manager under our Master Services Agreement, effective upon the execution of a joinder agreement by the new Manager.

Management Fee

Pursuant to our Master Services Agreement, we pay a base management fee to the Managers equal to $12.5 million per quarter (subject to an annual escalation by a specified inflation factor beginning on January 1, 2014). For any quarter in which the BPY General Partner determines that there is insufficient available cash to pay the base management fee as well as the next regular distribution on our units, the Service Recipients may elect to pay all or a portion of the base management fee in our units or in limited partnership units of the Property Partnership, subject to certain conditions.

Reimbursement of Expenses and Certain Taxes

We will also reimburse the Managers for any out-of-pocket fees, costs and expenses incurred in the provision of the management and administration services, including those of any third party. However, the Service Recipients are not required to reimburse the Managers for the salaries and other remuneration of their management, personnel or support staff who carry out any services or functions for such Service Recipients or overhead for such persons.

 

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The relevant Service Recipient will reimburse the Managers for all other out-of-pocket fees, costs and expenses incurred in connection with the provision of the services including those of any third party. Such out-of-pocket fees, costs and expenses are expected to include, among other things: (i) fees, costs and expenses relating to any debt or equity financing; (ii) fees, costs and expenses incurred in connection with the general administration of any Service Recipient in respect of services; (iii) taxes, licenses and other statutory fees or penalties levied against or in respect of a Service Recipient; (iv) amounts owed by the Managers under indemnification, contribution or similar arrangements; (v) fees, costs and expenses relating to our financial reporting, regulatory filings and investor relations and the fees, costs and expenses of agents, advisors and other persons who provide services to or on behalf of a Service Recipient; and (vi) any other fees, costs and expenses incurred by the Managers that are reasonably necessary for the performance by the Managers of their duties and functions under our Master Services Agreement.

In addition, the Service Recipients are required to pay all fees, costs and expenses incurred in connection with the investigation, acquisition, holding or disposal of any asset or business that is made or that is proposed to be made by us. Such additional fees, expenses and costs represent out-of-pocket costs associated with investment activities that will be undertaken pursuant to our Master Services Agreement.

The Service Recipients are also required to pay or reimburse the Managers for all sales, use, value added, goods and services, harmonized sales, withholding or other taxes or customs duties or other governmental charges levied or imposed by reason of our Master Services Agreement or any agreement it contemplates, other than income taxes, corporation taxes, capital taxes or other similar taxes payable by the Managers, which are personal to the Managers.

Assignment

Our Master Services Agreement may not be assigned by the Managers without the prior written consent of our company except that (i) the Managers may subcontract or arrange for the provision of services by another service provider, provided that the Managers remain liable under the agreement, and (ii) any of the Managers may assign the agreement to an affiliate or to a person that is its successor by way of merger, amalgamation or acquisition of the business of the Manager.

Termination

Our Master Services Agreement continues in perpetuity until terminated in accordance with its terms. However, the Service Recipients may terminate our Master Services Agreement upon written notice of termination from the BPY General Partner to the Managers if any of the following occurs:

 

   

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;

 

   

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;

 

   

any of the Managers is grossly negligent in the performance of its obligations under the agreement and such gross negligence results in material harm to the Service Recipients; or

 

   

certain events relating to the bankruptcy or insolvency of each of the Managers.

The Service Recipients have no right to terminate for any other reason, including if any of the Managers or Brookfield experiences a change of control. The BPY General Partner may only terminate our Master Services Agreement on behalf of our company with the prior unanimous approval of the BPY General Partner’s independent directors.

 

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Our Master Services Agreement expressly provides that our Master Services Agreement may not be terminated by the BPY General Partner due solely to the poor performance or the underperformance of any of our operations.

The Managers may terminate our Master Services Agreement upon written notice of termination to the BPY General Partner if any Service Recipient 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 Managers and the default continues unremedied for a period of 60 days after written notice of the breach is given to the Service Recipient. The Managers may also terminate our Master Services Agreement upon the occurrence of certain events relating to the bankruptcy or insolvency of the Service Recipients.

If our Master Services Agreement is terminated, the licensing agreement, the Relationship Agreement and any of Brookfield Asset Management’s obligations under the Relationship Agreement will also terminate.

Indemnification and Limitations on Liability

Under our Master Services Agreement, the Managers have not assumed and do not assume any responsibility other than to provide or arrange for the provision of the services called for thereunder in good faith and will not be responsible for any action that the Service Recipients take in following or declining to follow the advice or recommendations of the Managers. In addition, under our Master Services Agreement, the Managers and the related indemnified parties will not be liable to the Service Recipients for any act or omission, except for conduct that involved bad faith, fraud, willful misconduct, gross negligence or in the case of a criminal matter, conduct that the indemnified person knew was unlawful. The maximum amount of the aggregate liability of the Managers or any of their affiliates, or of any director, officer, agent, subcontractor, contractor, delegate, member, partner, shareholder, employee or other representative of the Managers or any of their affiliates, will be equal to the amounts previously paid by the Service Recipients in respect of services pursuant to our Master Services Agreement in the two most recent calendar years. The Service Recipients have agreed to indemnify the Managers, their affiliates, directors, officers, agents, subcontractors, delegates, members, partners, shareholders and employees to the fullest extent permitted by law from and against any claims, liabilities, losses, damages, costs or expenses (including legal fees) incurred by an indemnified person or threatened in connection with our respective businesses, 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 indemnified person’s bad faith, fraud or willful misconduct, gross negligence or in the case of a criminal matter, action that the indemnified person knew to have been unlawful.

Outside Activities

Our Master Services Agreement does not prohibit the Managers or their affiliates from pursuing other business activities or providing services to third parties that compete directly or indirectly with us.

VOTING AGREEMENTS

Our company and Brookfield have determined that it is advisable for our company to have control over the Property General Partner, Property GP LP and the Property Partnership. Accordingly, the Voting Agreement provides our company, through the BPY General Partner, with a number of rights.

Pursuant to the Voting Agreement, any voting rights with respect to the Property General Partner, Property GP LP and the Property Partnership will be voted in favour of the election of directors approved by our company. For these purposes, our company may maintain, from time to time, an approved slate of nominees or provide direction with respect to the approval or rejection of any matter in the form of general guidelines, policies or procedures in which case no further approval or direction will be required. Any such general guidelines, policies or procedures may be modified by our company in its discretion.

 

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In addition, pursuant to the Voting Agreement, any voting rights with respect to the Property General Partner, Property GP LP and the Property Partnership will be voted in accordance with the direction of our company with respect to the approval or rejection of the following matters: (i) any sale of all or substantially all of its assets; (ii) any merger, amalgamation, consolidation, business combination or other material corporate transaction, except in connection with any internal reorganization that does not result in a change of control; (iii) any plan or proposal for a complete or partial liquidation or dissolution, or any reorganization or any case, proceeding or action seeking relief under any existing laws or future laws relating to bankruptcy or insolvency; (iv) any amendment to the limited partnership agreement of Property GP LP or the Property Partnership; or (v) any commitment or agreement to do any of the foregoing.

In addition, pursuant to the Voting Agreement, Brookfield has agreed that it will not exercise its right under the limited partnership agreement for Property GP LP to remove the Property General Partner as the general partner of Property GP LP except with the prior consent of our company.

The Voting Agreement will be terminated: (i) at such time that our company ceases to own any limited partnership interest in the Property Partnership; (ii) at such time that the BPY General Partner (or its successors or permitted assigns) involuntarily ceases to be the general partner of our company; (iii) at such time that that the Property GP LP (or its successors or permitted assigns) involuntarily ceases to be the general partner of Property Partnership; or (iv) at such time that that the Property General Partner (or its successors or permitted assigns) involuntarily ceases to be the general partner of the Property GP LP. In addition, our company is permitted to terminate the Voting Agreement upon 30 days’ notice.

The Voting Agreement also contains restrictions on transfers of the shares of the Property General Partner and provides that Brookfield may transfer shares of the Property General Partner to any of its affiliates.

Our company and Brookfield have also determined that it is advisable for our company to have control over certain of the entities through which we hold our operating entities. Accordingly, our company has entered into voting agreements on substantially the same terms as the Voting Agreement, to provide us, through the BPY General Partner, with voting rights over the entities through which we hold certain of our operating entities, including GGP, Rouse and certain of our private equity funds.

INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS

To the knowledge of our company, no current or former director, officer or employee of our company, nor any associate or affiliate of any of them, is or was indebted to our company at any time since its formation.

At August 3, 2012, the aggregate indebtedness to Brookfield Office Properties, one of our operating entities, or its subsidiaries of all officers, directors and employees and former officers, directors and employees of Brookfield Office Properties and its subsidiaries was C$698,726. No loans have been extended since July 30, 2002 to directors, executives or senior officers of Brookfield Office Properties. At August 3, 2012, Richard B. Clark, the former CEO of Brookfield Office Properties, had an outstanding non-interest bearing loan from Brookfield Office Properties of C$698,726. The largest amount outstanding of such loan during the 12 months ended December 31, 2011 was C$698,726. Mr. Clark’s common shares purchased with the loan are held as security for the loan.

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

Except as disclosed in this Form 20-F, no proposed director or senior officer of the BPY General Partner or the Managers or other insider of our company, nor any associate or affiliate of the foregoing persons, has any existing or potential material conflict of interest with our company, the Property Partnership or any of its subsidiaries or interest in any material transaction involving our company, the Property Partnership or any of its subsidiaries.

 

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7.C. INTERESTS OF EXPERTS AND COUNSEL

Not applicable.

ITEM 8. FINANCIAL INFORMATION

8.A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

See Item 18. “Financial Statements”.

8.B. SIGNIFICANT CHANGES

In April 2012, one of our company’s real estate finance funds obtained control over an operating resort property by foreclosing on a loan receivable. The carrying amount of the loan receivable at March 31, 2012 was $174 million.

On June 19, 2012, Brookfield Office Properties announced that it had entered into an agreement to acquire a portfolio of office buildings and development sites in the City of London for approximately $871 million. The portfolio includes four operating assets totaling 884,000 square feet and two development sites which can accommodate approximately 1.4 million square feet of density. The target closing date of 99 Bishopsgate, Principal Place and the smaller assets is September 30, 2012; 125 Old Broad Street and Leadenhall Court are expected to close in June 2013.

ITEM 9. THE OFFER AND LISTING

9.A. OFFER AND LISTING DETAILS

See Item 9.C. “The Offer and Listing — Markets”.

9.B. PLAN OF DISTRIBUTION

Not applicable.

9.C. MARKETS

There is no public trading market for our units. However, our company intends to apply to list its units on the NYSE and the TSX under the symbol “BPY”. Listing of our units will be subject to our company meeting the listing requirements of the NYSE and the TSX.

9.D. SELLING SHAREHOLDERS

Not applicable.

9.E. DILUTION

Not applicable.

9.F. EXPENSES OF THE ISSUE

Not applicable.

 

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ITEM 10. ADDITIONAL INFORMATION

10.A. SHARE CAPITAL

See Item 4.A. “History and Development of the Company — The Spin-Off — Mechanics of the Spin-Off” and Item 10.B. “Additional Information — Memorandum and Articles of Association — Description of Our Units and Our Limited Partnership Agreement” for information regarding the spin-off, our units and our limited partnership agreement.

Prior Sales

On January 3, 2012, our company issued 900 of our units to Brookfield Asset Management in connection with our formation. On January 5, 2012, the Property Partnership issued 1,000 limited partnership units to our company in connection with its formation.

Transfer Agent and Registrar

We expect that CIBC Mellon Trust Company in Toronto, Ontario will be appointed to act as transfer agent and registrar and American Stock Transfer & Trust Company, LLC in New York, New York will be appointed to act as co-transfer agent and co-registrar for the purpose of registering our limited partnership interests and transfers of our limited partnership interests as provided in our limited partnership agreement.

10.B. MEMORANDUM AND ARTICLES OF ASSOCIATION

DESCRIPTION OF OUR UNITS AND OUR LIMITED PARTNERSHIP AGREEMENT

The following is a description of the material terms of our units and our amended and restated limited partnership agreement, which will be entered into in connection with the consummation of the spin-off, and is qualified in its entirety by reference to all of the provisions of our limited partnership agreement. Because this description is only a summary of the terms of our units and our limited partnership agreement, it does not contain all of the information that you may find useful. For more complete information, you should read our limited partnership agreement, the form of which will be filed as an exhibit to this Form 20-F. The limited partnership agreement will be available electronically on the website of the SEC at www.sec.gov and on our SEDAR profile at www.sedar.com and made available to our holders as described under Item 10.C. “Additional Information Material Contracts” and Item 10.H. “Documents on Display”.

Formation and Duration

Our company is a Bermuda exempted limited partnership registered under the Bermuda Limited Partnership Act 1883 and the Bermuda Exempted Partnerships Act 1992. Our company has a perpetual existence and will continue as a limited liability partnership unless terminated or dissolved in accordance with our limited partnership agreement. Our partnership interests consist of our units, which represent limited partnership interests in our company, and any additional partnership interests representing limited partnership interests that we may issue in the future as described below under “— Issuance of Additional Partnership Interests”.

Management

As required by law, our limited partnership agreement provides for the management and control of our company by a general partner, the BPY General Partner.

 

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Nature and Purpose

Under our limited partnership agreement, the purpose of our company is to: acquire and hold interests in the Property Partnership and, subject to the approval of the BPY General Partner, interests in any other entity; engage in any activity related to the capitalization and financing of our company’s interests in such entities; and engage in any other activity that is incidental to or in furtherance of the foregoing and that is approved by the BPY General Partner and that lawfully may be conducted by a limited partnership organized under the Bermuda Limited Partnership Act 1883, the Bermuda Exempted Partnerships Act 1992 and our limited partnership agreement.

Our Units

Our units are non-voting limited partnership interests in our company. A holder of our units does not hold a share of a body corporate. As holders of units of our company, holders will not have statutory rights normally associated with ownership of shares of a corporation including, for example, the right to bring “oppression” or “derivative” actions. The rights of holders of units of our company are based on our limited partnership agreement, amendments to which may be proposed only by or with the consent of the BPY General Partner as described below under “— Amendment of Our Limited Partnership Agreement”.

Units of our company represent a fractional limited partnership interest in our company and do not represent a direct investment in our company’s assets and should not be viewed by investors as direct securities of our company’s assets. Holders of our units are not entitled to the withdrawal or return of capital contributions in respect of our units, except to the extent, if any, that distributions are made to such holders pursuant to our limited partnership agreement or upon the liquidation of our company as described below under “— Liquidation and Distribution of Proceeds” or as otherwise required by applicable law. Except to the extent expressly provided in our limited partnership agreement, a holder of our units will not have priority over any other holder of our units, either as to the return of capital contributions or as to profits, losses or distributions.

Holders of our units do not have the ability to call meetings of unitholders, and holders of our units are not entitled to vote on matters relating to our company except as described below under “— No Management or Control; No Voting”. Any action that may be taken at a meeting of unitholders may be taken without a meeting if written consent is solicited by or on behalf of the BPY General Partner and receives approval of not less than the minimum percentage of support necessary to authorize or take such action at a meeting as described below under “— Meetings”.

Issuance of Additional Partnership Interests

The BPY General Partner has broad rights to cause our company to issue additional partnership interests and may cause us to issue additional partnership interests (including new classes of partnership interests and options, rights, warrants and appreciation rights relating to such interests) for any partnership purpose, at any time and on such terms and conditions as it may determine without the approval of any limited partners. Any additional partnership interests may be issued in one or more classes, or one or more series of classes, with such designations, preferences, rights, powers and duties (which may be senior to existing classes and series of partnership interests) as may be determined by the BPY General Partner in its sole discretion, all without the approval of our limited partners.

Investments in Property Partnership

If and to the extent that our company raises funds by way of the issuance of equity or debt securities, or otherwise, pursuant to a public offering, private placement or otherwise, an amount equal to the proceeds will be invested in the Property Partnership, unless otherwise agreed by us and the Property Partnership.

 

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Capital Contributions

No partner has the right to withdraw any or all of its capital contribution. The limited partners have no liability for further capital contributions to our company. Each limited partner’s liability will be limited to the amount of capital such partner is obligated to contribute to our company for its limited partner interest plus its share of any undistributed profits and assets, subject to certain exceptions. See “— Limited Liability” below.

Distributions

Distributions to partners of our company will be made only as determined by the BPY General Partner in its sole discretion. However, the BPY General Partner will not be permitted to cause our company to make a distribution if it does not have sufficient cash on hand to make the distribution (including as a result of borrowing), the distribution would render it insolvent, or if, in the opinion of the BPY General Partner, the distribution would leave it with insufficient funds to meet any future or contingent obligations, or the distribution would contravene the Bermuda Limited Partnership Act 1883. For greater certainty, our company, the Property Partnership or one or more of the Holding Entities may (but none is obligated to) borrow money in order to obtain sufficient cash to make a distribution. The amount of taxes withheld or paid by us in respect of our units held by limited partners or the BPY General Partner shall be treated either as a distribution to such partner or as a general expense of our company as determined by the BPY General Partner in its sole discretion.

Any distributions from our company will be made to the limited partners as to 99.8% and to the BPY General Partner as to 0.2%. Each limited partner will receive a pro rata share of distributions made to all limited partners in accordance with the proportion of all outstanding units held by that limited partner. Except for receiving 0.2% of distributions from our company, the BPY General Partner shall not be compensated for its services as the BPY General Partner but it shall be reimbursed for certain expenses. See Item 10.F. “Additional Information — Dividends and Paying Agents — Distribution Policy”.

Allocations of Income and Losses

Limited partners share in the net profits and net losses of our company generally in accordance with their respective percentage interest in our company.

Net income and net losses for U.S. federal income tax purposes will be allocated for each taxable year or other relevant period among our partners using a monthly, quarterly or other permissible convention pro rata on a per unit basis, except to the extent otherwise required by law or pursuant to tax elections made by our company. Each item of income, gain, loss and deduction so allocated to a partner of our partnership generally will be the same source and character as though such partner had realized the item directly.

The income for Canadian federal income tax purposes of our company for a given fiscal year will be allocated to each partner in an amount calculated by multiplying such income by a fraction, the numerator of which is the sum of the distributions received by such partner with respect to such fiscal year and the denominator of which is the aggregate amount of the distributions made by our company to partners with respect to such fiscal year. To such end, any person who was a partner at any time during such fiscal year but who has transferred all of their units before the last day of that fiscal year may be deemed to be a partner on the last day of such fiscal year for the purposes of subsection 96(1) of the Tax Act. Generally, the source and character of items of income so allocated to a partner with respect to a fiscal year of our company will be the same source and character as the distributions received by such partner with respect to such fiscal year.

If, with respect to a given fiscal year, no distribution is made by our company or we have a loss for Canadian federal income tax purposes, one quarter of the income, or loss, as the case may be, for Canadian federal income tax purposes of our company for such fiscal year, will be allocated to the partners of record at the end of each calendar quarter ending in such fiscal year pro rata to their respective percentage interests in our

 

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company, which in the case of the BPY General Partner shall mean 0.2%, and in the case of all of our limited partners shall mean in the aggregate 99.8%, which aggregate percentage interest shall be allocated among the limited partners in the proportion that the number of our units held at each such date by a limited partner is of the total number of our units issued and outstanding at each such date. Generally, the source and character of such income or losses so allocated to a partner at the end of each calendar quarter will be the same source and character as the income or loss earned or incurred by our company in such calendar quarter.

Limited Liability

Assuming that a limited partner does not participate in the control or management of our company or conduct the affairs of, sign or execute documents for or otherwise bind our company within the meaning of the Bermuda Limited Partnership Act 1883 and otherwise acts in conformity with the provisions of our limited partnership agreement, such partner’s liability under the Bermuda Limited Partnership Act 1883 and our limited partnership agreement will be limited to the amount of capital such partner is obligated to contribute to our company for its limited partner interest plus its share of any undistributed profits and assets, except as described below.

If it were determined, however, that a limited partner was participating in the control or management of our company or conducting the affairs of, signing or executing documents for or otherwise binding our company (or purporting to do any of the foregoing) within the meaning of the Bermuda Limited Partnership Act 1883 or the Bermuda Exempted Partnerships Act 1992, such limited partner would be liable as if it were a general partner of our partnership in respect of all debts of our company incurred while that limited partner was so acting or purporting to act. Neither our limited partnership agreement nor the Bermuda Limited Partnership Act 1883 specifically provides for legal recourse against the BPY General Partner if a limited partner were to lose limited liability through any fault of the BPY General Partner. While this does preclude a limited partner from seeking legal recourse, we are not aware of any precedent for such a claim in Bermuda case law.

No Management or Control; No Voting

Our company’s limited partners, 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. Limited partners are not entitled to vote on matters relating to our company, although holders of units are entitled to consent to certain matters with respect to certain amendments to our limited partnership agreement and certain matters with respect to the withdrawal of the BPY General Partner as described in further detail below. Each unit entitles the holder thereof to one vote for the purposes of any approvals of holders of units.

Meetings

The BPY General Partner may call special meetings of the limited partners at a time and place outside of Canada determined by the BPY General Partner on a date not less than 10 days nor more than 60 days after the mailing of notice of the meeting. The limited partners do not have the ability to call a special meeting. Only holders of record on the date set by the BPY General Partner (which may not be less than 10 nor more than 60 days before the meeting) are entitled to notice of any meeting.

Written consents may be solicited only by or on behalf of the BPY General Partner. Any such consent solicitation may specify that any written consents must be returned to our company within the time period, which may not be less than 20 days, specified by the BPY General Partner.

For purposes of determining holders of partnership interests entitled to provide consents to any action described above, the BPY General Partner may set a record date, which may be not less than 10 nor more than 60 days before the date by which record holders are requested in writing by the BPY General Partner to provide

 

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such consents. Only those holders of partnership interests on the record date established by the BPY General Partner will be entitled to provide consents with respect to matters as to which a consent right applies.

Amendment of Our Limited Partnership Agreement

Amendments to our limited partnership agreement may be proposed only by or with the consent of the BPY General Partner. To adopt a proposed amendment, other than the amendments that do not require limited partner approval discussed below, the BPY General Partner must seek approval of a majority of our outstanding units required to approve the amendment, either by way of a meeting of the limited partners to consider and vote upon the proposed amendment or by written approval.

Prohibited Amendments

No amendment may be made that would:

 

  1. enlarge the obligations of any limited partner without its consent, except that any amendment that would have a material adverse effect on the rights or preferences of any class of partnership interests in relation to other classes of partnership interests may be approved by at least a majority of the type or class of partnership interests so affected; or

 

  2. enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise payable by our company to the BPY General Partner or any of its affiliates without the consent of the BPY General Partner, which may be given or withheld in its sole discretion.

The provision of our limited partnership agreement preventing the amendments having the effects described in clauses (1) and (2) above can be amended upon the approval of the holders of at least 90% of the outstanding units.

No Limited Partner Approval

Subject to applicable law, the BPY General Partner may generally make amendments to our limited partnership agreement without the approval of any limited partner to reflect:

 

  1. a change in the name of our company, the location of our registered office or our registered agent;

 

  2. the admission, substitution or withdrawal of partners in accordance with our limited partnership agreement;

 

  3. a change that the BPY General Partner determines is reasonable and necessary or appropriate for our company to qualify or to continue our company’s qualification as an exempted limited partnership under the laws of Bermuda or a partnership in which the limited partners have limited liability under the laws of any jurisdiction or is necessary or advisable in the opinion of the BPY General Partner to ensure that our company will not be treated as an association taxable as a corporation or otherwise taxed as an entity for tax purposes;

 

  4. an amendment that the BPY General Partner determines to be necessary or appropriate to address certain changes in tax regulations, legislation or interpretation;

 

  5. an amendment that is necessary, in the opinion of our counsel, to prevent our company or the BPY General Partner or its directors or officers, from in any manner being subjected to the provisions of the U.S. Investment Company Act of 1940 or similar legislation in other jurisdictions;

 

  6. an amendment that the BPY General Partner determines in its sole discretion to be necessary or appropriate for the creation, authorization or issuance of any class or series of partnership interests or options, rights, warrants or appreciation rights relating to partnership securities;

 

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  7. any amendment expressly permitted in our limited partnership agreement to be made by the BPY General Partner acting alone;

 

  8. any amendment that the BPY General Partner determines in its sole discretion to be necessary or appropriate to reflect and account for the formation by our company of, or its investment in, any corporation, partnership, joint venture, limited liability company or other entity, as otherwise permitted by our limited partnership agreement;

 

  9. a change in our company’s fiscal year and related changes; or

 

  10. any other amendments substantially similar to any of the matters described in (1) through (9) above.

In addition, the BPY General Partner may make amendments to our limited partnership agreement without the approval of any limited partner if those amendments, in the discretion of the BPY General Partner:

 

  1. do not adversely affect our company’s limited partners considered as a whole (including any particular class of partnership interests as compared to other classes of partnership interests) in any material respect;

 

  2. are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any governmental agency or judicial authority;

 

  3. are necessary or appropriate to facilitate the trading of our units or to comply with any rule, regulation, guideline or requirement of any securities exchange on which our units are or will be listed for trading;

 

  4. are necessary or appropriate for any action taken by the BPY General Partner relating to splits or combinations of units under the provisions of our limited partnership agreement; or

 

  5. are required to effect the intent expressed in this Form 20-F or the intent of the provisions of our limited partnership agreement or are otherwise contemplated by our limited partnership agreement.

Opinion of Counsel and Limited Partner Approval

The BPY General Partner will not be required to obtain an opinion of counsel that an amendment will not result in a loss of limited liability to the limited partners if one of the amendments described above under “— No Limited Partner Approval” should occur. No other amendments to our limited partnership agreement will become effective without the approval of holders of at least 90% of our units, unless our company obtains an opinion of counsel to the effect that the amendment will not (i) cause our company to be treated as an association taxable as a corporation or otherwise taxable as an entity for tax purposes (provided that for U.S. tax purposes the BPY General Partner has not made the election described below under “— Election to be Treated as a Corporation”), or (ii) affect the limited liability under the Bermuda Limited Partnership Act 1883 of any of our company’s limited partners.

In addition to the above restrictions, any amendment that would have a material adverse effect on the rights or preferences of any type or class of partnership interests in relation to other classes of partnership interests will also require the approval of the holders of at least a majority of the outstanding partnership interests of the class so affected.

In addition, any amendment that reduces the voting percentage required to take any action must be approved by the written consent or affirmative vote of limited partners whose aggregate outstanding voting units constitute not less than the voting requirement sought to be reduced.

 

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Sale or Other Disposition of Assets

Our limited partnership agreement generally prohibits the BPY General Partner, without the prior approval of the holders of at least 66 2/3% of the voting power of our units, from causing our company to, among other things, sell, exchange or otherwise dispose of all or substantially all of our assets in a single transaction or a series of related transactions. However, the BPY General Partner, in its sole discretion, may mortgage, pledge, hypothecate or grant a security interest in all or substantially all of our assets (including for the benefit of persons who are not our company or our company’s subsidiaries) without that approval. The BPY General Partner may also sell all or substantially all of our assets under any forced sale of any or all of our assets pursuant to the foreclosure or other realization upon those encumbrances without that approval.

Take-Over Bids

If, within 120 days after the date of a take-over bid, as defined in the Securities Act (Ontario), the take-over bid is accepted by holders of not less than 90% of our outstanding units, other than our units held at the date of the take-over bid by the offeror or any affiliate or associate of the offeror, and the offeror acquires the units deposited or tendered under the take-over bid, the offeror will be entitled to acquire our units not deposited under the take-over bid on the same terms as the units acquired under the take-over bid.

Election to be Treated as a Corporation

If the BPY General Partner determines in its sole discretion that it is no longer in our company’s best interests to continue as a partnership for U.S. federal income tax purposes, the BPY General Partner may elect to treat our company as an association or as a publicly-traded partnership taxable as a corporation for U.S. federal (and applicable state) income tax purposes.

Termination and Dissolution

Our company will terminate upon the earlier to occur of: (i) the date on which all of our company’s assets have been disposed of or otherwise realized by us and the proceeds of such disposals or realizations have been distributed to partners; (ii) the service of notice by the BPY General Partner, with the special approval of a majority of its independent directors, that in its opinion the coming into force of any law, regulation or binding authority renders illegal or impracticable the continuation of our company; and (iii) at the election of the BPY General Partner, if our company, as determined by the BPY General Partner, is required to register as an “investment company” under the U.S. Investment Company Act of 1940 or similar legislation in other jurisdictions.

Our partnership will be dissolved upon the withdrawal of the BPY General Partner as the general partner of our partnership (unless a successor entity becomes the general partner as described in the following sentence or the withdrawal is effected in compliance with the provisions of our limited partnership agreement that are described below under “— Withdrawal of the BPY General Partner”) or the date on which any court of competent jurisdiction enters a decree of judicial dissolution of our partnership or an order to wind-up or liquidate the BPY General Partner without the appointment of a successor in compliance with the provisions of our limited partnership agreement that are described below under “— Withdrawal of the BPY General Partner”. Our partnership will be reconstituted and continue without dissolution if within 30 days of the date of dissolution (and provided a notice of dissolution has not been filed with the Bermuda Monetary Authority), a successor general partner executes a transfer deed pursuant to which the new general partner assumes the rights and undertakes the obligations of the general partner, but only if our partnership receives an opinion of counsel that the admission of the new general partner will not result in the loss of limited liability of any limited partner.

 

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Liquidation and Distribution of Proceeds

Upon our dissolution, unless our company is continued as a new limited partnership, the liquidator authorized to wind-up our company’s affairs will, acting with all of the powers of the BPY General Partner that the liquidator deems necessary or appropriate in its judgment, liquidate our company’s assets and apply the proceeds of the liquidation first, to discharge our company’s liabilities as provided in our limited partnership agreement and by law and thereafter to the partners pro rata according to the percentages of their respective partnership interests as of a record date selected by the liquidator. The liquidator may defer liquidation of our assets for a reasonable period of time or distribute assets to partners in kind if it determines that an immediate sale or distribution of all or some of our company’s assets would be impractical or would cause undue loss to the partners.

Withdrawal of the BPY General Partner

The BPY General Partner may withdraw as the general partner without first obtaining approval of our unitholders by giving written notice to the other partners, and that withdrawal will not constitute a violation of our limited partnership agreement.

Upon the withdrawal of a general partner, the holders of at least a majority of our units may select a successor to that withdrawing general partner. If a successor is not selected, or is selected but an opinion of counsel regarding limited liability, tax matters and the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions) cannot be obtained, our company will be dissolved, wound up and liquidated. See “— Termination and Dissolution” above.

In the event of the withdrawal of a general partner, where such withdrawal will violate our limited partnership agreement, a successor general partner will have the option to purchase the general partnership interest of the departing general partner for a cash payment equal to its fair market value. Under all other circumstances where a general partner withdraws, the departing general partner will have the option to require the successor general partner to purchase the general partnership interest of the departing general partner for a cash payment equal to its fair market value. In each case, this fair market value will be determined by agreement between the departing general partner and the successor general partner. If no agreement is reached within 30 days of the general partner’s departure, an independent investment banking firm or other independent expert selected by the departing general partner and the successor general partner will determine the fair market value. If the departing general partner and the successor general partner cannot agree upon an expert within 45 days of the general partner’s departure, then an expert chosen by agreement of the experts selected by each of them will determine the fair market value.

If the option described above is not exercised by either the departing general partner or the successor general partner, the departing general partner’s general partnership interest will automatically convert into units pursuant to a valuation of those interests as determined by an investment banking firm or other independent expert selected in the manner described in the preceding paragraph.

Transfer of the General Partnership Interest

The BPY General Partner may transfer all or any part of its general partnership interests without first obtaining approval of any unitholder. As a condition of this transfer, the transferee must: (i) be an affiliate of the general partner of the Property Partnership (or the transfer must be made concurrently with a transfer of the general partnership units of the Property Partnership to an affiliate of the transferee); (ii) agree to assume the rights and duties of the BPY General Partner to whose interest that transferee has succeeded; (iii) agree to assume and be bound by the provisions of our limited partnership agreement; and (iv) furnish an opinion of counsel regarding limited liability, tax matters and the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions). Any transfer of the general partnership interest is subject to prior notice to and approval of the relevant Bermuda regulatory authorities. At any time, the members of the BPY General Partner may sell or transfer all or part of their shares in the BPY General Partner without the approval of the unitholders.

 

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Partnership Name

If the BPY General Partner ceases to be the general partner of our partnership and our new general partner is not an affiliate of Brookfield, our company will be required by our limited partnership agreement to change our name to a name that does not include “Brookfield” and which could not be capable of confusion in any way with such name. Our limited partnership agreement explicitly provides that this obligation shall be enforceable and waivable by the BPY General Partner notwithstanding that it may have ceased to be the general partner of our partnership.

Transactions with Interested Parties

The BPY General Partner, its affiliates and their respective partners, members, directors, officers, employees and shareholders, which we refer to as “interested parties,” may become limited partners or beneficially interested in limited partners and may hold, dispose of or otherwise deal with our units with the same rights they would have if the BPY General Partner was not a party to our limited partnership agreement. An interested party will not be liable to account either to other interested parties or to our company, our company’s partners or any other persons for any profits or benefits made or derived by or in connection with any such transaction.

Our limited partnership agreement permits an interested party to sell investments to, purchase assets from, vest assets in and enter into any contract, arrangement or transaction with our company, the Property Partnership, any of the Holding Entities, any operating entity or any other holding entity established by our company and may be interested in any such contract, transaction or arrangement and shall not be liable to account either to our company, the Property Partnership, any of the Holding Entities, any operating entity or any other holding entity established by our company or any other person in respect of any such contract, transaction or arrangement, or any benefits or profits made or derived therefrom, by virtue only of the relationship between the parties concerned, subject to the bye-laws of the BPY General Partner.

Outside Activities of the BPY General Partner; Conflicts of Interest

Under our limited partnership agreement, the BPY General Partner is required to maintain as its sole activity the activity of acting as the general partner of our partnership. The BPY General Partner is not permitted to engage in any business or activity or incur or guarantee any debts or liabilities except in connection with or incidental to its performance as general partner or incurring, guaranteeing, acquiring, owning or disposing of debt or equity securities of the Property Partnership, a Holding Entity or any other holding entity established by our company.

Our limited partnership agreement provides that each person who is entitled to be indemnified by our company (other than the BPY General Partner), as described below under “— Indemnification; Limitation on Liability”, will have the right to engage in businesses of every type and description and other activities for profit, and to engage in and possess interests in business ventures of any and every type or description, irrespective of whether: (i) such businesses and activities are similar to our activities; or (ii) such businesses and activities directly compete with, or disfavor or exclude, the BPY General Partner, our company, the Property Partnership, any Holding Entity, any operating entity or any other holding entity established by us. Such business interests, activities and engagements will be deemed not to constitute a breach of our limited partnership agreement or any duties stated or implied by law or equity, including fiduciary duties, owed to any of the BPY General Partner, our company, the Property Partnership, any Holding Entity, any operating entity and any other holding entity established by us (or any of their respective investors), and shall be deemed not to be a breach of the BPY General Partner’s fiduciary duties or any other obligation of any type whatsoever of the BPY General Partner. None of the BPY General Partner, our company, the Property Partnership, any Holding Entity, any operating entity, any other holding entity established by us or any other person shall have any rights by virtue of our limited partnership agreement or the partnership relationship established thereby or otherwise in any business

 

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ventures of any person who is entitled to be indemnified by our company as described below under “— Indemnification; Limitation on Liability”.

The BPY General Partner and the other indemnified persons described in the preceding paragraph do not have any obligation under our limited partnership agreement or as a result of any duties stated or implied by law or equity, including fiduciary duties, to present business or investment opportunities to our company, our limited partners, the Property Partnership, any Holding Entity, any operating entity or any other holding entity established by our company. These provisions do not affect any obligation of an indemnified person to present business or investment opportunities to our company, the Property Partnership, any Holding Entity, any operating entity or any other holding entity established by our company pursuant to the Relationship Agreement or a separate written agreement between such persons.

Any conflicts of interest and potential conflicts of interest that are approved by the BPY General Partner’s nominating and governance committee from time to time will be deemed approved by all partners. Pursuant to our conflicts policy, by a majority vote, independent directors may grant approvals for any of the transactions described above in the form of general guidelines, policies or procedures in which case no further special approval will be required in connection with a particular transaction or matter permitted thereby. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield — Conflicts of Interest and Fiduciary Duties”.

Indemnification; Limitations on Liability

Under our limited partnership agreement, our company is required to indemnify to the fullest extent permitted by law the BPY General Partner and any of its affiliates (and their respective officers, directors, agents, shareholders, partners, members and employees), any person who serves on a governing body of the Property Partnership, a Holding Entity, operating entity or any other holding entity established by our company and any other person designated by the BPY General Partner as an indemnified person, in each case, against all losses, claims, damages, liabilities, costs or expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, incurred by an indemnified person in connection with our investments and activities or by reason of their holding such positions, except to the extent that the claims, liabilities, losses, damages, costs or expenses are determined to have resulted from the indemnified person’s bad faith, fraud or willful misconduct, or in the case of a criminal matter, action that the indemnified person knew to have been unlawful. In addition, under our limited partnership agreement: (i) the liability of such persons has been limited to the fullest extent permitted by law, except to the extent that their conduct involves bad faith, fraud or willful misconduct, or in the case of a criminal matter, action that the indemnified person knew to have been unlawful; and (ii) any matter that is approved by the independent directors of the BPY General Partner will not constitute a breach of our limited partnership agreement or any duties stated or implied by law or equity, including fiduciary duties. Our limited partnership agreement requires us to advance funds to pay the expenses of an indemnified person in connection with a matter in which indemnification may be sought until it is determined that the indemnified person is not entitled to indemnification.

Accounts, Reports and Other Information

Under our limited partnership agreement, within the time required by applicable law, including any rules of any applicable securities exchange, the BPY General Partner is required to prepare financial statements in accordance with IFRS or such other appropriate accounting principles as determined from time to time and make publicly available as of a date selected by the BPY General Partner, in its sole discretion, our company’s financial statements together with a statement of the accounting policies used in their preparation, such information as may be required by applicable laws and regulations and such information as the BPY General Partner deems appropriate. Our company’s annual financial statements must be audited by an independent accounting firm of international standing. Our company’s quarterly financial statements may be unaudited and

 

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will be made available publicly as and within the time period required by applicable laws and regulations, including any rules of any applicable securities exchange.

The BPY General Partner is also required to use commercially reasonable efforts to prepare and send to the limited partners of our partnership on an annual basis a Schedule K-1 (or equivalent). The BPY General Partner will, where reasonably possible, prepare and send information required by the non-U.S. limited partners of our partnership for U.S. federal income tax reporting purposes. The BPY General Partner will also use commercially reasonable efforts to supply information required by limited partners of our partnership for Canadian federal income tax purposes.

Governing Law; Submission to Jurisdiction

Our limited partnership agreement is governed by and will be construed in accordance with the laws of Bermuda. Under our limited partnership agreement, each of our company’s partners (other than governmental entities prohibited from submitting to the jurisdiction of a particular jurisdiction) will submit to the non-exclusive jurisdiction of any court in Bermuda in any dispute, suit, action or proceeding arising out of or relating to our limited partnership agreement. Each partner waives, to the fullest extent permitted by law, any immunity from jurisdiction of any such court or from any legal process therein and further waives, to the fullest extent permitted by law, any claim of inconvenient forum, improper venue or that any such court does not have jurisdiction over the partner. Any final judgment against a partner in any proceedings brought in a court in Bermuda will be conclusive and binding upon the partner and may be enforced in the courts of any other jurisdiction of which the partner is or may be subject, by suit upon such judgment. The foregoing submission to jurisdiction and waivers will survive the dissolution, liquidation, winding up and termination of our company.

Transfers of Units

We are not required to recognize any transfer of our units until certificates, if any, evidencing such units are surrendered for registration of transfer. Each person to whom a unit is transferred (including any nominee holder or an agent or representative acquiring such unit for the account of another person) will be admitted to our partnership as a partner with respect to the unit so transferred subject to and in accordance with the terms of our limited partnership agreement. Any transfer of a unit will not entitle the transferee to share in the profits and losses of our company, to receive distributions, to receive allocations of income, gain, loss, deduction or credit or any similar item or to any other rights to which the transferor was entitled until the transferee becomes a partner and a party to our limited partnership agreement.

By accepting a unit for transfer in accordance with our limited partnership agreement, each transferee will be deemed to have:

 

   

executed our limited partnership agreement and become bound by the terms thereof;

 

   

granted an irrevocable power of attorney to the BPY General Partner or the liquidator of our company and any officer thereof to act as such partner’s agent and attorney-in-fact to execute, swear to, acknowledge, deliver, file and record in the appropriate public offices: (i) all certificates, documents and other instruments relating to the existence or qualification of our company as an exempted limited partnership (or a partnership in which the limited partners have limited liability) in Bermuda and in all jurisdictions in which our company may conduct activities and affairs or own property; any amendment, change, modification or restatement of our limited partnership agreement, subject to the requirements of our limited partnership agreement; the dissolution and liquidation of our company; the admission or withdrawal of any partner of our partnership or any capital contribution of any partner of our partnership; the determination of the rights, preferences and privileges of any class or series of units or other partnership interests of our company, and any tax election with any limited partner or general partner on behalf of our partnership or the partners; and (ii) subject to the requirements of our limited partnership agreement, all ballots,

 

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consents, approvals, waivers, certificates, documents and other instruments necessary or appropriate, in the sole discretion of the BPY General Partner or the liquidator of our company, to make, evidence, give, confirm or ratify any voting consent, approval, agreement or other action that is made or given by our company’s partners or is consistent with the terms of our limited partnership agreement or to effectuate the terms or intent of our limited partnership agreement;

 

   

made the consents and waivers contained in our limited partnership agreement, including with respect to the approval of the transactions and agreements entered into in connection with our formation and the spin-off; and

 

   

ratified and confirmed all contracts, agreements, assignments and instruments entered into on behalf of our company in accordance with our limited partnership agreement, including the granting of any charge or security interest over the assets of our company and the assumption of any indebtedness in connection with the affairs of our company.

The transfer of any unit and the admission of any new partner to our partnership will not constitute any amendment to our limited partnership agreement.

Book-Based System

Our units may be represented in the form of one or more fully registered unit certificates held by, or on behalf of, the Canadian Depository for Securities, or CDS, or the Depository Trust Company, or DTC, as applicable, as custodian of such certificates for the participants of CDS or DTC, registered in the name of CDS or DTC or their respective nominee, and registration of ownership and transfers of our units may be effected through the book-based system administered by CDS or DTC as applicable.

 

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DESCRIPTION OF THE PROPERTY PARTNERSHIP LIMITED PARTNERSHIP AGREEMENT

The following is a description of the material terms of the Property Partnership’s limited partnership agreement, which will be entered into in connection with the consummation of the spin-off, and is qualified in its entirety by reference to all of the provisions of such agreement. You will not be a limited partner of the Property Partnership and will not have any rights under its limited partnership agreement. However, pursuant to the Voting Agreement, our company, through the BPY General Partner, will have a number of voting rights , including the right to direct all eligible votes in the election of the directors of the Property General Partner.

We have included a summary of what we believe are the most important provisions of the Property Partnership’s limited partnership agreement because we intend to conduct our operations through the Property Partnership and the Holding Entities and our rights with respect to our equity holding in the Property Partnership will be governed by the terms of the Property Partnership’s limited partnership agreement. Because this description is only a summary of the terms of the agreement, it does not contain all of the information that you may find useful. For more complete information, you should read the Property Partnership’s limited partnership agreement, the form of which will be filed as an exhibit to this Form 20-F. The agreement will be available electronically on the website of the SEC at www.sec.gov and on 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”.

Formation and Duration

The Property Partnership is a Bermuda exempted limited partnership registered under the Bermuda Limited Partnership Act 1883 and the Bermuda Exempted Partnerships Act 1992. The Property Partnership has a perpetual existence and will continue as a limited liability partnership unless the partnership is terminated or dissolved in accordance with its limited partnership agreement.

Management

As required by law, the Property Partnership’s limited partnership agreement provides for the management and control of the Property Partnership by a general partner, the Property GP LP.

Nature and Purpose

Under its limited partnership agreement, the purpose of the Property Partnership is to: acquire and hold interests in the Holding Entities and, subject to the approval of the Property GP LP, any other entity; engage in any activity related to the capitalization and financing of the Property Partnership’s interests in such entities; and engage in any other activity that is incidental to or in furtherance of the foregoing and that is approved by the Property GP LP and that lawfully may be conducted by a limited partnership organized under the Bermuda Limited Partnership Act 1883, the Bermuda Exempted Partnerships Act 1992 and our limited partnership agreement.

Units

The Property Partnership has two classes of units: class A non-voting limited partnership interests in the Property Partnership, or the Class A Units, and the Redemption-Exchange Units. Holders of either class of Property Partnership units are not entitled to the withdrawal or return of capital contributions in respect of their units, except to the extent, if any, that distributions are made to such holders pursuant to the Property Partnership’s limited partnership agreement or upon the dissolution of the Property Partnership as described below under “— Dissolution” or as otherwise required by applicable law. Holders of the Property Partnership’s units are not entitled to vote on matters relating to the Property Partnership except as described below under “— No Management or Control; No Voting”. Except to the extent expressly provided in the Property Partnership’s limited partnership agreement, a holder of Property Partnership units will not have priority over any other holder

 

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of Property Partnership units, either as to the return of capital contributions or as to profits, losses or distributions. The Property Partnership’s limited partnership agreement does not contain any restrictions on ownership of the Property Partnership units. The units of the Property Partnership have no par or other stated value.

The Redemption-Exchange Units will be identical to the Class A Units, except as described below under “— Distributions” and “— No Management or Control; No Voting” and except that they will have the right of redemption or exchange as described below under “— Redemption-Exchange Mechanism”.

In connection with the spin-off, the Class A Units of the Property Partnership will be issued to our company and the Redemption-Exchange Units will be issued to one or more wholly-owned subsidiaries of Brookfield Asset Management.

Issuance of Additional Partnership Interests

The Property Partnership may issue additional partnership interests (including Class A Units and Redemption-Exchange Units as well as new classes of partnership interests and options, rights, warrants and appreciation rights relating to such interests) for any partnership purpose, at any time and on such terms and conditions as the Property GP LP may determine without the approval of any limited partners. Any additional partnership interests may be issued in one or more classes, or one or more series of classes, with such designations, preferences, rights, powers and duties (which may be senior to existing classes and series of partnership interests) as may be determined by Property GP LP in its sole discretion, all without the approval of our limited partners.

Redemption-Exchange Mechanism

At any time after two years from the date of closing of the spin-off, the holders of the Redemption-Exchange Units will have the right to require the Property Partnership to redeem all or a portion of the Redemption-Exchange Units for cash, subject to our company’s right to acquire such interests for our units as described below. Any such holder may exercise its right of redemption by delivering a notice of redemption to the Property Partnership and our company.

After presentation for redemption, it will receive, subject to our company’s right to acquire such interests (in lieu of redemption) in exchange for units of our company, for each unit that is presented, either (a) cash in an amount equal to the market value of one of our units multiplied by the number of units to be redeemed (as determined by reference to the five day volume weighted average of the trading price of our units on the principal stock exchange for our units based on trading volumes) or (b) such other amount of cash as may be agreed by such holder and the Property Partnership. Upon its receipt of the redemption notice, our company will have a right to elect, at its sole discretion, to acquire all (but not less than all) Redemption-Exchange Units presented to the Property Partnership for redemption in exchange for units of our company on a one for one basis. Upon a redemption, the holder’s right to receive distributions with respect to the Property Partnership Redemption-Exchange Units so redeemed will cease.

The date of exchange specified in any redemption notice may not be less than five business days nor more than twenty business days after the date upon which the redemption notice is received by the Property Partnership and our company. At any time prior to the applicable redemption-exchange date, any holder of Redemption-Exchange Units who delivers a redemption notice will be entitled to withdraw such redemption notice.

Based on the number of our units to be distributed in the spin-off to holders of Brookfield Asset Management’s Class A limited voting shares and Class B limited voting shares, the number of our units to be held by Brookfield Asset Management after the spin-off and the number of Redemption-Exchange Units

 

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Brookfield will receive, Brookfield’s aggregate limited partnership interest in our company is currently anticipated to be approximately 90% if it exercised its redemption right in full and our company exercised its right to acquire such interests in exchange for units of our company on the Property Partnership Redemption-Exchange Units redeemed. Brookfield’s total percentage interest in our company would be increased if it participates in the Property Partnership’s distribution reinvestment plan.

Distributions

Distributions by the Property Partnership will be made in the sole discretion of the Property GP LP. However, the Property GP LP will not be permitted to cause the Property Partnership to make a distribution if the Property Partnership does not have sufficient cash on hand to make the distribution, the distribution would render the Property Partnership insolvent or if, in the opinion of the Property GP LP, the distribution would or might leave the Property Partnership with insufficient funds to meet any future or contingent obligations, or the distribution would contravene the Bermuda Limited Partnership Act 1883. For greater certainty, the Property Partnership or one or more of the Holding Entities may (but none is obligated to) borrow money in order to obtain sufficient cash to make a distribution.

Except as set forth below, prior to the dissolution of the Property Partnership, distributions of available cash (if any), including cash that has been borrowed for such purpose, in any given quarter will be made by the Property Partnership as follows, referred to as the Regular Distribution Waterfall:

 

   

first, 100% of any available cash to our company until our company has been distributed an amount equal to our expenses and outlays for the quarter properly incurred;

 

   

second, to the extent distributions in respect of Redemption-Exchange Units have accrued in previous quarters (as described in the next paragraph), 100% to all the holders of Redemption-Exchange Units pro rata in proportion to their respective percentage interests (which will be calculated using Redemption-Exchange Units only) (which distribution will be treated as having been made pursuant to the fourth and fifth provision below, as applicable) of all amounts that have been accrued in previous quarters and not yet recovered to the holders of Redemption-Exchange Units;

 

   

third, 100% of any available cash then remaining to the Property GP LP until an amount equal to 0.3125% of the amount by which our company’s total capitalization value exceeds the total capitalization value of our company determined immediately following the spin-off has been distributed to the Property GP LP, provided that for any quarter in which the Property GP LP determines that there is insufficient cash to pay this equity enhancement distribution, the Property GP LP may elect to pay all or a portion of this distribution in Redemption-Exchange Units. This distribution for any quarter will be reduced by an amount equal to (i) fees in excess of the base management fee of $12.5 million (plus the amount of any annual escalation by the specified inflation factor) are payable under our Master Services Agreement in such quarter plus (ii) the proportion of each cash payment in relation to such quarter made by an Operating Entity to Brookfield, including any payment made in the form of a dividend, distribution or other profit entitlement, which the Property GP LP determines to be comparable to this equity enhancement distribution that is attributable to the amount that a Service Recipient has committed and/or contributed at such time (either as debt or equity) to such Operating Entity (and, in the case of a commitment, as set forth in the terms of the subscription agreement or other underlying documentation with respect to such Operating Entity at or prior to such time), provided that the aggregate amount of any such payments under this clause (ii) will not exceed an amount equal to 0.3125% of the amount the Service Recipient has so committed and/or contributed. The total capitalization value of our company will be equal to the aggregate of the value of all of our outstanding units and the securities of other Service Recipients that are not held by our company, the Property Partnership, the Holding Entities, the operating entities or any other direct or indirect

 

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subsidiary of a Holding Entity, plus all outstanding third party debt (including, generally, debt owed to Brookfield but not amounts owed under the Brookfield revolving credit facility that will be in place at closing of the spin-off) with recourse against our company, the Property Partnership or a Holding Entity, less all cash held by such entities;

 

   

fourth, 100% of any available cash then remaining to the owners of the Property Partnership’s partnership interests, pro rata to their percentage interests, until an amount equal to the First Distribution Threshold, estimated to be $0.275 per unit, has been distributed in respect of each limited partnership unit during such quarter;

 

   

fifth, 85% of any available cash then remaining to the owners of the Property Partnership’s partnership interests, pro rata to their percentage interests, and 15% to the Property GP LP, until an amount equal to the Second Distribution Threshold, estimated to be $0.30 per unit, has been distributed in respect of each Property Partnership limited partnership unit during such quarter; and

 

   

thereafter, 75% of any available cash then remaining to the owners of the Property Partnership’s partnership interests, pro rata to their percentage interests, and 25% to the Property GP LP.

If, prior to the dissolution of the Property Partnership, available cash in any quarter is not sufficient to pay a distribution to the owners of all Property Partnership interests, pro rata to their percentage interest, then the Property General Partner may elect to pay the distribution at the then current level first to our company, in respect of the Class A Units of the Property Partnership held by our company, and then to the holders of the Redemption-Exchange Units to the extent practicable, and shall accrue any such deficiency for payment from available cash in future quarters as described above.

If, prior to the dissolution of the Property Partnership, available cash is deemed by the Property GP LP, in its sole discretion, to be (i) attributable to sales or other dispositions of the Property Partnership’s assets, and (ii) representative of unrecovered capital, then such available cash shall be distributed to the partners of the Property Partnership in proportion to the unrecovered capital attributable to the Property Partnership interests held by the partners until such time as the unrecovered capital attributable to each such partnership interest is equal to zero. Thereafter, distributions of available cash made by the Property Partnership (to the extent made prior to dissolution) will be made in accordance with the Regular Distribution Waterfall.

Upon the occurrence of an event resulting in the dissolution of the Property Partnership, all cash and property of the Property Partnership in excess of that required to discharge the Property Partnership’s liabilities will be distributed as follows: (i) to the extent such cash and/or property is attributable to a realization event occurring prior to the event of dissolution, such cash and/or property will be distributed in accordance with the Regular Distribution Waterfall and/or the distribution waterfall applicable to unrecovered capital, (ii) the aggregate amount of distributions previously deferred in respect of the Redemption-Exchange Units and not previously recovered and (iii) all other cash and/or property will be distributed in the manner set forth below:

 

   

first, 100% to our company until our company has received an amount equal to the excess of: (i) the amount of our outlays and expenses incurred during the term of the Property Partnership; over (ii) the aggregate amount of distributions received by our company pursuant to the first tier of the Regular Distribution Waterfall during the term of the Property Partnership;

 

   

second, 100% to the Property GP LP until the Property GP LP has received an amount equal to the fair market value of the equity enhancement distribution entitlement, as determined by a qualified independent valuator in accordance with the Property Partnership’s limited partnership agreement, provided that such amount may not exceed 2.5 times the aggregate equity enhancement distribution payments made to the Property GP LP during the immediately prior 24 months;

 

   

third, 100% to the partners of the Property Partnership, in proportion to their respective amounts of unrecovered capital in the Property Partnership;

 

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fourth, 100% to the owners of the Property Partnership’s partnership interests, pro rata to their percentage interests, until an amount has been distributed in respect of each Property Partnership limited partnership unit equal to the excess of: (i) the First Distribution Threshold for each quarter during the term of the Property Partnership (subject to adjustment upon the subsequent issuance of additional partnership interests in the Property Partnership); over (ii) the aggregate amount of distributions made in respect of a Property Partnership limited partnership unit pursuant to the third tier of the Regular Distribution Waterfall during the term of the Property Partnership (subject to adjustment upon the subsequent issuance of additional partnership interests in the Property Partnership);

 

   

fifth, 85% to the owners of the Property Partnership’s partnership interests, pro rata to their percentage interests, and 15% to the Property GP LP, until an amount has been distributed in respect of each Property Partnership limited partnership unit equal to the excess of: (i) the Second Distribution Threshold less the First Distribution Threshold for each quarter during the term of the Property Partnership (subject to adjustment upon the subsequent issuance of additional partnership interests in the Property Partnership); over (ii) the aggregate amount of distributions made in respect of an Property Partnership limited partnership unit pursuant to the fourth tier of the Regular Distribution Waterfall during the term of the Property Partnership (subject to adjustment upon the subsequent issuance of additional partnership interests in the Property Partnership); and

 

   

thereafter, 75% to the owners of the Property Partnership’s partnership interests, pro rata to their percentage interests, and 25% to the Property GP LP.

Each partner’s percentage interest is determined by the relative portion of all outstanding partnership interests held by that partner from time to time and is adjusted upon and reflects the issuance of additional partnership interests of the Property Partnership. In addition, the unreturned capital attributable to each of the partnership interests, as well as certain of the distribution thresholds set forth above, may be adjusted pursuant to the terms of the limited partnership agreement of the Property Partnership so as to ensure the uniformity of the economic rights and entitlements of: (i) the previously outstanding Property Partnership’s partnership interests; and (ii) the subsequently-issued Property Partnership’s partnership interests.

The limited partnership agreement of the Property Partnership provides that, to the extent that any Holding Entity or any operating entity pays to Brookfield any comparable performance or incentive distribution, the amount of any incentive distributions paid to the Property GP LP in accordance with the distribution entitlements described above will be reduced in an equitable manner to avoid duplication of distributions.

The Property GP LP may elect, at its sole discretion, to reinvest equity enhancement distributions and incentive distributions in Redemption-Exchange Units.

No Management or Control; No Voting

The Property Partnership’s limited partners, in their capacities as such, may not take part in the management or control of the activities and affairs of the Property Partnership and do not have any right or authority to act for or to bind the Property Partnership or to take part or interfere in the conduct or management of the Property Partnership. Limited partners are not entitled to vote on matters relating to the Property Partnership, although holders of units are entitled to consent to certain matters as described below under “— Amendment of the Property Partnership Limited Partnership Agreement”, “— Opinion of Counsel and Limited Partner Approval”, and “— Withdrawal of the General Partner” which may be effected only with the consent of the holders of the percentages of outstanding units of the Property Partnership specified below. For purposes of any approval required from holders of the Property Partnership’s units, if Brookfield and its subsidiaries are entitled to vote, they will be entitled to one vote per unit held subject to a maximum number of votes equal to 49% of the total number of units of the Property Partnership then issued and outstanding. Each unit entitles the holder thereof to one vote for the purposes of any approvals of holders of units.

 

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In addition, pursuant to the Voting Agreement, our company, through the BPY General Partner, has a number of voting rights, including the right to direct all eligible votes in the election of the directors of the Property General Partner. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Voting Agreements”.

Meetings

The Property GP LP may call special meetings of the limited partners at a time and place outside of Canada determined by it on a date not less than 10 days nor more than 60 days after the mailing of notice of the meeting. Special meetings of the limited partners may also be called by limited partners owning 50% or more of the outstanding partnership interests of the class or classes for which a meeting is proposed. For this purpose, the partnership interests outstanding do not include partnership interests owned by the Property GP LP or Brookfield. Only holders of record on the date set by the Property GP LP (which may not be less than 10 days nor more than 60 days, before the meeting) are entitled to notice of any meeting.

Amendment of the Property Partnership Limited Partnership Agreement

Amendments to the Property Partnership’s limited partnership agreement may be proposed only by or with the consent of the Property GP LP. To adopt a proposed amendment, other than the amendments that do not require limited partner approval discussed below, the Property GP LP must seek approval of a majority of the Property Partnership’s outstanding units required to approve the amendment, either by way of a meeting of the limited partners to consider and vote upon the proposed amendment or by written approval. For this purpose, the Redemption-Exchange Units will not constitute a separate class and will vote together with the other outstanding limited partnership units of the Property Partnership.

For purposes of any approval required from holders of the Property Partnership’s units, if Brookfield and its subsidiaries are entitled to vote, they will be entitled to one vote per unit held subject to a maximum number of votes equal to 49% of the total voting power of all units of the Property Partnership then issued and outstanding.

Prohibited Amendments

No amendment may be made that would:

 

  1. enlarge the obligations of any limited partner without its consent, except that any amendment that would have a material adverse effect on the rights or preferences of any class of partnership interests in relation to other classes of partnership interests may be approved by at least a majority of the type or class of partnership interests so affected; or

 

  2. enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise payable by the Property Partnership to the Property GP LP or any of its affiliates without the consent of the Property GP LP which may be given or withheld in its sole discretion.

The provision of the Property Partnership’s limited partnership agreement preventing the amendments having the effects described in clauses (1) or (2) above can be amended upon the approval of the holders of at least 90% of the outstanding units.

 

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No Limited Partner Approval

Subject to applicable law, the Property GP LP may generally make amendments to the Property Partnership’s limited partnership agreement without the approval of any limited partner to reflect:

 

  1. a change in the name of the partnership, the location of the partnership’s registered office or the partnership’s registered agent;

 

  2. the admission, substitution, withdrawal or removal of partners in accordance with the limited partnership agreement;

 

  3. a change that the Property GP LP determines is reasonable and necessary or appropriate for the partnership to qualify or to continue its qualification as an exempted limited partnership under the laws of Bermuda or a partnership in which the limited partners have limited liability under the laws of any jurisdiction or is necessary or advisable in the opinion of the Property GP LP to ensure that the Property Partnership will not be treated as an association taxable as a corporation or otherwise taxed as an entity for tax purposes;

 

  4. an amendment that the Property GP LP determines to be necessary or appropriate to address certain changes in tax regulations, legislation or interpretation;

 

  5. an amendment that is necessary, in the opinion of counsel, to prevent the Property Partnership or the Property GP LP or its directors or officers, from in any manner being subjected to the provisions of the U.S. Investment Company Act of 1940 or similar legislation in other jurisdictions;

 

  6. an amendment that the Property GP LP determines in its sole discretion to be necessary or appropriate for the creation, authorization or issuance of any class or series of partnership interests or options, rights, warrants or appreciation rights relating to partnership interests;

 

  7. any amendment expressly permitted in the Property Partnership’s limited partnership agreement to be made by the Property GP LP acting alone;

 

  8. any amendment that the Property GP determines in its sole discretion to be necessary or appropriate to reflect and account for the formation by the partnership of, or its investment in, any corporation, partnership, joint venture, limited liability company or other entity, as otherwise permitted by the Property Partnership’s limited partnership agreement;

 

  9. a change in the Property Partnership’s fiscal year and related changes;

 

  10. any amendment concerning the computation or allocation of specific items of income, gain, expense or loss among the partners that, in the sole discretion of the Property GP LP, is necessary or appropriate to: (i) comply with the requirements of applicable law; (ii) reflect the partners’ interests in the Property Partnership; or (iii) consistently reflect the distributions made by the Property Partnership to the partners pursuant to the terms of the limited partnership agreement of the Property Partnership;

 

  11. any amendment that the Property GP LP determines in its sole discretion to be necessary or appropriate to address any statute, rule, regulation, notice, or announcement that affects or could affect the U.S. federal income tax treatment of any allocation or distribution related to any interest of the Property GP LP in the profits of the Property Partnership; or

 

  12. any other amendments substantially similar to any of the matters described in (1) through (11) above.

 

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In addition, the Property GP LP may make amendments to the Property Partnership’s limited partnership agreement without the approval of any limited partner if those amendments, in the discretion of the Property GP LP:

 

  1. do not adversely affect the Property Partnership’s limited partners considered as a whole (including any particular class of partnership interests as compared to other classes of partnership interests) in any material respect;

 

  2. are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any governmental agency or judicial authority;

 

  3. are necessary or appropriate for any action taken by the Property GP LP relating to splits or combinations of units under the provisions of the Property Partnership’s limited partnership agreement; or

 

  4. are required to effect the intent expressed in this Form 20-F or the intent of the provisions of the Property Partnership’s limited partnership agreement or are otherwise contemplated by the Property Partnership’s limited partnership agreement.

Opinion of Counsel and Limited Partner Approval

The Property GP LP will not be required to obtain an opinion of counsel that an amendment will not result in a loss of limited liability to the limited partners if one of the amendments described above under “— No Limited Partner Approval” should occur. No other amendments to the Property Partnership’s limited partnership agreement will become effective without the approval of holders of at least 90% of the Property Partnership’s units, unless it obtains an opinion of counsel to the effect that the amendment will not (i) cause the Property Partnership to be treated as an association taxable as a corporation or otherwise taxable as an entity for tax purposes (provided that for U.S. tax purposes the Property GP LP has not made the election described below under “— Election to be Treated as a Corporation”), or (ii) affect the limited liability under the Bermuda Limited Partnership Act 1883 of any of the Property Partnership’s limited partners.

In addition to the above restrictions, any amendment that would have a material adverse effect on the rights or preferences of any type or class of partnership interests in relation to other classes of partnership interests will also require the approval of the holders of at least a majority of the outstanding partnership interests of the class so affected.

In addition, any amendment that reduces the voting percentage required to take any action must be approved by the written consent or affirmative vote of limited partners whose aggregate outstanding voting units constitute not less than the voting requirement sought to be reduced.

Sale or Other Disposition of Assets

The Property Partnership’s limited partnership agreement generally prohibits the Property GP LP, without the prior approval of the holders of a majority of the units of the Property Partnership, from causing the Property Partnership to, among other things, sell, exchange or otherwise dispose of all or substantially all of the Property Partnership’s assets in a single transaction or a series of related transactions, including by approving on the Property Partnership’s behalf the sale, exchange or other disposition of all or substantially all of the assets of the Property Partnership’s subsidiaries. However, the Property GP LP, in its sole discretion, may mortgage, pledge, hypothecate or grant a security interest in all or substantially all of the Property Partnership’s assets (including for the benefit of persons who are not the Property Partnership or the Property Partnership’s subsidiaries) without that approval. The Property GP LP may also sell all or substantially all of the Property Partnership’s assets under any forced sale of any or all of the Property Partnership’s assets pursuant to the foreclosure or other realization upon those encumbrances without that approval.

 

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Election to be Treated as a Corporation

If the Property GP LP determines that it is no longer in the Property Partnership’s best interests to continue as a partnership for U.S. federal income tax purposes, the Property GP LP may elect to treat the Property Partnership as an association or as a publicly-traded partnership taxable as a corporation for U.S. federal (and applicable state) income tax purposes.

Dissolution

The Property Partnership will dissolve and its affairs will be wound up upon the earlier to occur of: (i) the service of notice by the Property GP LP, with the approval of a majority of the members of the independent directors of the Property General Partner, that in the opinion of the Property GP LP the coming into force of any law, regulation or binding authority renders illegal or impracticable the continuation of the Property Partnership; (ii) the election of the Property GP LP if the Property Partnership, as determined by the Property GP LP, is required to register as an “investment company” under the U.S. Investment Company Act of 1940 or similar legislation in other jurisdictions; (iii) the date that the Property GP LP withdraws from the Property Partnership (unless a successor entity becomes the general partner of the Property Partnership as described below under “— Withdrawal of the General Partner”); (iv) the date on which any court of competent jurisdiction enters a decree of judicial dissolution of the Property Partnership or an order to wind-up or liquidate the Property GP LP without the appointment of a successor in compliance with the provisions of the Property Partnership’s limited partnership agreement that are described below under “— Withdrawal of the General Partner”; and (v) the date on which the Property GP LP decides to dispose of, or otherwise realize proceeds in respect of, all or substantially all of the Property Partnership’s assets in a single transaction or series of transactions.

The Property Partnership will be reconstituted and continue without dissolution if within 30 days of the date of dissolution (and provided that a notice of dissolution with respect to the Property Partnership has not been filed with the Bermuda Monetary Authority), a successor general partner executes a transfer deed pursuant to which the new general partner assumes the rights and undertakes the obligations of the original general partner, but only if the Property Partnership receives an opinion of counsel that the admission of the new general partner will not result in the loss of limited liability of any limited partner of the Property Partnership.

Withdrawal of the General Partner

The Property GP LP may withdraw as general partner without first obtaining approval of unitholders by giving written notice, and that withdrawal will not constitute a violation of the limited partnership agreement.

Upon the withdrawal of the Property GP LP, the holders of at least a majority of outstanding units may select a successor to that withdrawing general partner. If a successor is not selected, or is selected but an opinion of counsel regarding limited liability, tax matters and the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions) cannot be obtained, the Property Partnership will be dissolved, wound up and liquidated. See “— Dissolution” above.

The Property GP LP may not be removed unless that removal is approved by the vote of the holders of at least 66 2/3% of the outstanding class of units that are not Redemption-Exchange Units and it receives a withdrawal opinion of counsel regarding limited liability tax matters and the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions). Any removal of the Property GP LP is also subject to the approval of a successor general partner by the vote of the holders of a majority of its outstanding units that are not Redemption-Exchange Units.

In the event of (i) the removal of a general partner under circumstances where cause exists, or (ii) the withdrawal of a general partner as a result of certain events relating to the bankruptcy, insolvency or dissolution of that general partner, which withdrawal will violate the Property Partnership’s limited partnership agreement, a

 

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successor general partner will have the option to purchase the general partnership interest of the departing general partner for a cash payment equal to its fair market value. Under all other circumstances where a general partner withdraws or is removed by the limited partners, the departing general partner will have the option to require the successor general partner to purchase the general partnership interest of the departing general partner for a cash payment equal to its fair market value. In each case, this fair market value will be determined by agreement between the departing general partner and the successor general partner. If no agreement is reached within 30 days of the general partner’s departure, an independent investment banking firm or other independent expert selected by the departing general partner and the successor general partner will determine the fair market value. If the departing general partner and the successor general partner cannot agree upon an expert within 45 days of the general partner’s departure, then an expert chosen by agreement of the experts selected by each of them will determine the fair market value.

If the option described above is not exercised by either the departing general partner or the successor general partner, the departing general partner’s general partnership interests will automatically convert into units pursuant to a valuation of those interests as determined by an investment banking firm or other independent expert selected in the manner described in the preceding paragraph.

Transfer of the General Partnership Interest

The Property GP LP may transfer all or any part of its general partnership interests without first obtaining approval of any unitholder. As a condition of this transfer, the transferee must: (i) be an affiliate of the BPY General Partner (or the transfer must be made concurrently with a transfer of the general partnership units of our company to an affiliate of the transferee); (ii) agree to assume the rights and duties of the general partner to whose interest that transferee has succeeded; (iii) agree to assume the provisions of the Property Partnership’s limited partnership agreement; and (iv) furnish an opinion of counsel regarding limited liability, tax matters and the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions). Any transfer of the general partnership interest is subject to prior notice to and approval of the relevant Bermuda regulatory authorities. At any time, the members of the Property GP LP may sell or transfer all or part of their units in the Property GP LP without the approval of the unitholders.

Transactions with Interested Parties

The Property GP LP, its affiliates and their respective partners, members, directors, officers, employees and shareholders, which we refer to as “interested parties”, may become limited partners or beneficially interested in limited partners and may hold, dispose of or otherwise deal with units of the Property Partnership with the same rights they would have if the Property GP LP and Property General Partner were not a party to the limited partnership agreement of the Property Partnership. An interested party will not be liable to account either to other interested parties or to the Property Partnership, its partners or any other persons for any profits or benefits made or derived by or in connection with any such transaction.

The limited partnership agreement of the Property Partnership permits an interested party to sell investments to, purchase assets from, vest assets in and enter into any contract, arrangement or transaction with our company, the Property Partnership, any of the Holding Entities, any operating entity or any other holding entity established by the Property Partnership and may be interested in any such contract, transaction or arrangement and shall not be liable to account either to the Property Partnership, any of the Holding Entities, any operating entity or any other holding entity established by the Property Partnership or any other person in respect of any such contract, transaction or arrangement, or any benefits or profits made or derived therefrom, by virtue only of the relationship between the parties concerned, subject to the bye-laws of the Property General Partner.

 

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Outside Activities of the General Partner

Under the Property Partnership’s limited partnership agreement, the general partner is required to maintain as its sole activity the activity of acting as the general partner of the Property Partnership. The general partner is not permitted to engage in any business or activity or incur or guarantee any debts or liabilities except in connection with or incidental to its performance as general partner or incurring, guaranteeing, acquiring, owning or disposing of debt or equity securities of a subsidiary of an Holding Entity or any other holding entity established by the Property Partnership.

The Property Partnership’s limited partnership agreement provides that each person who is entitled to be indemnified by the partnership (other than the general partner), as described below under “— Indemnification; Limitations on Liability” will have the right to engage in businesses of every type and description and other activities for profit, and to engage in and possess interests in business ventures of any and every type or description, irrespective of whether: (i) such businesses and activities are similar to our activities; or (ii) such businesses and activities directly compete with, or disfavor or exclude, the Property General Partner, the Property GP LP, the Property Partnership, any Holding Entity, any operating entity, or any other holding entity established by the Property Partnership. Such business interests, activities and engagements will be deemed not to constitute a breach of the limited partnership agreement or any duties stated or implied by law or equity, including fiduciary duties, owed to any of the Property General Partner, the Property GP LP, the Property Partnership, any Holding Entity, any operating entity, and any other holding entity established by the Property Partnership (or any of their respective investors), and shall be deemed not to be a breach of the Property General Partner’s fiduciary duties or any other obligation of any type whatsoever of the general partner. None of the Property General Partner, the Property GP LP, the Property Partnership, any Holding Entity, operating entity, any other holding entity established by the Property Partnership or any other person shall have any rights by virtue of the Property Partnership’s limited partnership agreement or the partnership relationship established thereby or otherwise in any business ventures of any person who is entitled to be indemnified by the Property Partnership as described below under “— Indemnification; Limitations on Liability”.

The Property GP LP and the other indemnified persons described in the preceding paragraph do not have any obligation under the Property Partnership’s limited partnership agreement or as a result of any duties stated or implied by law or equity, including fiduciary duties, to present business or investment opportunities to the Property Partnership, the limited partners of the Property Partnership, any Holding Entity, operating entity, or any other holding entity established by the Property Partnership. These provisions do not affect any obligation of such indemnified person to present business or investment opportunities to our company, the Property Partnership, any Holding Entity, any operating entity or any other holding entity established by the Property Partnership pursuant to the Relationship Agreement or any separate written agreement between such persons.

Accounts, Reports and Other Information

Under the Property Partnership’s limited partnership agreement, the Property GP LP is required to prepare financial statements in accordance with IFRS or such other appropriate accounting principles as determined from time to time by the Property GP LP, in its sole discretion. The Property GP LP will deliver to our company: (i) the annual financial statements of the Property Partnership and (ii) the accounts and financial statements of any Holding Entity or any other holding entity established by the Property Partnership.

The Property GP LP is also required to use commercially reasonable efforts to prepare and send to the limited partners of the Property Partnership on an annual basis a Schedule K-1 (or equivalent). The Property GP LP will also, where reasonably possible, prepare and send information required by the non-U.S. limited partners of the Property Partnership for U.S. federal income tax reporting purposes.

 

 

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Indemnification; Limitations on Liability

Under the Property Partnership’s limited partnership agreement, it is required to indemnify to the fullest extent permitted by law the Property General Partner, the Property GP LP and any of their respective affiliates (and their respective officers, directors, agents, shareholders, partners, members and employees), any person who serves on a governing body of the Property Partnership, a Holding Entity, operating entity or any other holding entity established by our company and any other person designated by its general partner as an indemnified person, in each case, against all losses, claims, damages, liabilities, costs or expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, incurred by an indemnified person in connection with its business, investments and activities or by reason of their holding such positions, except to the extent that the claims, liabilities, losses, damages, costs or expenses are determined to have resulted from the indemnified person’s bad faith, fraud or willful misconduct, or in the case of a criminal matter, action that the indemnified person knew to have been unlawful. In addition, under the Property Partnership’s limited partnership agreement: (i) the liability of such persons has been limited to the fullest extent permitted by law, except to the extent that their conduct involves bad faith, fraud or willful misconduct, or in the case of a criminal matter, action that the indemnified person knew to have been unlawful; and (ii) any matter that is approved by the independent directors will not constitute a breach of any duties stated or implied by law or equity, including fiduciary duties. The Property Partnership’s limited partnership agreement requires it to advance funds to pay the expenses of an indemnified person in connection with a matter in which indemnification may be sought until it is determined that the indemnified person is not entitled to indemnification.

Governing Law

The Property Partnership’s limited partnership agreement is governed by and will be construed in accordance with the laws of Bermuda.

10.C. MATERIAL CONTRACTS

The following are the only material contracts, other than contracts entered into in the ordinary course of business, which have been entered into by us since our formation or which are proposed to be entered into by us:

 

  1. Master Purchase Agreement described under Item 4.A. “Information on the Company — History and Development of the Company — The Spin-Off”;

 

  2. Master Services Agreement by and among Brookfield Asset Management, the Service Recipients and the Managers described under Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Our Master Services Agreement”;

 

  3. Relationship Agreement by and among Brookfield Asset Management, our company and the Managers and others described under Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield — Relationship Agreement”;

 

  4. Registration Rights Agreement between our company and Brookfield Asset Management described under the heading Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield — Registration Rights Agreement”;

 

  5. Voting Agreement between Brookfield Asset Management, the Property General Partner and our company described under Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Voting Agreements”;

 

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  6. Amended and Restated Limited Partnership Agreement of our partnership described under Item 10.B. “Additional Information — Memorandum and Articles of Association — Description of Our Units and Our Limited Partnership Agreement”; and

 

  7. Amended and Restated Limited Partnership Agreement of the Property Partnership described under Item 10.B. “Additional Information — Memorandum and Articles of Association — Description of the Property Partnership Limited Partnership Agreement”.

Copies of the agreements noted above, following execution where not executed, will be made available, free of charge, by the BPY General Partner and will be available electronically on the website of the SEC at www.sec.gov and on our SEDAR profile at www.sedar.com. Written requests for such documents should be directed to our Corporate Secretary at 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda.

10.D. EXCHANGE CONTROLS

There are currently no governmental laws, decrees, regulations or other legislation of Bermuda which restrict the import or export of capital or the remittance of dividends, interest or other payments to non-residents of Bermuda holding our units.

10.E. TAXATION

The following summary discusses certain material U.S., Canadian, and Bermudian tax considerations related to the receipt, holding, and disposition of our units as of the date hereof to a holder who receives our units pursuant to the spin-off. Prospective purchasers of our units are advised to consult their own tax advisers concerning the consequences under the tax laws of the country of which they are resident or in which they are otherwise subject to tax of making an investment in our units.

U.S. Tax Considerations

This summary discusses certain material U.S. federal income tax considerations to unitholders relating to the receipt, holding, and disposition of our units as of the date hereof. This summary is based on provisions of the U.S. Internal Revenue Code of 1986, as amended, or the U.S. Internal Revenue Code, on the regulations promulgated thereunder, and on published administrative rulings, judicial decisions, and other applicable authorities, all as in effect on the date hereof and all of which are subject to change at any time, possibly with retroactive effect. This summary is necessarily general and may not apply to all categories of investors, some of which may be subject to special rules, including, without limitation, persons that own (directly or indirectly, applying certain attribution rules) more than 5% of our units, persons that own (directly or indirectly, applying certain attribution rules) more than 5% of any U.S. entity classified as a real estate investment trust for U.S. federal tax purposes in which we own (directly or indirectly) an interest, dealers in securities or currencies, financial institutions or financial services entities, life insurance companies, persons that hold our units as part of a straddle, hedge, constructive sale or conversion transaction with other investments, persons whose functional currency is not the U.S. Dollar, persons who have elected mark-to-market accounting, persons who hold our units through a partnership or other entity treated as a pass-through entity for U.S. federal income tax purposes, persons for whom our units are not a capital asset, persons who are liable for the alternative minimum tax and certain U.S. expatriates or former long-term residents of the U.S. Tax-exempt organizations are addressed separately below. The actual tax consequences of the receipt of our units pursuant to the spin-off and of the ownership and disposition of our units will vary depending on your individual circumstances.

For purposes of this discussion, a “U.S. Holder” is a beneficial owner of one or more of our units that is for U.S. federal income tax purposes: (i) an individual citizen or resident of the United States; (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; (iii) an estate the income of which is

 

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subject to U.S. federal income taxation regardless of its source; or (iv) a trust (a) that is subject to the primary supervision of a court within the United States and all substantial decisions of which one or more U.S. persons have the authority to control or (b) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

A “Non-U.S. Holder” is a beneficial owner of one or more of our units, other than a U.S. Holder or an entity classified as a partnership or other fiscally transparent entity for U.S. federal tax purposes.

If a partnership holds our units, the tax treatment of a partner of such partnership generally will depend upon the status of the partner and the activities of the partnership. Partners of partnerships that hold our units should consult an independent tax adviser.

This discussion does not constitute tax advice and is not intended to be a substitute for tax planning. You should consult an independent tax adviser concerning the U.S. federal, state and local income tax consequences particular to your receipt of our units pursuant to the spin-off and your ownership and disposition of our units, as well as any consequences under the laws of any other taxing jurisdiction.

Partnership Status of Our Company and the Property Partnership

Each of our company and the Property Partnership has made a protective election to be classified as a partnership for U.S. federal tax purposes. An entity that is treated as a partnership for U.S. federal tax purposes incurs no U.S. federal income tax liability. Instead, each partner is required to take into account its allocable share of items of income, gain, loss, deduction, or credit of the partnership in computing its U.S. federal income tax liability, regardless of whether cash distributions are made. Distributions of cash by a partnership to a partner generally are not taxable unless the amount of cash distributed to a partner is in excess of the partner’s adjusted basis in its partnership interest.

An entity that would otherwise be classified as a partnership for U.S. federal income tax purposes may nonetheless be taxable as a corporation if it is a “publicly-traded partnership”, unless an exception applies. Our company will be publicly-traded. However, an exception, referred to as the “Qualifying Income Exception”, exists with respect to a publicly-traded partnership if (i) at least 90% of such partnership’s gross income for every taxable year consists of “qualifying income” and (ii) the partnership would not be required to register under the U.S. Investment Company Act of 1940 if it were a U.S. corporation. Qualifying income includes certain interest income, dividends, real property rents, gains from the sale or other disposition of real property, and any gain from the sale or disposition of a capital asset or other property held for the production of income that otherwise constitutes qualifying income.

The BPY General Partner and the Property General Partner intend to manage the affairs of our company and the Property Partnership, respectively, so that our company will meet the Qualifying Income Exception in each taxable year. Accordingly, the BPY General Partner believes that our company will be treated as a partnership and not as a corporation for U.S. federal income tax purposes.

If our company fails to meet the Qualifying Income Exception, other than a failure which is determined by the U.S. Internal Revenue Service, or the IRS, to be inadvertent and which is cured within a reasonable time after discovery, or if our company is required to register under the U.S. Investment Company Act of 1940, our company will be treated as if it had transferred all of its assets, subject to liabilities, to a newly formed corporation, on the first day of the year in which our company fails to meet the Qualifying Income Exception, in return for stock in such corporation, and then distributed the stock to our unitholders in liquidation. This deemed contribution and liquidation likely would result in the recognition of gain (but not loss) to U.S. Holders, except that U.S. Holders generally would not recognize the portion of such gain attributable to stock or securities of non-U.S. corporations held by us. If, at the time of such contribution, our company were to have liabilities in excess of the tax basis of its assets, U.S. Holders generally would recognize gain in respect of such excess

 

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liabilities upon the deemed transfer. Thereafter, our company would be treated as a corporation for U.S. federal income tax purposes.

If our company were treated as a corporation in any taxable year, either as a result of a failure to meet the Qualifying Income Exception or otherwise, our company’s items of income, gain, loss, deduction, or credit would be reflected only on our company’s tax return rather than being passed through to our unitholders, and our company would be subject to U.S. corporate income tax and potentially branch profits tax with respect to its income, if any, effectively connected with a U.S. trade or business. Moreover, under certain circumstances, our company might be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes, and a U.S. Holder would be subject to the rules applicable to PFICs discussed below. See “— Consequences to U.S. Holders — Passive Foreign Investment Companies”. Subject to the PFIC rules, distributions made to U.S. Holders would be treated as taxable dividend income to the extent of our company’s current or accumulated earnings and profits. Any distribution in excess of current and accumulated earnings and profits would first be treated as a tax-free return of capital to the extent of a U.S. Holder’s adjusted tax basis in its units. Thereafter, to the extent such distribution were to exceed a U.S. Holder’s adjusted tax basis in its units, the distribution would be treated as gain from the sale or exchange of such units. The amount of a distribution made before January 1, 2013 and treated as a dividend could be eligible for reduced rates of taxation, provided certain conditions are met. In addition, dividends, interest and certain other passive income received by our company with respect to U.S. investments generally would be subject to U.S. withholding tax at a rate of 30% (although certain Non-U.S. Holders nevertheless might be entitled to certain treaty benefits in respect of their allocable share of such income) and U.S. Holders would not be allowed a tax credit with respect to any such tax withheld. In addition, the “portfolio interest” exemption would not apply to certain interest income of our company (although certain Non-U.S. Holders nevertheless might be entitled to certain treaty benefits in respect of their allocable share of such income).

Based on the foregoing consequences, treatment of our company as a corporation could materially reduce a holder’s after-tax return and therefore could result in a substantial reduction of the value of our units. If the Property Partnership were to be treated as a corporation for U.S. federal income tax purposes, consequences similar to those described above would apply.

The remainder of this summary assumes that our company and the Property Partnership will be treated as partnerships for U.S. federal tax purposes. We expect that a substantial portion of the items of income, gain, deduction, loss, or credit realized by our company will be realized in the first instance by the Property Partnership and allocated to our company for reallocation to our unitholders. Unless otherwise specified, references in this section to realization of our company’s items of income, gain, loss, deduction, or credit include a realization of such items by the Property Partnership (or other lower tier partnership) and the allocation of such items to our company.

Proposed Legislation

Over the past several years, a number of legislative and administrative proposals relating to partnership taxation have been introduced and, in certain cases, have been passed by the U.S. House of Representatives. On May 28, 2010, the U.S. House of Representatives passed legislation which, if it had been finally enacted into law and applied to our company or to the Property Partnership, could have had adverse consequences, including (i) the recharacterization of capital gain income as “ordinary income”, (ii) the potential reclassification of qualified dividend income as “ordinary income” subject to a higher rate of U.S. income tax, and (iii) potential limitations on the ability of our company to meet the “qualifying income” exception for taxation as a partnership for U.S. federal income tax purposes. This legislation was not passed by the U.S. Senate and therefore was not enacted into law. However, substantially similar legislation was reintroduced in the U.S. House of Representatives in February 2012.

The Obama administration has indicated it supports the adoption of legislation that similarly changes the treatment of carried interest for U.S. federal income tax purposes. In its published revenue proposals for 2013, the Obama administration proposes that the current law governing the treatment of carried interest be

 

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changed for taxable years ending after December 31, 2012, to subject such income to ordinary income tax. The Obama administration’s published revenue proposals for previous years contained similar proposals.

It remains unclear whether any legislation related to such revenue proposals or similar to the legislation described above will be proposed or enacted by the U.S. Congress and, if enacted, whether such legislation would affect an investment in our company. You should consult an independent tax adviser as to the potential effect of any proposed or future legislation on an investment in our company.

The remainder of this discussion is based on current law without regard to the proposed legislation or administrative proposals discussed above.

Consequences to U.S. Holders

Spin-Off

A U.S. Holder who receives our units pursuant to the spin-off will be considered to have received a taxable distribution in an amount equal to the fair market value of the gross amount of our units received by such holder plus the amount of cash received in lieu of fractional units, without reduction for any Canadian tax withheld in respect of the spin-off. This distribution would be treated as a dividend, taxable as ordinary income, to the extent of your share of current and accumulated earnings and profits of Brookfield Asset Management as determined for U.S. federal income tax purposes (which Brookfield Asset Management does not calculate). If you are a non-corporate U.S. Holder, including an individual, the amount of the dividend received by you generally would be “qualified dividend income” subject to U.S. tax at preferential rates, provided Brookfield Asset Management is not a PFIC for the taxable year in which the dividend is distributed or for the preceding taxable year, you received the dividend in respect of Class A limited voting shares that are readily tradable on an established securities market in the United States (such as the NYSE), and the following additional requirements are met: (i) you do not treat the dividend as “investment income” for purpose of the rules limiting deductions for investment interest, (ii) you have held the shares of stock in respect of which such dividend was made for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date, and (iii) you satisfy certain at-risk requirements and other rules. Based upon the composition of its income and its assets, Brookfield Asset Management does not believe that it is a PFIC for the current taxable year or for the preceding taxable year. However, no assurance can be provided that the IRS will agree with such position.

If the amount of the distribution were to exceed Brookfield Asset Management’s current and accumulated earnings and profits, the excess would be treated as a recovery of basis to the extent of your basis in Brookfield Asset Management shares and then as capital gain. Because Brookfield Asset Management does not calculate earnings and profits for U.S. tax purposes, however, you should expect not to be able to establish that any portion of the distribution would be treated as recovery of basis or capital gain.

If you fail to timely provide Brookfield Asset Management with a properly completed IRS Form W-9, you may be subject to “backup” withholding tax on the distribution, unless you come within certain exempt categories of recipients and, when required, demonstrate that status. Backup withholding is not an additional tax, and any amounts withheld under the “backup” withholding rules will be allowed as a credit against your 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. You should consult an independent tax adviser regarding the application of the foregoing rules to you.

Dividends received by you pursuant to the spin-off generally will be treated as foreign source income for foreign tax credit limitation purposes. Accordingly, any Canadian federal withholding tax assessed on dividends received by you pursuant to the spin-off may, subject to certain limitations, be claimed as a foreign tax credit against your U.S. federal income tax liability or may be claimed as a deduction for U.S. federal income tax purposes. Notwithstanding the foregoing, the rules relating to foreign tax credits are complex, and the availability of a foreign tax credit depends on numerous factors. You should consult an independent tax adviser concerning the application of the U.S. foreign tax credit rules to you.

 

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Holding of Our Units

Income and Loss. If you are a U.S. Holder, you will be required to take into account, as described below, your allocable share of our company’s items of income, gain, loss, deduction, and credit for each of our company’s taxable years ending with or within your taxable year. Each item generally will have the same character and source as though you had realized the item directly. You must report such items without regard to whether any distribution has been or will be received from our company. Our company intends to make cash distributions to all unitholders on a quarterly basis in amounts generally expected to be sufficient to permit U.S. Holders to fund their estimated U.S. tax obligations (including U.S. federal, state, and local income taxes) with respect to their allocable shares of our company’s net income or gain. However, based upon your particular tax situation and simplifying assumptions that our company will make in determining the amount of such distributions, and depending upon whether you elect to reinvest such distributions pursuant to the distribution reinvestment plan, if available, your tax liability might exceed cash distributions made to you, in which case any tax liabilities arising from your ownership of our units would need to be satisfied from your own funds.

With respect to U.S. Holders who are individuals, certain dividends paid by a corporation (including certain qualified foreign corporations) to our company and that are allocable to such U.S. Holders prior to January 1, 2013 may qualify for reduced rates of taxation. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of specified income tax treaties with the United States. In addition, a foreign corporation is treated as a qualified corporation with respect to its shares that are readily tradable on an established securities market in the United States. Among other exceptions, U.S. Holders who are individuals will not be eligible for reduced rates of taxation on any dividends if the payer is a PFIC for the taxable year in which such dividends are paid or for the preceding taxable year. U.S. Holders that are corporations may be entitled to a “dividends received deduction” in respect of dividends paid by U.S. corporations in which our company (through the Property Partnership) owns stock. You should consult an independent tax adviser regarding the application of the foregoing rules in light of your particular circumstances.

For U.S. federal income tax purposes, your allocable share of our company’s items of income, gain, loss, deduction, or credit will be governed by our limited partnership agreement if such allocations have “substantial economic effect” or are determined to be in accordance with your interest in our company. Similarly, our company’s allocable share of items of income, gain, loss, deduction, or credit of the Property Partnership will be governed by the limited partnership agreement of the Property Partnership if such allocations have “substantial economic effect” or are determined to be in accordance with our company’s interest in the Property Partnership. The BPY General Partner and the Property General Partner believe that, for U.S. federal income tax purposes, such allocations should be given effect, and the BPY General Partner and the Property General Partner intend to prepare tax returns based on such allocations. If the IRS were to successfully challenge the allocations made pursuant to either our company’s limited partnership agreement or the limited partnership agreement of the Property Partnership, then the resulting allocations for U.S. federal income tax purposes might be less favorable than the allocations set forth in such agreements.

Basis. You will have an initial tax basis in your units equal to their fair market value on the date you receive them pursuant to the spin-off, increased by your share of our company’s liabilities, if any. That basis will be increased by your share of our company’s income and by increases in your share of our company’s liabilities, if any. That basis will be decreased, but not below zero, by distributions you receive from our company, by your share of our company’s losses, and by any decrease in your share of our company’s liabilities. Under applicable U.S. federal income tax rules, a partner in a partnership has a single, or “unitary”, tax basis in his or her partnership interest, unlike a shareholder of a corporation. As a result, any amount you pay to acquire additional units (including through the distribution reinvestment plan, if available) will be averaged with the adjusted tax basis of units owned by you prior to the acquisition of such additional units. The BPY General Partner expresses no opinion regarding the appropriate methodology to be used in making this determination.

 

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For purposes of the foregoing rules, the rules discussed immediately below, and the rules applicable to a sale or exchange of our units, our company’s liabilities generally will include our company’s share of any liabilities of the Property Partnership.

Limits on Deductions for Losses and Expenses. Your deduction of your allocable share of our company’s losses will be limited to your tax basis in our units and, if you are an individual or a corporate holder that is subject to the “at risk” rules, to the amount for which you are considered to be “at risk” with respect to our company’s activities, if that is less than your tax basis. In general, you will be at risk to the extent of your tax basis in our units, reduced by (i) the portion of that basis attributable to your share of our company’s liabilities for which you will not be personally liable (excluding certain qualified non-recourse financing) and (ii) any amount of money you borrow to acquire or hold our units, if the lender of those borrowed funds owns an interest in our company, is related to you, or can look only to your units for repayment. Your at-risk amount generally will increase by your allocable share of our company’s income and gain and decrease by distributions you receive from our company and your allocable share of losses and deductions. You must recapture losses deducted in previous years to the extent that distributions cause your at-risk amount to be less than zero at the end of any taxable year. Losses disallowed or recaptured as a result of these limitations will carry forward and will be allowable to the extent that your tax basis or at-risk amount, whichever is the limiting factor, subsequently increases. Upon the taxable disposition of our units, any gain recognized by you can be offset by losses that were previously suspended by the at-risk limitation, but may not be offset by losses suspended by the basis limitation. Any excess loss above the gain previously suspended by the at-risk or basis limitations may no longer be used. You should consult an independent tax adviser as to the effects of the at-risk rules.

Limitations on Deductibility of Organizational Expenses and Syndication Fees. In general, neither our company nor any U.S. Holder may deduct organizational or syndication expenses. Similar rules apply to organizational or syndication expenses incurred by the Property Partnership. Syndication fees (which would include any sales or placement fees or commissions) must be capitalized and cannot be amortized or otherwise deducted.

Limitations on Interest Deductions. Your share of our company’s interest expense is likely to be treated as “investment interest” expense. For a non-corporate U.S. Holder, the deductibility of “investment interest” expense is generally limited to the amount of such holder’s “net investment income”. Your share of our company’s dividend and interest income will be treated as investment income, although “qualified dividend income” subject to reduced rates of tax in the hands of an individual will only be treated as investment income if such individual elects to treat such dividend as ordinary income not subject to reduced rates of tax. In addition, state and local tax laws may disallow deductions for your share of our company’s interest expense.

Net investment income includes gross income from property held for investment and amounts treated as portfolio income under the passive loss rules, less deductible expenses, other than interest, directly connected with the production of investment income, but generally does not include gains attributable to the disposition of property held for investment.

Deductibility of Partnership Investment Expenditures by Individual Partners and by Trusts and Estates. Subject to certain exceptions, all miscellaneous itemized deductions of an individual taxpayer, and certain of such deductions of an estate or trust, are deductible only to the extent that such deductions exceed 2% of the taxpayer’s adjusted gross income. Moreover, absent U.S. Congressional action, in taxable years beginning on or after January 1, 2013, the otherwise allowable itemized deductions of individuals whose gross income exceeds an applicable threshold amount are subject to reduction by an amount equal to the lesser of (i) 3% of the excess of the individual’s adjusted gross income over the threshold amount, or (ii) 80% of the amount of the individual’s itemized deductions. The operating expenses of our company, including our company’s allocable share of the base management fee or any other management fees, may be treated as miscellaneous itemized deductions subject to the foregoing rule. Alternatively, it is possible that our company and the Property Partnership will be required to capitalize amounts paid in respect of certain management fees. Accordingly, if

 

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you are a non-corporate U.S. Holder, you should consult an independent tax adviser regarding the application of these limitations.

Treatment of Distributions

Distributions of cash by our company generally will not be taxable to you to the extent of your adjusted tax basis (described above) in our units. Any cash distributions in excess of your adjusted tax basis generally will be considered to be gain from the sale or exchange of our units (described below). Under current law, such gain generally would be treated as capital gain and would be long-term capital gain if your holding period for our units were to exceed one year. A reduction in your allocable share of our liabilities, and certain distributions of marketable securities by our company, would be treated similar to cash distributions for U.S. federal income tax purposes.

Sale or Exchange of Our Units

You will recognize gain or loss on the sale or taxable exchange of our units equal to the difference, if any, between the amount realized and your tax basis in our units sold or exchanged. Your amount realized will be measured by the sum of the cash or the fair market value of other property received plus your share of our company’s liabilities, if any.

Gain or loss recognized by you upon the sale or exchange of our units generally will be taxable as capital gain or loss and will be long-term capital gain or loss if you held our units for more than one year as of the date of such sale or exchange. Assuming you have not elected to treat your share of our company’s investment in any PFIC as a “qualified electing fund”, gain attributable to such investment in a PFIC would be taxable in the manner described below in “—Passive Foreign Investment Companies”. In addition, certain gain attributable to “unrealized receivables” or “inventory items” could be characterized as ordinary income rather than capital gain. For example, if our company were to hold debt acquired at a market discount, accrued market discount on such debt would be treated as “unrealized receivables”. The deductibility of capital losses is subject to limitations.

Each U.S. Holder who acquires our units at different times and intends to sell all or a portion of our units within a year of the most recent purchase should consult an independent tax adviser regarding the application of certain “split holding period” rules to such sale and the treatment of any gain or loss as long-term or short-term capital gain or loss.

Foreign Tax Credit Limitations

If you are a U.S. Holder, you generally will be entitled to a foreign tax credit with respect to your allocable share of creditable foreign taxes paid on our company’s income and gain. Complex rules may, depending on your particular circumstances, limit the availability or use of foreign tax credits. Gain from the sale of our company’s investments may be treated as U.S.-source gain. Consequently, you may not be able to use the foreign tax credit arising from any foreign taxes imposed on such gain unless the credit can be applied (subject to applicable limitations) against U.S. tax due on other income treated as derived from foreign sources. Certain losses that our company incurs may be treated as foreign-source losses, which could reduce the amount of foreign tax credits otherwise available.

Section 754 Election

Our company and the Property Partnership each intend to make the election permitted by Section 754 of the U.S. Internal Revenue Code, or the Section 754 Election. The Section 754 Election is irrevocable without the consent of the IRS. The Section 754 Election generally requires our company to adjust the tax basis in its assets, or inside basis, attributable to a transferee of our units under Section 743(b) of the U.S. Internal Revenue Code to reflect the purchase price paid by the transferee for our units. This election does not apply to a person

 

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who purchases units directly from us. For purposes of this discussion, a transferee’s inside basis in our company’s assets will be considered to have two components: (i) the transferee’s share of our company’s tax basis in our company’s assets, or common basis, and (ii) the adjustment under Section 743(b) of the U.S. Internal Revenue Code to that basis. The foregoing rules would also apply to the Property Partnership.

Generally, a Section 754 Election would be advantageous to a transferee U.S. Holder if such holder’s tax basis in its units were higher than such units’ share of the aggregate tax basis of our company’s assets immediately prior to the transfer. In that case, as a result of the Section 754 Election, the transferee U.S. Holder would have a higher tax basis in its share of our company’s assets for purposes of calculating, among other items, such holder’s share of any gain or loss on a sale of our company’s assets. Conversely, a Section 754 Election would be disadvantageous to a transferee U.S. Holder if such holder’s tax basis in its units were lower than such units’ share of the aggregate tax basis of our company’s assets immediately prior to the transfer. Thus, the fair market value of our units may be affected either favorably or adversely by the election.

Whether or not the Section 754 Election is made, if our units are transferred at a time when our company has a “substantial built-in loss” in its assets, our company will be obligated to reduce the tax basis in the portion of such assets attributable to such units.

The calculations involved in the Section 754 Election are complex, and the BPY General Partner and the Property GP LP advise that they will make them on the basis of assumptions as to the value of our assets and other matters. Each U.S. Holder should consult an independent tax adviser as to the effects of the Section 754 Election.

Uniformity of Our Units

Because we cannot match transferors and transferees of our units, we must maintain uniformity of the economic and tax characteristics of our units to a purchaser of our units. In the absence of uniformity, we may be unable to comply fully with a number of U.S. federal income tax requirements. A lack of uniformity can result from a literal application of certain U.S. Treasury regulations to our company’s Section 743(b) adjustments, the determination that our company’s Section 704(c) allocations are unreasonable, or other reasons. Section 704(c) allocations would be intended to reduce or eliminate the disparity between tax basis and the value of our company’s assets in certain circumstances, including on the issuance of additional units. In order to maintain the fungibility of all of our units at all times, we will seek to achieve the uniformity of U.S. tax treatment for all purchasers of our units which are acquired at the same time and price (irrespective of the identity of the particular seller of our units or the time when our units are issued), through the application of certain tax accounting principles that the BPY General Partner believes are reasonable for our company. However, the IRS may disagree with us and may successfully challenge our application of such tax accounting principles. Any non-uniformity could have a negative impact on the value of our units.

Foreign Currency Gain or Loss

Our company’s functional currency will be the U.S. Dollar, and our company’s income or loss will be calculated in U.S. Dollars. It is likely that our company will recognize “foreign currency” gain or loss with respect to transactions involving non-U.S. Dollar currencies. In general, foreign currency gain or loss is treated as ordinary income or loss. You should consult an independent tax adviser regarding the tax treatment of foreign currency gain or loss.

Passive Foreign Investment Companies

U.S. Holders may be subject to special rules applicable to indirect investments in foreign corporations, including an investment through our company in a PFIC. A PFIC is defined as any foreign corporation with respect to which (after applying certain look-through rules) either (i) 75% or more of its gross income for a taxable year is “passive income” or (ii) 50% or more of its assets in any taxable year (generally based on the

 

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quarterly average of the value of its assets) produce or are held for the production of “passive income”. There are no minimum stock ownership requirements for PFICs. If you hold an interest in a foreign corporation for any taxable year during which the corporation is classified as a PFIC with respect to you, then the corporation will continue to be classified as a PFIC with respect to you for any subsequent taxable year during which you continue to hold an interest in the corporation, even if the corporation’s income or assets would not cause it to be a PFIC in such subsequent taxable year, unless an exception applies.

Subject to certain exceptions described below, any gain on the disposition of stock of a PFIC owned by you indirectly through our company, as well as income realized on certain “excess distributions” by such PFIC, would be treated as though realized ratably over the shorter of your holding period of our units or our company’s holding period for the PFIC. Such gain or income generally would be taxable as ordinary income, and dividends paid by the PFIC would not be eligible for the preferential tax rate for dividends paid to non-corporate U.S. Holders. In addition, an interest charge would apply, based on the tax deferred from prior years.

If you were to make an election to treat your share of our company’s interest in a PFIC as a “qualified electing fund”, such election a “QEF election”, for the first year you were treated as holding such interest, then in lieu of the foregoing treatment, you would be required to include in income each year a portion of the ordinary earnings and net capital gains of the PFIC, even if not distributed to our company or to you. A QEF election must be made by you on an entity-by-entity basis. To make a QEF election, you must, among other things, (i) obtain a PFIC annual information statement (through an intermediary statement supplied by our company) and (ii) prepare and submit IRS Form 8621 with your annual income tax return.

Once you have made a QEF election for an entity, such election applies to any additional shares of interest in such entity acquired directly or indirectly, including through additional units acquired after the QEF election is made (such as units acquired under the distribution reinvestment plan, if available). If you were to make a QEF election after the first year that you were treated as holding an interest in a PFIC, the adverse tax consequences relating to PFIC stock would continue to apply with respect to the pre-QEF election period, unless you were to make a “purging election”. The purging election would create a deemed sale of your previously held share of our company’s interests in a PFIC. The gain recognized by the purging election would be subject to the special tax and interest charge rules, which treat the gain as an excess distribution, as described above. As a result of the purging election, you would have a new basis and holding period in your share of our company’s interests in the PFIC. You should consult an independent tax adviser as to the manner in which such direct inclusions could affect your allocable share of our company’s income and your tax basis in our units and the advisability of making a QEF election or a purging election.

Alternatively, in the case of a PFIC that is a publicly-traded foreign company, an election may be made to “mark to market” the stock of such foreign company on an annual basis. Pursuant to such an election, you would include in each year as ordinary income the excess, if any, of the fair market value of such stock over its adjusted basis at the end of the taxable year. The BPY General Partner and the Property General Partner currently believe it is possible that one or more of our existing or future operating entities will qualify as PFICs that are publicly-traded. However, there can be no assurance that a mark-to-market election will be available for any such entity. You should consult an independent tax adviser regarding the availability of the mark-to-market election with respect to any PFIC in which you are treated as owning an interest through our company.

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 one or more of our existing Holding Entities and operating entities are likely to be classified as PFICs. Moreover, 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. In addition, in order to ensure that we satisfy the Qualifying Income Exception, we may determine to hold an existing or future operating entity through a Holding Entity that would be classified as a PFIC. See “—Investment Structure” below.

 

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There can be no assurance that an investment in PFIC stock will be eligible for the mark-to-market election. However, to the extent reasonably practicable, we intend to timely provide you with the information necessary to make a QEF election with respect to any entity that the BPY General Partner and the Property General Partner believe is a PFIC with respect to you. Accordingly, you are urged to consider timely filing a QEF election with respect to each such entity for which our company provides the necessary information. Any such election should be made for the first year our company holds an interest in such entity or for the first year in which you hold our units, if later.

Recently enacted U.S. legislation requires each U.S. person who directly or indirectly owns an interest in a PFIC to file an annual report with the IRS, and the failure to file such report could result in the imposition of penalties on such U.S. person and in the extension of the statute of limitations with respect to federal income tax returns filed by such U.S. person. However, this reporting requirement has been temporarily suspended. You should consult an independent tax adviser regarding the PFIC rules, including the potential effect of this legislation on your filing requirements and the advisability of making a QEF election or, if applicable, a mark-to-market election, with respect to any PFIC in which you are treated as owning an interest through our company.

Investment Structure

To ensure that our company meets the Qualifying Income Exception for publicly-traded partnerships (discussed above) and complies with certain requirements in its limited partnership agreement, we may structure certain investments through an entity classified as a corporation for U.S. federal income tax purposes. Such investment structures will be entered into as determined in the sole discretion of the BPY General Partner and the Property General Partner in order to create a tax structure that generally is efficient for our unitholders. However, because our unitholders will be located in numerous taxing jurisdictions, no assurance can be given that any such investment structure will benefit all our unitholders to the same extent, and such an investment structure might even result in additional tax burdens on some unitholders. As discussed above, if any such entity were a non-U.S. corporation, it might be considered a PFIC. If any such entity were a U.S. corporation, it would be subject to U.S. federal net income tax on its income, including any gain recognized on the disposition of its investments. In addition, if the investment were to involve U.S. real property, gain recognized on the disposition of the investment by a corporation generally would be subject to corporate level tax, whether the corporation were a U.S. or a non-U.S. corporation.

U.S. Withholding Taxes

Although each U.S. Holder is required to provide us with an IRS Form W-9, we nevertheless may be unable to accurately or timely determine the tax status of our investors for purposes of determining whether U.S. withholding applies to payments made by our company to some or all of our unitholders. In such a case, payments made by our company to U.S. Holders might be subject to U.S. “backup” withholding at the applicable rate (currently 28%) or other U.S. withholding taxes (potentially as high as 35%). You would be able to treat as a credit your allocable share of any U.S. withholding taxes paid in the taxable year in which such withholding taxes were paid and, as a result, you might be entitled to a refund of such taxes from the IRS. In the event you transfer or otherwise dispose of some or all of your units, special rules might apply for purposes of determining whether you or the transferee of such units were subject to U.S. withholding taxes in respect of income allocable to, or distributions made on account of, such units or entitled to refunds of any such taxes withheld. See below “Administrative Matters—Certain Effects of a Transfer of Units”. You should consult an independent tax adviser regarding the treatment of U.S. withholding taxes.

Transferor/Transferee Allocations

Our company may allocate items of income, gain, loss, and deduction using a monthly or other convention, whereby any such items recognized in a given month by our company are allocated to our unitholders as of a specified date of such month. As a result, if you transfer your units, you might be allocated

 

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income, gain, loss, and deduction realized by our company after the date of the transfer. Similarly, if you acquire additional units, you might be allocated income, gain, loss, and deduction realized by our company prior to your ownership of such units.

Although Section 706 of the U.S. Internal Revenue Code generally governs allocations of items of partnership income and deductions between transferors and transferees of partnership interests, it is not clear that our company’s allocation method complies with the requirements. If our company’s convention were not permitted, the IRS might contend that our company’s taxable income or losses must be reallocated among our unitholders. If such a contention were sustained, your tax liabilities might be adjusted to your detriment. The BPY General Partner is authorized to revise our company’s method of allocation between transferors and transferees (as well as among investors whose interests otherwise vary during a taxable period).

U.S. Federal Estate Tax Consequences

If our units are included in the gross estate of a U.S. citizen or resident for U.S. federal estate tax purposes, then a U.S. federal estate tax might be payable in connection with the death of such person. Individual U.S. Holders should consult an independent tax adviser concerning the potential U.S. federal estate tax consequences with respect to our units.

Certain Reporting Requirements

A U.S. Holder who invests more than $100,000 in our company may be required to file IRS Form 8865 reporting the investment with such U.S. Holder’s U.S. federal income tax return for the year that includes the date of the investment. You may be subject to substantial penalties if you fail to comply with this and other information reporting requirements with respect to an investment in our units. You should consult an independent tax adviser regarding such reporting requirements.

U.S. Taxation of Tax-Exempt U.S. Holders of Our Units

Income recognized by a U.S. tax-exempt organization is exempt from U.S. federal income tax except to the extent of the organization’s unrelated business taxable income, or UBTI. UBTI is defined generally as any gross income derived by a tax-exempt organization from an unrelated trade or business that it regularly carries on, less the deductions directly connected with that trade or business. In addition, income arising from a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) that holds operating assets or is otherwise engaged in a trade or business generally will constitute UBTI. Notwithstanding the foregoing, UBTI generally does not include any dividend income, interest income, certain other categories of passive income, or capital gains realized by a tax-exempt organization, so long as such income is not “debt-financed”, as discussed below. The BPY General Partner currently believes that our company should not be regarded as engaged in a trade or business, and anticipates that any operating assets held by our company will be held through entities that are treated as corporations for U.S. federal income tax purposes.

The exclusion from UBTI does not apply to income from “debt-financed property”, which is treated as UBTI to the extent of the percentage of such income that the average acquisition indebtedness with respect to the property bears to the average tax basis of the property for the taxable year. If an entity treated as a partnership for U.S. federal income tax purposes incurs acquisition indebtedness, a tax-exempt partner in such partnership will be deemed to have acquisition indebtedness equal to its allocable portion of such acquisition indebtedness. If any such indebtedness were used by our company or by the Property Partnership to acquire property, such property generally would constitute debt-financed property, and any income or gain realized on such debt-financed property and allocated to a tax-exempt organization generally would constitute UBTI to such tax-exempt organization. In addition, even if such indebtedness were not used either by our company or by the Property Partnership to acquire property but were instead used to fund distributions to our unitholders, if a tax-exempt organization subject to taxation in the United States used such proceeds to make an investment outside our company, the IRS might assert that such investment constitutes debt-financed property to such unitholder with

 

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the consequences noted above. Our company and the Property Partnership do not intend to directly incur debt to acquire property, and the BPY General Partner and the Property General Partner do not believe that our company or the Property Partnership will generate UBTI attributable to debt-financed property in the future. Moreover, 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 UBTI. However, neither our company nor the Property Partnership is prohibited from incurring indebtedness, and no assurance can be provided that neither our company nor the Property Partnership will generate UBTI attributable to debt-financed property in the future. Tax-exempt U.S. Holders should consult an independent tax adviser regarding the tax consequences of an investment in our units.

Investments by U.S. Mutual Funds

U.S. mutual funds that are treated as regulated investment companies, or RICs, for U.S. federal income tax purposes are required, among other things, to meet an annual 90% gross income and a quarterly 50% asset value test under Section 851(b) of the U.S. Internal Revenue Code to maintain their favorable U.S. federal income tax status. The treatment of an investment by a RIC in our units for purposes of these tests will depend on whether our company is treated as a “qualified publicly-traded partnership”. If our company is so treated, then our units themselves are the relevant assets for purposes of the 50% asset value test, and the net income from our units is the relevant gross income for purposes of the 90% gross income test. If, however, our company is not so treated, then the relevant assets are the RIC’s allocable share of the underlying assets held by our company, and the relevant gross income is the RIC’s allocable share of the underlying gross income earned by our company. Whether our company will qualify as a qualified publicly-traded partnership depends on the exact nature of its future investments, but the BPY General Partner believes it is likely that our company will not be treated as a qualified publicly-traded partnership. RICs should consult an independent tax adviser regarding the U.S. tax consequences of an investment in our units.

Consequences to Non-U.S. Holders

Spin-Off

A Non-U.S. Holder generally should not recognize gain or loss for U.S. federal income tax purposes upon the receipt of our units pursuant to the spin-off.

Holding of Units and Other Considerations

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 our company is unlikely to earn income treated as effectively connected with a U.S. trade or business, including effectively connected income attributable to the sale of a “U.S. real property interest”, as defined in the U.S. Internal Revenue Code. If, as anticipated, our company is not treated as engaged in a U.S. trade or business or as deriving income which is treated as effectively connected with a U.S. trade or business, and provided that a Non-U.S. Holder is not itself engaged in a U.S. trade or business, then such Non-U.S. Holder generally will not be subject to U.S. tax return filing requirements solely as a result of owning our units and generally will not be subject to U.S. federal income tax on its allocable share of our company’s interest and dividends from non-U.S.-sources or gain from the sale or other disposition of securities or real property located outside of the United States.

However, there can be no assurance that the law will not change or that the IRS will not deem our company to be engaged in a U.S. trade or business. If, contrary to the BPY General Partner’s expectations, our company is treated as engaged in a U.S. trade or business, then a Non-U.S. Holder generally would be required to file a U.S. federal income tax return, even if no effectively connected income were allocable to it. If our company were to have income treated as effectively connected with a U.S. trade or business, then a Non-U.S. Holder would be required to report that income and would be subject to U.S. federal income tax at the regular graduated rates. In addition, our company might be required to withhold U.S. federal income tax on such Non-U.S.

 

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Holder’s distributive share of such income. A corporate Non-U.S. Holder might also be subject to branch profits tax at a rate of 30%, or at a lower treaty rate, if applicable. Finally, if our company were treated as engaged in a U.S. trade or business, a portion of any gain realized by a Non-U.S. Holder upon the sale or exchange of its units could be treated as income effectively connected with a U.S. trade or business and therefore subject to U.S. federal income tax at the regular graduated rates.

In general, even if our company is not engaged in a U.S. trade or business, and assuming you are not otherwise engaged in a U.S. trade or business, you will nonetheless be subject to a withholding tax of 30% on the gross amount of certain U.S.-source income which is not effectively connected with a U.S. trade or business. Income subjected to such a flat tax rate is income of a fixed or determinable annual or periodic nature, including dividends and certain interest income. Such withholding tax may be reduced or eliminated with respect to certain types of income under an applicable income tax treaty between the United States and your country of residence or under the “portfolio interest” rules of the U.S. Internal Revenue Code, provided that you provide proper certification as to your eligibility for such treatment. Notwithstanding the foregoing, and although each Non-U.S. Holder is required to provide us with an IRS Form W-8, we nevertheless may be unable to accurately or timely determine the tax status of our investors for purposes of establishing whether reduced rates of withholding apply to some or all of our investors. In such a case, your allocable share of distributions of U.S.-source dividend and interest income will be subject to U.S. withholding tax at a rate of 30%. Further, if you would not be subject to U.S. tax based on your tax status or otherwise were eligible for a reduced rate of U.S. withholding, you might need to take additional steps to receive a credit or refund of any excess withholding tax paid on your account, which could include the filing of a non-resident U.S. income tax return with the IRS. Among other limitations applicable to claiming treaty benefits, if you reside in a treaty jurisdiction which does not treat our company as a pass-through entity, you might not be eligible to receive a refund or credit of excess U.S. withholding taxes paid on your account. In the event you transfer or otherwise dispose of some or all of your units, special rules may apply for purposes of determining whether you or the transferee of such units are subject to U.S. withholding taxes in respect of income allocable to, or distributions made on account of, such units or entitled to refunds of any such taxes withheld. See “—Administrative Matters—Certain Effects of a Transfer of Units” below. You should consult an independent tax adviser regarding the treatment of U.S. withholding taxes.

Special rules may apply in the case of a Non-U.S. Holder subject to special rules, including, without limitation, any Non-U.S. Holder (i) that has an office or fixed place of business in the United States; (ii) that is present in the United States for 183 days or more in a taxable year; or (iii) that is (a) a former citizen or long-term resident of the United States, (b) a foreign insurance company that is treated as holding a partnership interest in our company in connection with its U.S. business, (c) a PFIC, or (d) a corporation that accumulates earnings to avoid U.S. federal income tax. You should consult an independent tax adviser regarding the application of these special rules.

Taxes in Other Jurisdictions

In addition to U.S. federal income tax consequences, an investment in our company could subject you to U.S. state, local, and non-U.S. taxes imposed by the various jurisdictions in which our company entities do business or own property now or in the future, even if you do not reside in any of those jurisdictions. You could also be subject to tax return filing obligations and income, franchise, or other taxes, including withholding taxes, in the jurisdictions in which we invest. Furthermore, you 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 your responsibility to file all U.S. federal, state, local, and non-U.S. tax returns that may be required of you.

Income or gain from investments held by our company may be subject to withholding or other taxes in jurisdictions outside the United States, except to the extent an income tax treaty applies. If you wish to claim the

 

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benefit of an applicable income tax treaty, you might be required to submit information to tax authorities in such jurisdictions. You should consult an independent tax adviser regarding the U.S. federal, state, local, and non-U.S. tax consequences of an investment in our company.

Administrative Matters

Tax Matters Partner

The BPY General Partner will act as our company’s “tax matters partner”. As the tax matters partner, the BPY General Partner will have the authority, subject to certain restrictions, to act on behalf of our company in connection with any administrative or judicial review of our company’s items of income, gain, loss, deduction, or credit.

Information Returns

We have agreed to use commercially reasonable efforts to furnish to you, within 90 days after the close of each calendar year, tax information (including IRS Schedule K-1), which describes on a U.S. Dollar basis your share of our company’s income, gain, loss, and deduction for our preceding taxable year. However, providing this U.S. tax information to our unitholders will be subject to delay in the event of, among other reasons, the late receipt of any necessary tax information from lower-tier entities. It is therefore possible that, in any taxable year, you will need to apply for an extension of time to file your tax returns. In preparing this U.S. tax information, we will use various accounting and reporting conventions, some of which have been mentioned in the previous discussion, to determine your share of income, gain, loss, and deduction. The IRS may successfully contend that certain of these reporting conventions are impermissible, which could result in an adjustment to your income or loss.

Our company may be audited by the IRS. Adjustments resulting from an IRS audit could require you to adjust a prior year’s tax liability and result in an audit of your own tax return. Any audit of your tax return could result in adjustments not related to our tax returns, as well as those related to our tax returns.

Tax Shelter Regulations and Related Reporting Requirements

If we were to engage in a “reportable transaction”, we (and possibly our unitholders) would be required to make a detailed disclosure of the transaction to the IRS in accordance with regulations governing tax shelters and other potentially tax-motivated transactions. A transaction may be a reportable transaction based upon any of several factors, including the fact that it is a type of tax avoidance transaction publicly identified by the IRS as a “listed transaction” or “transaction of interest”, or that it produces certain kinds of losses in excess of $2 million (or, in the case of certain foreign currency transactions, losses in excess of $50,000). An investment in our company may be considered a “reportable transaction” if, for example, our company were to recognize certain significant losses in the future. In certain circumstances, a unitholder who disposes of an interest in a transaction resulting in the recognition by such holder of significant losses in excess of certain threshold amounts may be obligated to disclose its participation in such transaction. Certain of these rules are unclear, and the scope of reportable transactions can change retroactively. Therefore, it is possible that the rules may apply to transactions other than significant loss transactions.

Moreover, if we were to participate in a reportable transaction with a significant purpose to avoid or evade tax, or in any listed transaction, you might be subject to (i) significant accuracy related penalties with a broad scope, (ii) for those persons otherwise entitled to deduct interest on federal tax deficiencies, non-deductibility of interest on any resulting tax liability, and (iii) in the case of a listed transaction, an extended statute of limitations. We do not intend to participate in any reportable transaction with a significant purpose to avoid or evade tax, nor do we intend to participate in any listed transactions. However, no assurance can be provided that the IRS will not assert that we have participated in such a transaction.

You should consult an independent tax adviser concerning any possible disclosure obligation under the regulations governing tax shelters with respect to the disposition of our units.

 

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Taxable Year

Our company currently intends to use the calendar year as its taxable year for U.S. federal income tax purposes. Under certain circumstances which we currently believe are unlikely to apply, a taxable year other than the calendar year may be required for such purposes.

Constructive Termination

Subject to the electing large partnership rules described below, our company 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 company would result in the close of its taxable year for all unitholders. If a unitholder reports on a taxable year other than a fiscal year ending on our company’s year-end, and the unitholder is otherwise subject to U.S. federal income tax, the closing of our company’s taxable year may result in more than 12 months of our company’s taxable income or loss being includable in such unitholder’s taxable income for the year of the termination. We would be required to make new tax elections after a termination, including a new Section 754 Election. A constructive termination could also result in penalties and other adverse tax consequences if we were unable to determine that the termination had occurred. Moreover, a constructive termination might either accelerate the application of, or subject our company to, any tax legislation enacted before the termination.

Elective Procedures for Large Partnerships

The U.S. Internal Revenue Code allows large partnerships to elect streamlined procedures for income tax reporting. This election would reduce the number of items that must be separately stated on the IRS Schedules K-1 that are issued to our unitholders, and such IRS Schedules K-1 would have to be provided to holders on or before the first March 15 following the close of each taxable year. In addition, this election would prevent our company from suffering a “technical termination” (which would close our company’s taxable year and require that we make a new Section 754 Election) if, within a 12-month period, there were a sale or exchange of 50% or more of our total units. Despite the foregoing benefits, there are also costs and administrative burdens associated with such an election. Consequently, as of this time, our company has not elected to be subject to the reporting procedures applicable to large partnerships.

Withholding and Backup Withholding

For each calendar year, we will report to you and to the IRS the amount of distributions that we pay, and the amount of tax (if any) that we withhold on these distributions. The proper application to our company of the rules for withholding under Sections 1441 through 1446 of the U.S. Internal Revenue Code (applicable to certain dividends, interest, and amounts treated as effectively connected with a U.S. trade or business, among other items) is unclear. Because the documentation we receive may not properly reflect the identities of unitholders at any particular time (in light of possible sales of our units), we may over-withhold or under-withhold with respect to a particular unitholder. For example, we may impose withholding, remit such amount to the IRS and thus reduce the amount of a distribution paid to a Non-U.S. Holder. It may be the case, however, that the corresponding amount of our income was not properly allocable to such holder, and the appropriate amount of withholding should have been less than the actual amount withheld. Such Non-U.S. Holder would be entitled to a credit against the holder’s U.S. federal income tax liability for all withholding, including any such excess withholding. However, if the withheld amount were to exceed the holder’s U.S. federal income tax liability, the holder would need to apply for a refund to obtain the benefit of such excess withholding. Similarly, we may fail to withhold on a distribution, and it may be the case that the corresponding income was properly allocable to a Non-U.S. Holder and that withholding should have been imposed. In such case, we intend to pay the under-withheld amount to the IRS, and we may treat such under-withholding as an expense that will be borne by all unitholders on a pro rata basis (since we may be unable to allocate any such excess withholding tax cost to the relevant Non-U.S. Holder).

 

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Under the backup withholding rules, you may be subject to backup withholding tax (at the applicable rate, currently 28%) with respect to distributions paid unless: (i) you are an exempt recipient and demonstrate this fact when required; or (ii) provide a taxpayer identification number, certify as to no loss of exemption from backup withholding tax, and otherwise comply with the applicable requirements of the backup withholding tax rules. A U.S. Holder that is exempt should certify such status on a properly completed IRS Form W-9. A Non-U.S. Holder may qualify as an exempt recipient by submitting a properly completed IRS Form W-8. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund from the IRS, provided you supply the required information to the IRS in a timely manner. If you do not timely provide our company, or the applicable nominee, broker, clearing agent, or other intermediary, with IRS Form W-9 or IRS Form W-8, as applicable, or such form is not properly completed, then our company may become subject to U.S. backup withholding taxes in excess of what would have been imposed had our company or the applicable intermediary received properly completed forms from all unitholders. For administrative reasons, and in order to maintain the fungibility of our units, such excess U.S. backup withholding taxes may be treated by our company as an expense that will be borne indirectly by all unitholders on a pro rata basis (e.g., since it may be impractical for us to allocate any such excess withholding tax cost to the unitholders that failed to timely provide the proper U.S. tax forms).

Additional Withholding Requirements

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 unless (i) the non-U.S. financial institution enters into an agreement with the IRS to provide to the IRS information concerning its direct and certain indirect U.S. account holders, or (ii) in the case of other non-U.S. entities, such entity provides to the withholding agent similar information concerning its substantial U.S. beneficial owners. Significant exceptions to these requirements apply, but the scope of these exceptions is addressed in U.S. Treasury regulations that have yet to be made final. You should consult an independent tax adviser regarding the treatment of U.S. withholding taxes in general and the application of the recently enacted legislation in light of your particular circumstances.

Information Reporting with Respect to Foreign Financial Assets

Under recently promulgated U.S. Treasury Regulations, U.S. individuals that own “specified foreign financial assets” with an aggregate fair market value exceeding either $50,000 on the last day of the taxable year or $75,000 at any time during the taxable year generally are required to file an information report with respect to such assets with their tax returns. Significant penalties may apply to persons who fail to comply with these new rules. Specified foreign financial assets include not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person, and any interest in a foreign entity. The U.S. Treasury Department and the IRS anticipate that, for taxable years beginning on or after January 1, 2012, these information reporting requirements will apply to certain U.S. entities that own specified foreign financial assets. The failure to report information required under these regulations could result in substantial penalties and in the extension of the statute of limitations with respect to federal income tax returns filed by you. You should consult an independent tax adviser regarding the possible implications of these recently promulgated regulations for an investment in our units.

Certain Effects of a Transfer of Units

Our company may allocate items of income, gain, loss, deduction, and credit using a monthly or other convention, whereby any such items recognized in a given month by our company are allocated to our unitholders as of a specified date of such month. Any U.S. withholding taxes applicable to dividends received by the Property Partnership (and, in turn, our company) generally will be withheld by our company only when such

 

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dividends are paid. Because our company generally intends to distribute amounts received in respect of dividends shortly after receipt of such amounts, it is generally expected that any U.S. withholding taxes withheld by our company on such amounts will correspond to our unitholders who were allocated income and who received the distributions in respect of such amounts. The Property Partnership may invest in debt obligations or other securities for which the accrual of interest or income thereon is not matched by a contemporaneous receipt of cash. Any such accrued interest or other income would be allocated pursuant to such monthly or other convention. Consequently, our unitholders may recognize income in excess of cash distributions received from our company, and any income so included by a unitholder would increase the basis such unitholder has in our units and would offset any gain (or increase the amount of loss) realized by such unitholder on a subsequent disposition of its units. In addition, U.S. withholding taxes generally would be withheld by our company only on the payment of cash in respect of such accrued interest or other income, and, therefore, it is possible that some unitholders would be allocated income which might be distributed to a subsequent unitholder, and such subsequent unitholder would be subject to withholding at the time of distribution. As a result, the subsequent unitholder, and not the unitholder who was allocated income, would be entitled to claim any available credit with respect to such withholding.

The Property Partnership has invested and will continue to invest in certain Holding Entities and operating entities organized in non-U.S. jurisdictions, and income and gain from such investments may be subject to withholding and other taxes in such jurisdictions. If any such non-U.S. taxes were imposed on income allocable to a U.S. Holder, and such holder were thereafter to dispose of its units prior to the date distributions were made in respect of such income, under applicable provisions of the U.S. Internal Revenue Code and U.S. Treasury regulations, the unitholder to whom such income was allocated (and not the unitholder to whom distributions were ultimately made) would, subject to other applicable limitations, be the party permitted to claim a credit for such non-U.S. taxes for U.S. federal income tax purposes. Thus a unitholder may be affected either favorably or adversely by the foregoing rules. Complex rules may, depending on a unitholder’s particular circumstances, limit the availability or use of foreign tax credits, and you are urged to consult an independent tax adviser regarding all aspects of foreign tax credits.

Nominee Reporting

Persons who hold an interest in our company as a nominee for another person are required to furnish to us:

 

  (a) the name, address and taxpayer identification number of the beneficial owner and the nominee;

 

  (b) whether the beneficial owner is (1) a person that is not a U.S. person, (2) a foreign government, an international organization, or any wholly owned agency or instrumentality of either of the foregoing, or (3) a tax-exempt entity;

 

  (c) the amount and description of units held, acquired, or transferred for the beneficial owner; and

 

  (d) specific information including the dates of acquisitions and transfers, means of acquisitions and transfers, and acquisition cost for purchases, as well as the amount of net proceeds from sales.

Brokers and financial institutions are required to furnish additional information, including whether they are U.S. persons and specific information on our units they acquire, hold, or transfer for their own account. A penalty of $100 per failure, up to a maximum of $1,500,000 per calendar year, generally is imposed by the U.S. Internal Revenue Code for the failure to report such information to us. The nominee is required to supply the beneficial owner of our units with the information furnished to us.

New Legislation or Administrative or Judicial Action

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authority may be available. You should be aware that the U.S. federal income tax rules, particularly those applicable to partnerships, are constantly under review (including currently) 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 revised interpretations of established concepts, statutory changes, revisions to regulations and other modifications and interpretations, any of which could adversely affect the value of our units and be effective on a retroactive basis. For example, changes to the U.S. federal tax laws and interpretations thereof could make it more difficult or impossible for our company to be treated as a partnership that is not taxable as a corporation for U.S. federal income tax purposes, affect the tax considerations of owning our units, change the character or treatment of portions of our company’s income (including, for example, the treatment of carried interest as ordinary income rather than capital gain), and adversely affect an investment in our units. Such changes could also affect or cause our company to change the way it conducts its activities, affect the tax considerations of an investment in our company, and otherwise change the character or treatment of portions of our company’s income (including changes that recharacterize certain allocations as potentially non-deductible fees).

Our company’s organizational documents and agreements permit the BPY General Partner to modify our limited partnership agreement from time to time, without the consent of our unitholders, to elect to treat our company as a corporation for U.S. federal tax purposes, or to address certain changes in U.S. federal income tax regulations, legislation or interpretation. In some circumstances, such revisions could have a material adverse impact on some or all of our unitholders.

THE FOREGOING DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING. THE TAX MATTERS RELATING TO OUR COMPANY AND UNITHOLDERS ARE COMPLEX AND ARE SUBJECT TO VARYING INTERPRETATIONS. MOREOVER, THE EFFECT OF EXISTING INCOME TAX LAWS, THE MEANING AND IMPACT OF WHICH IS UNCERTAIN, AND OF PROPOSED CHANGES IN INCOME TAX LAWS WILL VARY WITH THE PARTICULAR CIRCUMSTANCES OF EACH UNITHOLDER, AND IN REVIEWING THIS REGISTRATION STATEMENT THESE MATTERS SHOULD BE CONSIDERED. EACH UNITHOLDER SHOULD CONSULT AN INDEPENDENT TAX ADVISER WITH RESPECT TO THE U.S. FEDERAL, STATE, LOCAL, AND OTHER TAX CONSEQUENCES OF ANY INVESTMENT IN OUR UNITS.

Canadian Federal Income Tax Considerations

The following is a summary of the principal Canadian federal income tax consequences under the Tax Act of the receipt, holding and disposition of units in our company generally applicable to a holder who receives units in our company pursuant to the spin-off and who, for purposes of the Tax Act and at all relevant times, holds our units as capital property, deals at arm’s length with and is not affiliated with our company, the Property Partnership, the BPY General Partner, the Property General Partner, the Property GP LP and their respective affiliates. Generally, our units will be considered to be capital property to a holder, provided that the holder does not use or hold our units in the course of carrying on a business of trading or dealing in securities and has not acquired them in one or more transactions considered to be an adventure or concern in the nature of trade.

This summary is not applicable to (i) a holder that is a “financial institution” as defined in the Tax Act for purposes of the “mark-to-market” rules, (ii) a holder that is a “specified financial institution” as defined in the Tax Act, (iii) a holder who makes or has made a functional currency reporting election pursuant to section 261 of the Tax Act, (iv) a holder an interest in which would be a “tax shelter investment” as defined in the Tax Act (and this summary assumes that no such persons hold our units), (v) a holder who has, directly or indirectly, a “significant interest” as defined in subsection 34.2(1) of the Tax Act in our company, or (vi) a holder to whom any affiliate of our company is a “foreign affiliate” for purposes of the Tax Act. Any such holders should consult their own tax advisors with respect to an investment in our units.

This summary is based on the current provisions of the Tax Act, the regulations thereunder, or the Regulations, all specific proposals to amend the Tax Act or the Regulations publicly announced by or on behalf of the Minister prior to the date hereof, or the Tax Proposals, and the current published administrative and

 

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assessing policies and practices of the CRA. This summary assumes that all Tax Proposals will be enacted in the form proposed but no assurance can be given that the Tax Proposals will be enacted in the form proposed or at all. This summary does not otherwise take into account or anticipate any changes in law, whether by judicial, administrative or legislative decision or action or changes in CRA’s administrative and assessing policies and practices, nor does it take into account provincial, territorial or foreign income tax legislation or considerations, which may differ from those described herein. This summary is not exhaustive of all possible Canadian federal income tax consequences that may affect holders and prospective holders.

This summary assumes that neither our company nor the Property Partnership will be considered to carry on business in Canada. Our Managing General Partner and the Property General Partner have advised that they intend to organize and conduct the affairs of each of these entities, to the extent possible, so that neither of these entities should be considered to carry on business in Canada for purposes of the Tax Act. However, no assurance can be given in this regard.

This summary also assumes that neither our company nor the Property Partnership is a “tax shelter” or “tax shelter investment”, each as defined in the Tax Act. However, no assurance can be given in this regard.

This summary also assumes that neither our company nor the Property Partnership will be a “SIFT partnership” as defined in subsection 197(1) of the Tax Act at any relevant time for purposes of the SIFT Rules on the basis that neither our company nor the Property Partnership will be a “Canadian resident partnership” as defined in subsection 248(1) of the Tax Act at any relevant time. However, there can be no assurance that the SIFT Rules will not be revised or amended such that the SIFT Rules will apply.

This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any particular holder of our units, and no representation with respect to the Canadian federal income tax consequences to any particular holder is made. Consequently, holders of our units and prospective holders of our units are advised to consult their own tax advisors with respect to their particular circumstances. See also “Risk Factors- Risks Relating to Taxation.”

For purposes of the Tax Act, all amounts relating to the acquisition, holding or disposition of our units must be expressed in Canadian Dollars including any distributions, adjusted cost base and proceeds of disposition. For purposes of the Tax Act, amounts denominated in a currency other than the Canadian Dollar generally must be converted into Canadian Dollars using the rate of exchange quoted by the Bank of Canada at noon on the date such amounts arose, or such other rate of exchange as is acceptable to the CRA.

Taxation of Canadian Resident Limited Partners

The following is a discussion of the consequences under the Tax Act to a unitholder who, for purposes of the Tax Act and at all relevant times, is resident or deemed to be resident in Canada, or Canadian Limited Partners.

Spin-Off

Canadian Limited Partners who received units of our company under the spin-off will be considered to have received a taxable dividend equal to the fair market value of our units so received plus the amount of any cash received in lieu of fractional units. The adjusted cost base to a Canadian Limited Partner of our units received upon the spin-off will be equal to the fair market value of our units so received. In computing the adjusted cost base of our units at any time, the adjusted cost base of a Canadian Limited Partner’s units will be averaged with the adjusted cost base of all of our other units, if any, held by the Canadian Limited Partner as capital property at the particular time.

Such dividend received by a shareholder who is an individual will be included in computing the holder’s income subject to the gross-up and dividend tax credit rules normally applicable under the Tax Act to taxable dividends received from taxable Canadian corporations. The dividend will be eligible for the enhanced

 

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gross-up and dividend tax credit if Brookfield Asset Management designates the dividend as an “eligible dividend”. There may be limitations on Brookfield Asset Management’s ability to designate dividends as eligible dividends. Such dividend received by an individual, or certain trusts, may give rise to alternative minimum tax under the Tax Act, depending on the individual’s circumstances.

Such dividend received by a holder that is a corporation will be included in the corporation’s income and will generally be deductible in computing its taxable income. Certain corporations, including “private corporations” or “subject corporations” (as such terms are defined in the Tax Act) may be liable to pay a refundable tax under Part IV of the Tax Act at the rate of 33 1/3% on the dividend to the extent that the dividend is deductible in computing taxable income.

Subsection 55(2) of the Tax Act provides that where a corporate holder receives a dividend and such dividend is deductible in computing the holder’s income and is not subject to Part IV tax or is subject to Part IV tax that is refundable as part of the series of transactions that includes the receipt of the dividend, all or part of the dividend may in certain circumstances be treated as a capital gain from the disposition of a capital property the taxable portion of which must be included in computing the holder’s income for the year in which the dividend was received. Accordingly, corporate holders should consult their own tax advisors for specific advice with respect to the potential application of this provision.

Computation of Income or Loss

Each Canadian Limited Partner is required to include (or, subject to the “at-risk rules” discussed below, entitled to deduct) in computing his or her income for a particular taxation year the Canadian Limited Partner’s pro rata share of the income (or loss) of our company for its fiscal year ending in, or coincidentally with, the Canadian Limited Partner’s taxation year end, whether or not any of that income is distributed to the Canadian Limited Partner in the taxation year and regardless of whether our units were held throughout such year.

Our company will not itself be a taxable entity and is not expected to be required to file an income tax return in Canada. However, the income (or loss) of our company for a fiscal period for purposes of the Tax Act will be computed as if it were a separate person resident in Canada and the unitholders will be allocated a share of that income (or loss) in accordance with our limited partnership agreement. The income (or loss) of our company will include our company’s share of the income (or loss) of the Property Partnership for a fiscal year determined in accordance with the Property Partnership’s limited partnership agreement. For this purpose, our company’s fiscal year end and that of the Property Partnership will be December 31.

The income for tax purposes of our company for a given fiscal year of our company will be allocated to each Canadian Limited Partner in an amount calculated by multiplying such income that is allocable to unitholders by a fraction, the numerator of which is the sum of the distributions received by such Canadian Limited Partner with respect to such fiscal year and the denominator of which is the aggregate amount of the distributions made by our company to all unitholders with respect to such fiscal year. Generally, the source and character of items of income allocated to Canadian Limited Partner with respect to a fiscal year of our company will be the same source and character as the cash distributions received by such Canadian Limited Partner with respect to such fiscal year.

If, with respect to a given fiscal year, no distribution is made by us to our unitholders or our company has a loss for tax purposes, one quarter of the income, or loss, as the case may be, for tax purposes of our company for such fiscal year that is allocable to unitholders, will be allocated to our unitholders of record at the end of each calendar quarter ending in such fiscal year in the proportion that the number of our units held at each such date by a unitholder is of the total number of units of our company that are issued and outstanding at each such date. Generally, the source and character of such income or loss allocated to a unitholder at the end of the each calendar quarter will be the same source and character as the income or loss earned or incurred by our company in such calendar quarter.

 

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The income of our company as determined for purposes of the Tax Act may differ from its income as determined for accounting purposes and may not be matched by cash distributions. In addition, for purposes of the Tax Act, all income (or losses) of our company and the Property Partnership must be calculated in Canadian currency. Where our company (or the Property Partnership) holds investments denominated in U.S. Dollars or other foreign currencies, gains and losses may be realized by our company as a consequence of fluctuations in the relative values of the Canadian and foreign currencies.

In computing the income (or loss) of our company, deductions may be claimed in respect of reasonable administrative costs, interest and other expenses incurred by us for the purpose of earning income, subject to the relevant provisions of the Tax Act. Our company may also deduct from its income for the year a portion of the reasonable expenses, if any, incurred by our company to issue our units. The portion of such issue expenses deductible by our company in a taxation year is 20% of such issue expenses, pro-rated where our company’s taxation year is less than 365 days. Our company and the Property Partnership may be required to withhold and remit Canadian federal withholding tax on any management or administration fees or charges paid or credited to a non-resident person, to the extent that such management or administration fees or charges are deductible in computing our company’s or the Property Partnership’s income from a source in Canada.

In general, a Canadian Limited Partner’s share of any income (or loss) from our company from a particular source will be treated as if it were income (or loss) of the Canadian Limited Partner from that source, and any provisions of the Tax Act applicable to that type of income (or loss) will apply to the Canadian Limited Partner. Our company will invest in limited partnership units of the Property Partnership. In computing our company’s income (or loss) under the Tax Act, the Property Partnership will itself be deemed to be a separate person resident in Canada which computes its income (or loss) and allocates to its partners their respective share of such income (or loss). Accordingly, the source and character of amounts included in (or deducted from) the income of Canadian Limited Partners on account of income (or loss) earned by the Property Partnership generally will be determined by reference to the source and character of such amounts when earned by the Property Partnership.

The characterization by CRA of gains realized by our company or the Property Partnership on the disposition of investments as either capital gains or income gains will depend largely on factual considerations, and no conclusions are expressed herein.

A Canadian Limited Partner’s share of taxable dividends received or considered to be received by our company in a fiscal year from a corporation resident in Canada will be treated as a dividend received by the Canadian Limited Partner and will be subject to the normal rules in the Tax Act applicable to such dividends, including the enhanced dividend gross-up and tax credit for “eligible dividends” as defined in the Tax Act when the dividend received by the Property Partnership is designated as an “eligible dividend”.

Foreign taxes paid by our company or the Property Partnership and taxes withheld at source (other than for the account of a particular unitholder) will be allocated pursuant to the governing partnership agreement. Each Canadian Limited Partner’s share of the “business-income tax” and “non-business-income tax” paid in a foreign country for a year will be creditable against its Canadian federal income tax liability to the extent permitted by the detailed rules contained in the Tax Act. Although the foreign tax credit provisions are designed to avoid double taxation, the maximum credit is limited. Because of this, and because of timing differences in recognition of expenses and income and other factors, there is a risk of double taxation. The Minister announced the Foreign Tax Credit Generator Proposals on March 4, 2010 which are contained in draft legislation released on August 27, 2010, to address certain foreign tax credit generator transactions. Under the Foreign Tax Credit Generator Proposals, the foreign “business income tax” or “non-business-income tax” for any taxation year may be limited in certain circumstances, including where a Canadian Limited Partner’s share of our company’s income under the income tax laws of any country (other than Canada) under whose laws the income of our company is subject to income taxation, is less than the Canadian Limited Partner’s share of such income for purposes of the Tax Act. No assurances can be given that the Foreign Tax Credit Generator Proposals will not

 

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apply to any Canadian Limited Partner. If the Foreign Tax Credit Generator Proposals apply, a Canadian Limited Partner’s foreign tax credits will be limited.

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, 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-resident partners may be entitled to under an applicable income tax treaty or convention, provided that the residency status and entitlement to the 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, the BPY General Partner and the Property General Partner expect that 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-resident 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 CRA would apply its administrative practice in this context. Under 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 reduced rates of Canadian federal withholding tax that such partners may be entitled to under the Treaty.

If our company incurs losses for tax purposes, each Canadian Limited Partner will, subject to the REOP Proposals discussed below, be entitled to deduct in the computation of income for tax purposes the Canadian Limited Partner’s pro rata share of any net losses for tax purposes of our company for its fiscal year to the extent that the Canadian Limited Partner’s investment is “at-risk” within the meaning of the Tax Act. The Tax Act contains “at-risk rules” which may, in certain circumstances, restrict the deduction of a limited partner’s share of any losses of a limited partnership. The BPY General Partner and the Property General Partner do not anticipate that our company or the Property Partnership will incur losses but no assurance can be given in this regard. Accordingly, Canadian Limited Partners should consult their own tax advisors for specific advice with respect to the potential application of the “at-risk rules”.

On October 31, 2003, the Department of Finance released for public comment Tax Proposals under which a taxpayer would be considered to have a loss from a source that is a business or property for a taxation year only if, in that year, it is reasonable to assume that the taxpayer will realize a cumulative profit (excluding capital gains or losses) from the business or property during the period that the business is carried on or that the property is held. In general, these Tax Proposals, or the REOP Proposals, may deny the realization of losses by Canadian Limited Partners from their investment in our company in a particular taxation year, if, in the year the loss is claimed, it is not reasonable to expect that an overall cumulative profit would be earned from the investment in our company for the period in which the Canadian Limited Partner has held and can reasonably be expected to hold the investment. The BPY General Partner and the Property General Partner do not anticipate that the activities of our company and the Property Partnership will, in and of themselves, generate losses, but no assurance can be given in this regard. However, Canadian Limited Partners may incur expenses in connection with an acquisition of units in our company that could result in a loss that could be affected by the REOP Proposals. As part of the 2005 federal budget, the Minister announced that an alternative proposal to reflect the REOP Proposals would be released for comment at an early opportunity. No such alternative proposal has been released to date. There can be no assurance that such alternative proposal will not adversely affect Canadian Limited Partners, or that any revised proposal may not differ significantly from the REOP Proposals described herein.

 

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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”, referred to as the FIE Proposals, 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. The Minister released draft legislation to implement the revised Tax Proposals on August 27, 2010. 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 Canadian Limited Partners, either directly or by way of allocation of such income imputed to our company or 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 Canadian Limited Partner, 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. No assurance can be given that existing section 94.1 of the Tax Act as proposed to be amended will not apply to a Canadian Limited Partner, our company or the Property Partnership. If these rules apply to a Canadian Limited Partner, our company or the Property Partnership, income will be imputed directly to the Canadian Limited Partner or to our company or to the Property Partnership and allocated to the Canadian Limited Partner in accordance with the rules in existing section 94.1 of the Tax Act as proposed to be amended. The rules in existing section 94.1 of the Tax Act as proposed to be amended are complex and Canadian Limited Partners should consult their own tax advisors regarding the application of these rules to them in their particular circumstances.

Dividends paid by the CFAs to the Property Partnership will be included in computing the income of the Property Partnership. To the extent that any of the CFAs or any direct or indirect subsidiary that itself is a controlled foreign affiliate of the Property Partnership, or Indirect CFA, thereof earns income that is characterized as FAPI, in a particular taxation year of the CFA or Indirect CFA, the FAPI allocable to the Property Partnership 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 that CFA or Indirect CFA ends, whether or not the Property Partnership actually receives a distribution of that FAPI. Our company will include its share of such FAPI of the Property Partnership in computing its income for Canadian federal income tax purposes and Canadian Limited Partners 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, Canadian Limited Partners 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. If an amount of FAPI is included in computing the income of the Property Partnership for Canadian federal income tax purposes, an amount may be deductible in respect of the “foreign accrual tax” as defined in the Tax Act applicable to the FAPI. Any amount of FAPI included in income net of the amount of any deduction in respect of “foreign accrual tax” will increase the adjusted cost base to the Property Partnership of its shares of the particular CFA in respect of which the FAPI was included. At such time as the Property Partnership receives a dividend of this type of income that was previously treated as FAPI, that dividend will effectively not be taxable to the Property Partnership and there will be a corresponding reduction in the adjusted cost base to the Property Partnership of the particular CFA shares. Under the Foreign Tax Credit Generator Proposals, the “foreign accrual tax” applicable to a particular amount of FAPI included in a partnership’s income in respect of a particular “foreign affiliate” of the partnership may be limited in certain specified circumstances, including where the share of the income of any member of the partnership that is a person resident in Canada is, under the income tax laws of any country (other than Canada) under whose laws the income of the partnership is subject to income taxation, less than its share thereof for purposes of the Tax Act. No assurances can be given that the Foreign Tax Credit Generator Proposals will not apply to the Property Partnership. If the Foreign Tax Credit Generator Proposals apply, the “foreign accrual tax” applicable to a particular amount of FAPI included in the Property Partnership’s income in respect of a particular “foreign affiliate” of the Property Partnership will be limited.

 

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Disposition of Our Units

The disposition by a Canadian Limited Partner of a unit of our company will result in the realization of a capital gain (or capital loss) by such limited partner. The amount of such capital gain (or capital loss) will generally be the amount, if any, by which the proceeds of disposition of a unit, less any reasonable costs of disposition, exceed (or are exceeded by) the adjusted cost base of such unit. In general, the adjusted cost base of a Canadian Limited Partner’s units of our company will be equal to (i) the actual cost of the units (excluding any portion thereof financed with limited recourse indebtedness) whether acquired pursuant to the spin-off, the distribution reinvestment plan or otherwise, plus (ii) the pro rata share of the income of our company allocated to the Canadian Limited Partner for the fiscal years of our company ending before the relevant time less (iii) the aggregate of the pro rata share of losses of our company allocated to the Canadian Limited Partner (other than losses which cannot be deducted because they exceed the Canadian Limited Partner’s “at-risk” amount) for the fiscal years of our company ending before the relevant time and the Canadian Limited Partner’s distributions from our company made before the relevant time. The adjusted cost base of each of our units will be subject to the averaging provisions contained in the Tax Act.

Where a Canadian Limited Partner disposes of all of its units of our company, such person will no longer be a partner of our partnership. If, however, a Canadian Limited Partner is entitled to receive a distribution from our company after the disposition of all such units, then the Canadian Limited Partner will be deemed to dispose of the units at the later of: (i) the end of the fiscal year of our company during which the disposition occurred; and (ii) the date of the last distribution made by our company to which the Canadian Limited Partner was entitled. Pursuant to the Tax Proposals, the pro rata share of the income (or loss) for tax purposes of our company for a particular fiscal year which is allocated to a Canadian Limited Partner who has ceased to be a partner will generally be added (or deducted) in the computation of the adjusted cost base of the Canadian Limited Partner’s units immediately prior to the time of the disposition. These rules are complex and Canadian Limited Partners should consult their own tax advisors for advice with respect to the specific tax consequences to them of disposing of units of our company.

A Canadian Limited Partner will realize a deemed capital gain if, and to the extent that, the adjusted cost base of the Canadian Limited Partner’s units of our company is negative at the end of any of our fiscal years. In such a case, the adjusted cost base of the Canadian Limited Partner’s units of our company will be nil at the beginning of our next fiscal year.

Capital Gains and Capital Losses

In general, one-half of a capital gain realized by a Canadian Limited Partner must be included in computing such Canadian Limited Partner’s income as a taxable capital gain. One-half of a capital loss is deducted as an allowable capital loss against taxable capital gains realized in the year and any remainder may be deducted against taxable capital gains in any of the three years preceding the year or any year following the year to the extent and under the circumstances described in the Tax Act.

Where a Canadian Limited Partner disposes of units to a tax-exempt person, more than one-half of such capital gain may be treated as a taxable capital gain if any portion of the gain is attributable to an increase in value of depreciable property held by the Property Partnership. Canadian Limited Partners contemplating such dispositions should consult their own advisors. The Property General Partner does not expect that the Property Partnership will hold any depreciable property and therefore expects that only one-half of any capital gains arising from a disposition of our units should be treated as taxable capital gains.

A Canadian Limited Partner that is throughout the relevant taxation year a “Canadian-controlled private corporation” as defined in the Tax Act may be liable to pay an additional refundable tax of 6 2/3% on its “aggregate investment income”, as defined in the Tax Act, for the year, which is defined to include taxable capital gains. Canadian Limited Partners that are individuals or trusts may be subject to the alternative minimum tax rules. Such Canadian Limited Partners should consult their own tax advisors.

 

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Eligibility for Investment

Provided that our units are listed on a “designated stock exchange” (which currently includes the NYSE and the TSX), our units will be “qualified investments” under the Tax Act for a trust governed by a RRSP, deferred profit share plan, RRIF, registered education saving plan, registered disability saving plan, and a TFSA. 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 we do not deal at arm’s length for purposes of the Tax Act. The Department of Finance (Canada) has recently indicated that it is prepared to recommend further amendments to the prohibited investment rules contained in the Tax Act that will narrow the circumstances in which a holder of a TFSA or an annuitant of an RRSP or RRIF will have a “significant interest”, however, no draft legislation has been released as at the date hereof. 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.

Taxation of Non-Canadian Limited Partners

The following summary applies to a holder who, for purposes of the Tax Act, at all relevant times, is not, and is not deemed to be resident in Canada and who does not use or hold their investment in our company in connection with a business carried on, or deemed to be carried on, in Canada, or a Non-Canadian Limited Partner.

The following summary assumes that (i) our units are not and will not be “taxable Canadian property” of any Non-Canadian Limited Partner at any relevant time, and (ii) our company and the Property Partnership will not dispose of properties that are “taxable Canadian property”. “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” 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. In general, our units will not constitute “taxable Canadian property” of any Non-Canadian Limited Partner at the time of disposition, unless (a) at any time during the 60-month period immediately preceding the disposition, more than 50% of the fair market value of our units was derived, directly or indirectly (under Tax Proposals released 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”; (iii) “timber resource property”; 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”. Since our company’s assets will consist principally of units of the Property Partnership, our units would generally be “taxable Canadian property” at a particular time if the units of the Property Partnership held by our company derived, directly or indirectly (under Tax Proposals released on August 27, 2010, excluding through a corporation, partnership or trust, the shares or interest in which were not themselves “taxable Canadian property”) more than 50% of their fair market value from properties described in (i) to (iv) above, at any time in the 60-month period preceding the particular time. The BPY General Partner and the Property General Partner do not expect our units to be “taxable Canadian property” at any relevant time and do not expect our company or the Property Partnership to dispose of “taxable Canadian property”. However, no assurance can be given in this regard.

Special rules, which are not discussed in this summary, may apply to a Non-Canadian Limited Partner that is an insurer carrying on business in Canada and elsewhere.

 

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Spin-Off

Non-Canadian Limited Partners who received our units under the spin-off will be considered to have received a taxable dividend equal to the fair market value of our units so received plus the amount of any cash received in lieu of fractional units. The dividend will be subject to Canadian federal withholding tax under Part XIII of the Tax Act at the rate of 25% of the amount of the dividend, subject to reduction under the terms of an applicable income tax treaty or convention. To satisfy this withholding tax liability, Brookfield Asset Management will withhold a portion of our units otherwise distributable and will withhold a portion of any cash distribution in lieu of fractional units otherwise distributable the aggregate value of which will be equal to the Canadian federal withholding taxes applicable to the taxable dividend. Subject to receipt of any applicable regulatory approval, Brookfield Asset Management will purchase withheld units at a price equal to the fair market value of our units based on the five day volume- weighted average of the trading price of our units following closing of the spin-off and will remit the proceeds of this sale together with the amount of any cash withheld from any cash distribution in lieu of fractional units in satisfaction of the Canadian federal withholding tax liability. Where the rate at which tax is withheld with respect to a Non-Canadian Limited Partner’s taxable dividend exceeds the rate that is applicable after giving effect to the terms of any relevant income tax treaty or convention, a refund or credit may be claimed by the Non-Canadian Limited Partner. The adjusted cost base to a Non-Canadian Limited Partner of the units received upon the spin-off will be equal to the fair market value of the units so received. In computing the adjusted cost base of our units at any time, the adjusted cost base of a Non-Canadian Limited Partner’s units will be averaged with the adjusted cost base of all of our other units, if any, held by the Non-Canadian Limited Partner as capital property at the particular time.

Taxation of Income or Loss

A Non-Canadian Limited Partner will not be subject to Canadian federal income tax under Part I of the Tax Act on its share of income from a business carried on by our company (or the Property Partnership) outside Canada or the non-business income earned by our company (or the Property Partnership) from sources in Canada. However, a Non-Canadian Limited Partner may be subject to Canadian federal withholding tax under Part XIII of the Tax Act, as described below. The BPY General Partner and the Property General Partner, as the case may be, intend to organize and conduct the affairs of our company and the Property Partnership such that Non-Canadian Limited Partners should not be considered to be carrying on business in Canada solely by virtue of holding our units. However, no assurance can be given in this regard.

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, 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-resident partners may be entitled to under an applicable income tax treaty or convention, provided that the residency status and entitlement to the treaty benefits can be established. In determining the rate of Canadian federal withholding tax applicable to amounts paid by Holding Entities to the Property Partnership, the BPY General Partner and the Property General Partner 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 would apply its administrative practice in this context. Under the Treaty, a Canadian resident payer is required in certain circumstances to look-though 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.

 

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Bermuda Tax Considerations

In Bermuda there are no taxes on profits, income or dividends, nor is there any capital gains tax, estate duty or death duty. Profits can be accumulated and it is not obligatory to pay dividends. As “exempted undertakings”, exempted partnerships and overseas partnerships are entitled to apply for (and will ordinarily receive) an assurance pursuant to the Exempted Undertakings Tax Protection Act 1966 that, in the event that legislation introducing taxes computed on profits or income, or computed on any capital asset, gain or appreciation, is enacted, such taxes shall not be applicable to the partnership or any of its operations until March 31, 2015. Such an assurance may include the assurance that any tax in the nature of estate duty or inheritance tax shall not be applicable to the units, debentures or other obligations of the partnership.

Exempted partnerships and overseas partnerships fall within the definition of “international businesses” for the purposes of the Stamp Duties (International Businesses Relief) Act 1990, which means that instruments executed by or in relation to an exempted partnership or an overseas partnership are exempt from stamp duties (such duties were formerly applicable under the Stamp Duties Act 1976). Thus, stamp duties are not payable upon, for example, an instrument which effects the transfer or assignment of a unit in an exempted partnership or an overseas partnership, or the sale or mortgage of partnership assets; nor are they payable upon the partnership capital.

10.F. DIVIDENDS AND PAYING AGENTS

Distribution Policy

The BPY General Partner has sole authority to determine whether our company will make distributions and the amount and timing of these distributions. The BPY General Partner has adopted a distribution policy pursuant to which 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 distribution yield of approximately 4% of IFRS Value. We will target an initial pay-out ratio of approximately 80% of FFO. See Item 5.A. “Operating and Financial Review and Prospects — Operating Results — Performance Measures” for a discussion of FFO. We will initially pursue a distribution growth rate target in the range of 3% to 5% annually. Our company, the Property Partnership or one or more Holding Entities may (but none is obligated to) borrow money in order to obtain sufficient cash to make a distribution.

From time to time our distributions may exceed the above percentages as a result of acquisitions that are attractive on a long-term cash flow and/or total return basis but are not immediately accretive to FFO. Our company’s ability to make distributions will depend on our company receiving sufficient distributions from the Property Partnership, which in turn depend on the Property Partnership receiving sufficient distributions from the Holding Entities, and we cannot assure you that our company will in fact make cash distributions as intended. In particular, the amount and timing of distributions will depend upon a number of factors, including, among others, our actual results of operations and financial condition, the amount of cash that is generated by our operations and investments, restrictions imposed by the terms of any indebtedness that is incurred to leverage our operations and investments or to fund liquidity needs, levels of operating and other expenses, contingent liabilities and other factors that the BPY General Partner deems relevant.

Distributions made by the Property Partnership will be made pro rata with respect to the Property Partnership’s limited partnership interests owned by us and those limited partnership interests owned by Brookfield. Our company’s ability to make distributions will also be subject to additional risks and uncertainties, including those set forth in this Form 20-F under Item 3.D. “Key Information — Risk Factors” and Item 5. “Operating and Financial Review and Prospects”. In addition, the BPY General Partner will not be permitted to cause our company to make a distribution if we do not have sufficient cash on hand to make the distribution, if the distribution would render our company insolvent or if, in the opinion of the BPY General Partner, the distribution would leave us with insufficient funds to meet any future or contingent obligations.

However, there can be no assurance that we will be able to make distributions in the amounts discussed above or meet our target growth rate. Our ability to make distributions will depend on several factors, some of which are out of our control, including, among other things, general economic conditions, our results of

 

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operations and financial condition, the amount of cash that is generated by our operations and investments, restrictions imposed by the terms of any indebtedness that is incurred to finance our operations and investments or to fund liquidity needs, levels of operating and other expenses and contingent liabilities. See “Special Note Regarding Forward Looking Statements”.

Distribution Reinvestment Plan

Following the spin-off, we intend to adopt a distribution reinvestment plan for holders of our units resident in Canada. We may in the future expand our distribution reinvestment plan to include holders of our units resident in the United States. The following is a summary description of what we expect the principal terms of our company’s distribution reinvestment plan will be. To the extent Brookfield participates in our dividend reinvestment plan and reinvests distributions it receives on our units, it will receive additional units of our company.

Pursuant to the distribution reinvestment plan, Canadian holders of our units will be able to elect to have distributions paid on units held by them automatically reinvested in additional units in accordance with the terms of the plan. Distributions to be reinvested in our units under the distribution reinvestment plan will be reduced by the amount of any applicable withholding tax.

Distributions due to plan participants will be paid to the plan agent, for the benefit of the plan participants and, if a plan participant has elected to have his or her distributions automatically reinvested, or applied, on behalf of such plan participant, to the purchase of additional units, such purchases will be made from our company on the distribution date at a price per unit calculated by reference to the volume weighted average of the trading price for our units on a stock exchange on which our units are listed for the five trading days immediately preceding the date the relevant distribution is paid by our company.

As soon as reasonably practicable after each distribution payment date, a statement of account will be mailed to each participant setting out the amount of the relevant cash distribution reinvested, the price of each unit purchased, the number of units purchased under the distribution reinvestment plan on the distribution payment date and the total number of units, computed to four decimal places, held for the account of the participant under the distribution reinvestment plan (or, in the case of beneficial holders, CDS Clearing and Depository Services Inc., or CDS, will receive such statement on behalf of the beneficial holders participating in the plan). While our company will not issue fractional units, a plan participant’s entitlement to units purchased under the distribution reinvestment plan may include a fraction of a unit and such fractional units shall accumulate. A cash adjustment for any fractional units will be paid by the plan agent upon the withdrawal from or termination by a plan participant of his or her participation in the distribution reinvestment plan or upon termination of the distribution reinvestment plan at a price per unit based upon the closing price for our units on a stock exchange on which our units are listed on the trading day immediately preceding such withdrawal or termination. A registered holder may, at any time, obtain unit certificates for any number of whole units held for the participant’s account under the plan by notifying the plan agent. Certificates for units acquired under the plan will not be issued to participants unless specifically requested. Prior to pledging, selling or otherwise transferring units held for a participant’s account (except for sale of our units through the plan agent), a registered holder must request that his or her units be electronically transferred to his or her brokerage account or a unit certificate be issued. The automatic reinvestment of distributions under the plan will not relieve participants of any income tax obligations applicable to such distributions. No brokerage commissions will be payable in connection with the purchase of our units under the distribution reinvestment plan and all administrative costs will be borne by our company.

Unitholders will be able to terminate their participation in the distribution reinvestment plan by providing, or by causing to be provided, notice to the plan agent. Such notice, if actually received by the plan agent no later than five business days prior to a record date, will have effect in respect of the distribution to be made as of such date. Thereafter, distributions to such unitholders will be in cash. In addition, unitholders may

 

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request that all or part of their units be sold. When our units are sold through the plan agent, a holder will receive the proceeds less a handling charge and any brokerage trading fees. Our company will be able to terminate the distribution reinvestment plan, in its sole discretion, upon notice to the plan participants and the plan agent but, such action will have no retroactive effect that would prejudice a participant’s interest. Our company will also be able to amend, modify or suspend the distribution reinvestment plan at any time in its sole discretion, provided that the plan agent gives notice of that amendment, modification or suspension to our unitholders, for any amendment, modification or suspension to the distribution reinvestment plan that in our company’s opinion may materially prejudice participants.

The Property Partnership will have a corresponding distribution reinvestment plan in respect of distributions made to our company and to holders of the Redemption-Exchange Units. Our company does not intend to reinvest distributions it receives from the Property Partnership in the Property Partnership’s distribution reinvestment plan except to the extent that holders of our units elect to reinvest distributions pursuant to our distribution reinvestment plan. Brookfield has advised our company that it may from time to time reinvest distributions it receives from us in respect of our units or from the Property Partnership in respect of the Redemption-Exchange Units pursuant to the distribution reinvestment plans of our company or the Property Partnership, as applicable. To the extent Brookfield reinvests distributions it receives on our units, it will receive additional units of our company. To the extent Brookfield elects to reinvest distributions it receives from the Property Partnership pursuant to the Property Partnership’s dividend reinvestment plan, it will receive Redemption-Exchange Units. Such Redemption-Exchange Units received by Brookfield also would become subject to the Redemption-Exchange Mechanism and may therefore result in Brookfield acquiring additional units of our company.

PAYING AGENT

We expect that CIBC Mellon Trust Company in Toronto, Ontario will be appointed to act as paying agent for distributions by our company.

10.G. STATEMENT BY EXPERTS

The following financial statements:

 

   

the carve-out financial statements of the Commercial Property Operations of Brookfield Asset Management Inc. as at December 31, 2011 and December 31, 2010 and for each of the years in the three-year period ended December 31, 2011 and the supplemental schedule of investment property information as at December 31, 2011;

 

   

the balance sheet of Brookfield Property Partners Limited as at May 31, 2012;

 

   

the balance sheet of Brookfield Property Partners L.P. as at May 31, 2012; and

 

   

the statements of operations, comprehensive income and cash flows of TRZ Holdings LLC and Subsidiaries for the year ended December 31, 2009,

included in this Form 20-F have been audited by Deloitte & Touche LLP, independent registered chartered accountants, as stated in their reports appearing herein and elsewhere in this Form 20-F. Such financial statements are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The address of Deloitte & Touche LLP is Brookfield Place, 181 Bay Street, Suite 1400, Toronto, Ontario, M5J 2V1.

The financial statements and the related financial statement schedule of General Growth Properties, Inc., included in this Form 20-F have been audited by Deloitte & Touche LLP, independent registered public

 

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accounting firm, as stated in their report appearing herein and elsewhere in this Form 20-F (which reports express an unqualified opinion on the consolidated financial statements and consolidated financial statement schedule and for the consolidated financial statements includes an explanatory paragraph regarding the Company’s financial statements with assets, liabilities, and a capital structure having carrying values not comparable with prior periods). Such financial statements are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The address of Deloitte & Touche LLP is 111 South Wacker, Chicago, IL 60606.

The consolidated financial statements of GGP/Homart II L.L.C. and GGP-TRS L.L.C. as of December 31, 2011 and 2010, and for each of the three years in the period ended December 31, 2011, not presented separately herein, have been audited by KPMG LLP, an independent registered public accounting firm. The reports on GGP/Homart II L.L.C. and GGP-TRS L.L.C. are included herein and upon the authority of said firm as experts in accounting and auditing. The address of KPMG LLP is 200 East Randolph Drive, Suite 5500, Chicago, IL 60601.

Each of the foregoing audit firms has consented to the inclusion of its audit reports in this Form 20-F.

10.H. DOCUMENTS ON DISPLAY

Any statement in this Form 20-F about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the Form 20-F, the contract or document is deemed to modify the description contained in this Form 20-F. You must review the exhibits themselves for a complete description of the contract or document.

Brookfield Asset Management and our company are both subject to the information filing requirements of the Exchange Act, and accordingly are required to file periodic reports and other information with the SEC. As a foreign private issuer under the SEC’s regulations, we expect to file annual reports on Form 20-F and will furnish other reports on Form 6-K. The information disclosed in our reports may be less extensive than that required to be disclosed in annual and quarterly reports on Forms 10-K and 10-Q required to be filed with the SEC by U.S. issuers. Moreover, as a foreign private issuer, we are not subject to the proxy requirements under Section 14 of the Exchange Act, and the BPY General Partner’s directors and our principal unitholders are not subject to the insider short swing profit reporting and recovery rules under Section 16 of the Exchange Act. Our and Brookfield Asset Management’s SEC filings are available at the SEC’s website at www.sec.gov. You may also read and copy any document we or Brookfield Asset Management files with the SEC at the public reference facilities maintained by the SEC at SEC Headquarters, Public Reference Section, 100 F Street, N.E., Washington D.C. 20549. You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330.

In addition, Brookfield Asset Management and our company are required by Canadian securities laws to file documents electronically with Canadian securities regulatory authorities and these filings are available on our or Brookfield Asset Management’s SEDAR profile at www.sedar.com. Written requests for such documents should be directed to our Corporate Secretary at 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda.

10.I. SUBSIDIARY INFORMATION

Not applicable.

 

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See the information contained in this Form 20-F under Item 5. “Operating and Financial Review and Prospects”.

 

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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

12.A. DEBT SECURITIES

Not applicable.

12.B. WARRANTS AND RIGHTS

Not applicable.

12.C. OTHER SECURITIES

Not applicable.

12.D. AMERICAN DEPOSITARY SHARES

Not applicable.

 

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PART II

 

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

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

None.

 

ITEM 15. CONTROLS AND PROCEDURES

Not applicable.

 

ITEM 16. [RESERVED]

16.A. AUDIT COMMITTEE FINANCIAL EXPERTS

Not applicable.

16.B. CODE OF ETHICS

Not applicable.

16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Not applicable.

16.D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

16.E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

None.

16.F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

None.

16.G. CORPORATE GOVERNANCE

Not applicable.

16.H. MINING SAFETY DISCLOSURE

Not applicable.

 

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PART III

 

ITEM 17. FINANCIAL STATEMENTS

Not applicable.

 

ITEM 18. FINANCIAL STATEMENTS

See the list of financial statements beginning on page F-1 which are filed as part of the registration statement on Form 20-F. In addition, see the Unaudited Pro Forma Financial Statements beginning on page PF-1 which are filed as part of the registration statement on Form 20-F.

 

ITEM 19. EXHIBITS

 

Number

 

Description

1.1   Certificate of registration of our company, registered as of January 3, 2012*
1.2   Limited Partnership Agreement of our company, dated January 3, 2012*
1.3   Form of Amended and Restated Limited Partnership Agreement of our company, to be dated the date of the spin-off**
4.1   Master Purchase Agreement between our company and Brookfield Asset Management*
4.2   Form of Master Services Agreement by and among Brookfield Asset Management, the Service Recipients and the Managers (revised)**
4.3   Form of Amended and Restated Limited Partnership Agreement of the Property Partnership, to be dated the date of the spin-off**
4.4   Form of Relationship Agreement among our company, the Property Partnership, the Holding Entities, the Managers and Brookfield Asset Management*
4.5   Form of Registration Rights Agreement between our company and Brookfield Asset Management*
4.6   Form of Voting Agreement among Brookfield Asset Management, the Property General Partner and our company*
8.1   List of significant subsidiaries of our company***
15.1(a)   Consent of Deloitte & Touche LLP**
15.1(b)   Consent of Deloitte & Touche LLP**
15.1(c)   Consent of KPMG LLP**
15.1(d)   Consent of KPMG LLP**

 

* Filed as an exhibit to Amendment No. 1 to Registration Statement on Form 20-F on June 12, 2012 and incorporated herein by reference.
** Filed herewith.
*** To be filed by amendment.

 

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F/A and that it has duly caused and authorized the undersigned to sign this registration statement on its behalf.

 

BROOKFIELD PROPERTY PARTNERS L.P.,
by its general partner, 1648285 ALBERTA ULC
By:   /s/ Michelle L. Campbell
  Name: Michelle L. Campbell
  Title: Secretary

Date: August 6, 2012

 

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INDEX TO FINANCIAL STATEMENTS

 

     

        Page        

 

Carve-out financial statements of the Commercial Property Operations of Brookfield Asset Management Inc. as at December 31, 2011 and December 31, 2010 and for each of the years in the three-year period ended December 31, 2011

 

   F-2

 

Condensed carve-out financial statements of the Commercial Property Operations of Brookfield Asset Management Inc. as at March 31, 2012 and December 31, 2011 and for the three month periods ended March 31, 2012 and March 31, 2011

 

   F-43

Balance sheet of Brookfield Property Partners L.P. as at May 31, 2012

 

   F-61

 

Balance sheet of Brookfield Property Partners Limited as at May 31, 2012

 

   F-65

 

Consolidated financial statements of General Growth Properties, Inc. as of December 31, 2011 and December 31, 2010 and for each of the three years in the period ended December 31, 2011

 

   F-69

Consolidated financial statements of TRZ Holdings LLC and Subsidiaries as of December 31, 2011 and December 31, 2010 and for each of the years in the three-year period ended December 31, 2011

 

   F-134

 

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COMMERCIAL PROPERTY OPERATIONS OF BROOKFIELD

ASSET MANAGEMENT INC.

Carve-out financial statements as at December 31, 2011 and December 31, 2010

and for each of the years in the three-year period

ended December 31, 2011

 

F-2


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Report of Independent Registered Chartered Accountants

To the Board of Directors of

Brookfield Asset Management Inc.

We have audited the accompanying carve-out financial statements of the Commercial Property Operations of Brookfield Asset Management Inc. (the “Business”), which comprise the carve-out balance sheets as at December 31, 2011 and December 31, 2010, and the carve-out statements of income (loss), comprehensive income (loss), changes in equity and cashflow for each of the years in the three-year period ended December 31, 2011, and the notes to the carve-out financial statements. Our audit also included a supplemental schedule of investment property information as at December 31, 2011 (the “Schedule”).

Management’s Responsibility for the Carve-out Financial Statements and the Schedule

Management is responsible for the preparation and fair presentation of these carve-out financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and the Schedule, and for such internal control as management determines is necessary to enable the preparation of carve-out financial statements and the Schedule that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these carve-out financial statements and the Schedule based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the carve-out financial statements and the Schedule are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the carve-out financial statements and the Schedule. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the carve-out financial statements and the Schedule, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the carve-out financial statements and the Schedule in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the carve-out financial statements and the Schedule.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the carve-out financial statements present fairly, in all material respects, the financial position of the Business as at December 31, 2011 and December 31, 2010 and its financial performance and cashflows for each of the years in the three-year period ended December 31, 2011 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also, in our opinion, the Schedule, when considered in relation to the carve-out financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

Independent Registered Chartered Accountants

Licensed Public Accountants

Toronto, Canada

April 9, 2012

 

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Commercial Property Operations of Brookfield Asset Management Inc.

Carve-out Balance Sheets

 

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

Assets

          

Non-current assets

          

Investment properties

   5        $  27,594         $  20,960   

Equity accounted investments

   7        6,888         4,402   

Other non-current assets

   9        2,532         1,954   

Loans and notes receivable

   10        985         537   
              37,999         27,853   

Current assets

          

Loans and notes receivable

   10        773         1,543   

Accounts receivable and other

   11        796         772   

Cash and cash equivalents

            749         399   
              2,318         2,714   

Total assets

            $  40,317         $  30,567   

Liabilities and equity in net assets

          

Non-current liabilities

          

Property debt

   12        $  13,978         $    9,173   

Capital securities

   13        994         1,038   

Other non-current liabilities

   14        493         1,107   

Deferred tax liability

   15        728         555   
              16,193         11,873   

Current liabilities

          

Property debt

   12        1,409         2,791   

Accounts payable and other liabilities

   16        1,221         759   
              2,630         3,550   

Equity in net assets

          

Equity in net assets attributable to parent company

   17        11,881         7,464   

Non-controlling interests

   17        9,613         7,680   

Total equity in net assets

            21,494         15,144   

Total liabilities and equity in net assets

            $  40,317         $  30,567   

See accompanying notes to the carve-out financial statements

 

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Commercial Property Operations of Brookfield Asset Management Inc.

Carve-out Statements of Income (Loss)

 

(US$ Millions) Years ended December 31,    Note    2011      2010      2009  

Revenue

   18    $ 2,820       $ 2,270       $ 1,999   

Property net operating income

   18      1,507         1,250         1,124   

Investment and other income

   19      177         142         98   

Expenses:

           

Interest expense

        977         790         635   

General and administrative expense

        84         88         131   

Depreciation and amortization

          20         21         16   
Income before fair value gains (losses), realized gains, share of net earnings (losses) from equity accounted investments and income taxes         603         493         440   

Fair value gains (losses)

   20      1,112         574         (887)   

Realized gains

        365         250         39   

Share of net earnings (losses) from equity accounted investments

   7      2,104         870         (461)   

Income (loss) before income taxes

        4,184         2,187         (869)   

Income tax (expense) benefit

   15      (439)         (78)         135   

Net income (loss)

        $ 3,745       $ 2,109       $ (734)   

Net income (loss) attributable to

           

Parent company

      $ 2,323       $ 1,026       $ (477)   

Non-controlling interests

          1,422         1,083         (257)   
          $ 3,745       $ 2,109       $ (734)   

See accompanying notes to the carve-out financial statements

 

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Commercial Property Operations of Brookfield Asset Management Inc.

Carve-out Statements of Comprehensive Income (Loss)

 

(US$ Millions) Years ended December 31,    Note    2011      2010      2009  

Net income (loss)

        $ 3,745       $ 2,109       $ (734)   

Other comprehensive income (loss)

   17 (c)         

Foreign currency translation

        (387)         430         847   

Available-for-sale securities

        4         (2)         (25)   

Cash flow hedges

          (258)         67         14   
            (641)         495         836   

Comprehensive income

        $ 3,104       $ 2,604       $ 102   

Comprehensive income (loss) attributable to

           

Parent company

           

Net income (loss)

      $ 2,323       $ 1,026       $ (477)   

Other comprehensive income (loss)

          (365)         368         536   
            1,958         1,394         59   

Non-controlling interests

           

Net income (loss)

        1,422         1,083         (257)   

Other comprehensive income (loss)

          (276)         127         300   
            1,146         1,210         43   

Total comprehensive income

        $ 3,104       $ 2,604       $ 102   

See accompanying notes to the carve-out financial statements

 

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Commercial Property Operations of Brookfield Asset Management Inc.

Carve-out Statements of Changes in Equity

 

(US$ Millions)          Accumulated Other Comprehensive Income                       
     Equity in net
assets
    Foreign currency
translation
    Cash flow
hedges
    Available-for-sale
securities
    Total     Equity in net
assets
attributable to
parent
company
    Non-controlling
interests
    Total equity
in net assets
 

Balance as at January 1, 2009

  $ 5,622      $ -      $ (32)      $ (1)      $ (33)      $ 5,589      $         3,931        $ 9,520   

Net income (loss)

    (477)        -        -        -        -        (477)        (257)        (734)   

Other comprehensive income (loss)

    -        528        16        (8)        536        536        300        836   

Contributions

    1,356        -        -        -        -        1,356        1,445        2,801   

(Distributions)

    (1,028)        -        -        -        -        (1,028)        (182)        (1,210)   

Balance as at December 31, 2009

  $ 5,473      $ 528      $ (16)      $ (9)      $ 503      $ 5,976      $ 5,237        $11,213   

Net income

    1,026        -        -        -        -        1,026        1,083        2,109   

Other comprehensive income

    -        296        67        5        368        368        127        495   

Contributions

    2,185        -        -        -        -        2,185        1,529        3,714   

(Distributions)

    (2,091)        -        -        -        -        (2,091)        (296)        (2,387)   

Balance as at December 31, 2010

  $ 6,593      $             824      $ 51      $ (4)      $ 871      $ 7,464      $ 7,680        $15,144   

Net income

    2,323        -        -        -        -        2,323        1,422        3,745   

Other comprehensive income (loss)

    -        (218)        (155)        8        (365)        (365)        (276)        (641)   

Contributions

    2,909        -        -        -        -        2,909        1,684        4,593   

(Distributions)

    (450)        -        -        -        -        (450)        (897)        (1,347)   

Balance as at December 31, 2011

  $     11,375      $ 606      $ (104)      $ 4      $ 506      $         11,881      $ 9,613        $21,494   

See accompanying notes to the carve-out financial statements

 

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Commercial Property Operations of Brookfield Asset Management Inc.

Carve-out Statements of Cashflow

 

(US$ Millions) Years ended December 31,    2011      2010      2009  

Operating activities

        

Net income (loss)

   $ 3,745       $ 2,109       $ (734)   

Share of net earnings (losses) from equity accounted investments

     (2,104)         (870)         461   

Fair value (gains) losses

     (1,112)         (574)         887   

Deferred income tax

     275         (39)         (195)   

Realized gains

     (365)         (250)         (39)   

Accretion of discount on loan receivable

     (39)         (28)         -   

Depreciation and amortization

     20         21         16   

Initial direct leasing costs

     (37)         (19)         (20)   

Working capital and other

     1,228         460         (210)   
       1,611         810         166   

Financing activities

        

Property debt, issuance

     1,954         1,467         2,070   

Property debt, repayments

     (3,536)         (1,906)         (1,402)   

Other secured debt, issuance

     1,022         168         304   

Other secured debt, repayments

     (683)         (268)         (445)   

Capital securities redeemed

     (25)         -         -   

Proceeds from equity installment receivable

     121         -         -   

Non-controlling interests, issued

     667         1,038         1,024   

Non-controlling interests, purchased

     (86)         -         -   

Non-controlling interests, distributions

     (410)         (225)         (154)   

Contributions from parent company

     307         358         769   

Distributions to parent company

     (337)         (551)         (133)   
       (1,006)         81         2,033   

Investing activities

        

Investment properties, proceeds of dispositions

     1,537         804         98   

Investment properties, investments

     (373)         (692)         (991)   

Distributions from equity accounted investments

     -         316         -   

Investment in equity accounted investments

     (1,053)         (485)         -   

Proceeds from sale of investments

     101         109         -   

Financial assets, investments

     (150)         (463)         (162)   

Foreign currency hedges of net investments

     (97)         (35)         -   

Loans and notes receivables, collected

     744         302         228   

Loans and notes receivables, advanced

     (181)         (102)         (129)   

Loan receivable from parent company, collected

     658         -      

Loan receivable from parent company, advanced

     (364)         (28)         (653)   

Other property, plant and equipment, investments

     -         (8)         (1)   

Restricted cash and deposits

     (25)         13         (55)   

Capital expenditures - development and redevelopment

     (447)         (355)         (351)   

Capital expenditures - operating properties

     (605)         (130)         (140)   
       (255)         (754)         (2,156)   

Increase in cash and cash equivalents

     350         137         43   

Cash and cash equivalents, beginning of year

     399         262         219   

Cash and cash equivalents, end of year

   $ 749       $ 399       $ 262   

See accompanying notes to the carve-out financial statements

 

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Notes to the Carve-out Financial Statements

NOTE 1: NATURE AND DESCRIPTION OF THE OPERATIONS

The Commercial Property Operations of Brookfield Asset Management Inc. (“Brookfield” or the “parent company”) consist of substantially all of Brookfield’s commercial property operations, including office, retail, multi-family and industrial and opportunistic investments, located in the United States, Canada, Australia, Brazil and Europe that have historically been owned and operated, both directly and through its operating entities, by Brookfield (collectively, the “Business” or the “company”). These operations include interests in 126 office properties and 184 retail properties. In addition, Brookfield has interests in a multi-family and industrial platform and an 18 million square foot commercial office development pipeline.

Brookfield will effect a reorganization so that an interest in the Business is acquired by holding entities, which will be owned by a subsidiary of Brookfield Property Partners L.P. (the “partnership”), a newly formed limited partnership. Brookfield intends to transfer the Business through a special dividend to holders of its Class A limited voting shares and Class B limited voting shares of the partnership’s non-voting limited partnership units (the “spin-off’). Immediately following the spin-off, holders of Class A limited voting shares and Class B limited voting shares of Brookfield will hold 99% of the units of the partnership. The partnership’s sole direct investment will be a limited partner interest in Brookfield Property L.P. (the “property partnership”) which will control the Business through holding entities. It is currently anticipated that the partnership and Brookfield will hold a limited partnership interests in the property partnership of approximately 10% and 90%, respectively. The partnership will control the strategic, financial and operating policy decisions of the property partnership pursuant to a voting agreement to be entered into between the partnership and Brookfield. Wholly-owned subsidiaries of Brookfield will serve as the general partners for both the partnership and the property partnership.

The parent company’s registered head office is Brookfield Place, 181 Bay Street, Suite 300, Toronto, Ontario, M5J 2T3.

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

a) Basis of presentation

These carve-out financial statements (the “financial statements”) have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) using the historical books and records of Brookfield. The financial statements represent a carve-out of the assets, liabilities, revenues, expenses, and cashflows of the Business that will be contributed to the partnership. The principal operating subsidiaries of the Business generally maintain their own independent management and infrastructure. To the extent that certain resources are centralized by Brookfield and shared across entities including those of the Business, such as information technology, fees for access to and use of such resources have been charged to the respective subsidiaries as a means of allocation of such costs across the operations. Such fees are included in the results of operations of the Business. The financial statements do not include the parent company’s general partner interests in certain of the retail and other investments as these interests are not being transferred to the partnership.

The financial statements present the equity in the net assets of the Business rather than the shareholders’ equity. Non-controlling interests in the net assets and results of the subsidiaries within the Business are shown separately in equity in the carve-out balance sheet. In addition, while the Business is not a taxable legal entity, current and deferred income taxes have been provided in these carve-out financial statements as if it were.

Due to the inherent limitations of carving out the assets, liabilities, operations and cashflows from larger entities, these financial statements may not necessarily reflect the company’s financial position, results of operations and cashflow for future periods, nor do they reflect the financial position, results of operations and cashflow that would have been realized had the Business been a stand-alone entity during the periods presented.

 

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Table of Contents

The financial statements are prepared on a going concern basis and have been presented in U.S. dollars rounded to the nearest million unless otherwise indicated. The accounting policies set out below have been applied consistently in all material respects. Standards and interpretations effective for future accounting periods are described in Note 4.

 

b) Investment properties

Investment properties include operating properties held to earn rental income and properties that are being constructed or developed for future use as investment properties. Operating properties and development properties are recorded at fair value, determined based on available market evidence, at the balance sheet date. Related fair value gains and losses are recorded in net income in the period in which they arise.

The cost of development properties includes direct development costs, realty taxes and borrowing costs directly attributable to the development. Borrowing costs associated with direct expenditures on properties under development or redevelopment are capitalized. Borrowing costs are also capitalized on the purchase cost of a site or property acquired specifically for redevelopment in the short-term but only where activities necessary to prepare the asset for development or redevelopment are in progress. The amount of borrowing costs capitalized is determined first by reference to borrowings specific to the project, where relevant, and otherwise by applying a weighted average cost of borrowings to eligible expenditures after adjusting for borrowings associated with other specific developments. Where borrowings are associated with specific developments, the amount capitalized is the gross cost incurred on those borrowings less any investment income arising on their temporary investment. Borrowing costs are capitalized from the commencement of the development until the date of practical completion. The capitalization of borrowing costs is suspended if there are prolonged periods when development activity is interrupted. The Business considers practical completion to have occurred when the property is capable of operating in the manner intended by management. Generally this occurs upon completion of construction and receipt of all necessary occupancy and other material permits. Where the Business has pre-leased space as of or prior to the start of the development and the lease requires the Business to construct tenant improvements which enhance the value of the property, practical completion is considered to occur on completion of such improvements.

Initial direct leasing costs incurred by the Business in negotiating and arranging tenant leases are added to the carrying amount of investment properties.

 

c) Equity accounted investments
  (i) Investments in joint ventures

A joint venture is a contractual arrangement pursuant to which the Business and other parties undertake an economic activity that is subject to joint control whereby the strategic financial and operating policy decisions relating to the activities of the joint venture require the unanimous consent of the parties sharing control.

Joint venture arrangements that involve the establishment of a separate entity in which each venture has an interest are referred to as jointly controlled entities. The Business reports its interests in jointly controlled entities using the equity method of accounting. Under the equity method, investments in jointly controlled entities are carried in the carve-out balance sheet at cost as adjusted for the company’s proportionate share of post-acquisition changes in the net assets of the joint ventures, or for post-acquisition changes in any excess of the company’s carrying amount over the net assets of the joint ventures, less any identified impairment loss. When the company’s share of losses of a joint venture equals or exceeds its interest in that joint venture, the Business discontinues recognizing its share of further losses. An additional share of losses is provided for and a liability is recognized only to the extent that the company has incurred legal or constructive obligations to fund the entity or made payments on behalf of that entity.

Where the Business undertakes its activities under joint venture arrangements through a direct interest in the joint venture’s assets, rather than through the establishment of a separate entity, the company’s

 

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proportionate share of joint venture assets, liabilities, revenues and expenses are recognized in the financial statements and classified according to their nature.

Where the Business transacts with its jointly controlled entities, unrealized profits and losses are eliminated to the extent of the company’s interest in the joint venture. Balances outstanding between the Business and jointly controlled entities in which it has an interest are not eliminated in the carve-out balance sheet.

 

  (ii) Investments in associates

An associate is an entity over which the investor has significant influence but not control and that is not a subsidiary or an interest in a joint venture.

The results and assets and liabilities of associates are incorporated in the financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the carve-out balance sheet at cost as adjusted for the company’s proportionate share of post-acquisition changes in the net assets of the associates, or for post-acquisition changes in any excess of the company’s carrying amount over the net assets of the associates, less any identified impairment loss. When the company’s share of losses of an associate equals or exceeds its interest in that associate, the Business discontinues recognizing its share of further losses. An additional share of losses is provided for and a liability is recognized only to the extent that the Business has incurred legal or constructive obligations or made payments on behalf of that associate.

Where the Business transacts with an associate of the Business, profits and losses are eliminated to the extent of the company’s interest in the relevant associate. Balances outstanding between the Business and associates are not eliminated in the carve-out balance sheet.

 

d) Other Property, Plant and Equipment

The company accounts for its other property, plant and equipment, using the revaluation method or the cost model, depending on the nature of the asset and the operating segment. Other property, plant and equipment measured using the revaluation method is initially measured at cost and subsequently carried at its revalued amount, being the fair value at the date of the revaluation less any subsequent accumulated depreciation and any accumulated impairment losses. Under the cost method, assets are initially recorded at cost and are subsequently depreciated over the assets’ useful lives, unless an impairment is identified requiring a write-down to estimated fair value.

 

e) Loans and notes receivable

Loans and notes receivable are carried at amortized cost with interest income recognized following the effective interest method. Notes receivable purchased at a discount are also carried at amortized cost with discounts amortized over the remaining expected life of the loan following the effective interest method.

A loan is considered impaired when, based upon current information and events, it is probable that the company will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement. Loans are evaluated individually for impairment given the unique nature and size of each loan. For each collateralized loan, the company’s finance subsidiaries perform a quarterly review of all collateral properties underlying the loans receivables. Impairment is measured based on the present value of expected future cashflows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

 

f) Taxation

Current income tax assets and liabilities are measured at the amount expected to be paid to tax authorities by the parent company in respect of the Business or directly by the company’s taxable subsidiaries, net of recoveries, based on the tax rates and laws enacted or substantively enacted at the balance sheet date. Deferred income tax

 

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liabilities are provided for using the liability method on temporary differences between the tax bases and carrying amounts of assets and liabilities. Deferred income tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that deductions, tax credits and tax losses can be utilized. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent it is no longer probable that the income tax asset will be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability settled, based on the tax rates and laws that have been enacted or substantively enacted at the balance sheet date. Current and deferred income tax relating to items recognized directly in equity are also recognized directly in equity.

 

g) Provisions

A provision is a liability of uncertain timing or amount. Provisions are recognized when the Business has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. Provisions are re-measured at each balance sheet date using the current discount rate. The increase in the provision due to passage of time is recognized as interest expense.

 

h) Foreign currencies

The financial statements are presented in U.S. dollars, which is the functional currency of the parent company and the presentation currency for the financial statements.

Assets and liabilities of subsidiaries or equity accounted investees having a functional currency other than the U.S. dollar are translated at the rate of exchange at the balance sheet date. Revenues and expenses are translated at average rates for the period. The resulting foreign currency translation adjustments are recognized in other comprehensive income (“OCI”).

Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the date of the transactions. At the end of each reporting period, foreign currency denominated monetary assets and liabilities are translated to the functional currency using the prevailing rate of exchange at the balance sheet date. Gains and losses on translation of monetary items are recognized in the income statement in interest and other, except for those related to monetary liabilities qualifying as hedges of the company’s investment in foreign operations or certain intercompany loans to or from a foreign operation for which settlement is neither planned nor likely to occur in the foreseeable future, which are included in other comprehensive income.

 

i) Revenue recognition
  (i) Investment properties

The Business has retained substantially all of the risks and benefits of ownership of its investment properties and therefore accounts for leases with its tenants as operating leases. Revenue recognition under a lease commences when the tenant has a right to use the leased asset. Generally, this occurs on the lease inception date or, where the Business is required to make additions to the property in the form of tenant improvements which enhance the value of the property, upon substantial completion of those improvements. The total amount of contractual rent to be received from operating leases is recognized on a straight-line basis over the term of the lease; a straight-line rent receivable, which is included in the carrying amount of investment property, is recorded for the difference between the rental revenue recorded and the contractual amount received.

Rental revenue also includes percentage participating rents and recoveries of operating expenses, including property and capital taxes. Percentage participating rents are recognized when tenants’ specified sales targets have been met. Operating expense recoveries are recognized in the period that recoverable costs are chargeable to tenants.

 

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  (ii) Performance and management fee revenue

Certain of the company’s operating subsidiaries are entitled to management fees and performance fees on the management of properties for third parties. The Business recognizes management fees as earned. The Business recognizes performance fees in revenue when the amount receivable from its fund partners is determinable at the end of a contractually specified term.

 

j) Derivative financial instruments and hedge accounting

Derivative instruments are recorded in the carve-out balance sheets at fair value, including those derivatives that are embedded in financial or non-financial contracts and which are not closely related to the host contract.

The following summarizes the company’s classification and measurement of financial assets and liabilities:

 

      Classification        Measurement  

Financial assets

       

Non-current financial assets

       

Equity securities designated as available-for-sale (“AFS”)

     AFS           Fair value   

U.S. Office Fund option

     FVTPL(1)           Fair value   

Brookfield Residential promissory notes

     Loans and receivables           Amortized cost   

Loans receivable designated as FVTPL

     FVTPL           Fair value   

Other loans receivable

     Loans and receivables           Amortized cost   

Receivables and other assets

       

Accounts receivable

     Loans and receivables           Amortized cost   

Loan receivable from affiliate

     Loans and receivables           Amortized cost   

Restricted cash and deposits

     Loans and receivables           Amortized cost   

Cash and cash equivalents

     Loans and receivables           Amortized cost   

Financial liabilities

       

Commercial property debt

     Other liabilities           Amortized cost(2)   

Capital securities – corporate

     Other liabilities           Amortized cost   

Other non-current financial liabilities

       

Loan payable

     Other liabilities           Amortized cost   

U.S. Office Fund true-up obligation

     Other liabilities           Amortized cost(2)   

Accounts payable and accrued liabilities

     Other liabilities           Amortized cost   
                     
(1) 

Fair value through profit and loss (“FVTPL”)

(2) 

Except for derivatives embedded in the related financial instruments that are classified as FVTPL

The company’s subsidiaries selectively utilize derivative financial instruments primarily to manage financial risks, including interest rate and foreign exchange risks. Derivative financial instruments are recorded at fair value determined on a credit adjusted basis.

The Business applies hedge accounting to derivative financial instruments in cashflow hedging relationships, and to derivative and non-derivative financial instruments designated as hedges of net investments in subsidiaries. Hedge accounting is discontinued prospectively when the hedge relationship is terminated or no longer qualifies as a hedge, or when the hedging item is sold or terminated.

In cashflow hedging relationships, the effective portion of the change in the fair value of the hedging derivative is recognized in OCI while the ineffective portion is recognized in net income. Hedging gains and losses recognized in accumulated other comprehensive income (“AOCI”) are reclassified to net income in the periods when the hedged item affects net income. Gains and losses on derivatives are immediately reclassified to investment and other income when the hedged item is sold or terminated or when it is determined that a hedged forecasted transaction is no longer probable.

 

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In a net investment hedging relationship, the effective portion of foreign exchange gains and losses on the hedging instruments is recognized in OCI and the ineffective portion is recognized in net income. The amounts recorded in AOCI are recognized in net income when there is a disposition or partial disposition of the foreign subsidiary.

Changes in the fair value of derivative instruments, including embedded derivatives, that are not designated as hedges for accounting purposes are recognized in fair value gains (losses) or general and administrative expense consistent with the underlying nature and purpose of the derivative instrument.

The asset or liability relating to unrealized gains and losses on derivative financial instruments are recorded in accounts receivable and other or accounts payable and other, respectively.

 

k) Goodwill

Goodwill represents the excess of the price paid for the acquisition of a consolidated entity over the fair value of the net identifiable tangible and intangible assets and liabilities acquired. Goodwill is allocated to the cash generating unit to which it relates. The Business identified cash generating units as identifiable groups of assets that are largely independent of the cash inflows from other assets to group of assets.

Goodwill is evaluated for impairment annually or more often if events or circumstances indicate there may be impairment. Impairment is determined for goodwill by assessing if the carrying value of a cash generating unit, including the allocated goodwill, exceeds its recoverable amount determined as the greater of the estimated fair value less costs to sell or the value in use. Impairment losses recognized in respect of a cash generating unit are first allocated to the carrying value of goodwill and any excess is allocated to the carrying amount of assets in the cash generating unit. Any goodwill impairment is charged to income in the period in which the impairment is identified. Impairment losses on goodwill are not subsequently reversed.

 

l) Business combinations

The acquisition of businesses is accounted for using the acquisition method. The cost of an acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued in exchange for control of the acquiree. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3, “Business Combinations” (“IFRS 3”), are recognized at their fair values at the acquisition date, except for non-current assets that are classified as held-for-sale in accordance with IFRS 5, “Non-current Assets Held for Sale and Discontinued Operations”, which are recognized and measured at fair value, less costs to sell. The interests of non-controlling shareholders in the acquiree are initially measured at the non-controlling interests’ proportion of the net fair value of the identifiable assets, liabilities and contingent liabilities recognized.

To the extent the fair value of consideration paid exceeds the fair value of the net identifiable tangible and intangible assets, the excess is recorded as goodwill. To the extent the fair value of consideration paid is less than the fair value of net identifiable tangible and intangible assets, the excess is recognized in net income.

Where a business combination is achieved in stages, previously held interests in the acquired entity are re-measured to fair value at the acquisition date, which is the date control is obtained, and the resulting gain or loss, if any, is recognized in net income. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are reclassified to net income. Changes in the company’s ownership interest of a subsidiary that do not result in a gain or loss of control are accounted for as equity transactions and are recorded as a component of equity. Acquisition costs are recorded as an expense in net income as incurred.

 

m) Cash and cash equivalents

Cash and cash equivalents include cash and short-term investments with original maturities of three months or less.

 

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n) Critical judgments in applying accounting policies

The following are the critical judgments that have been made in applying the company’s accounting policies and that have the most significant effect on the amounts in the financial statements:

 

  (i) Investment in U.S. Office Fund

The company’s investment in the U.S. Office Fund (the “Fund”) is described in Note 6. The critical judgments made in accounting for the Fund relate to the company’s determination that it obtained control of the Fund upon exercise of the U.S. Office Fund Option, which is described in Note 6, in the third quarter of 2011, the measurement of the transactions related to the exercise of the U.S. Office Fund Option and redemption of non-controlling interests in the Fund, as well as the classification of gains or losses resulting from the exercise of the option and redemption of non-controlling interests in earnings or equity. Prior to exercise of the U.S. Office Fund Option, critical judgments in respect of the accounting for the Fund related to the determination that the Fund was subject to joint control based on the rights assigned to the company and its joint venture partners under the joint venture agreement and the classification of certain of the investments in the venture as liabilities or equity, the identification of contractual provisions in the joint venture agreement that are accounted for separately as financial instruments under IAS 39, “Financial Instruments – Recognition and Measurement” (“IAS 39”).

 

  (ii) Investment property

The company’s accounting policies relating to investment property are described in Note 2(b). In applying this policy, judgment is applied in determining whether certain costs are additions to the carrying amount of the property and, for properties under development, identifying the point at which practical completion of the property occurs and identifying the directly attributable borrowing costs to be included in the carrying value of the development property. Judgment is also applied in determining the extent and frequency of independent appraisals.

 

  (iii) Income taxes

The Business applies judgment in determining the tax rate applicable to its Real Estate Investment Trust (“REIT”) subsidiaries and identifying the temporary differences related to such subsidiaries with respect to which deferred income taxes are recognized. Deferred taxes related to temporary differences arising in the company’s REIT subsidiaries, joint ventures and associates are measured based on the tax rates applicable to distributions received by the investor entity on the basis that REITs can deduct dividends or distributions paid such that their liability for income taxes is substantially reduced or eliminated for the year, and the Business intends that these entities will continue to distribute their taxable income and continue to qualify as REITs for the foreseeable future.

The Business measures deferred income taxes associated with its investment properties based on its specific intention with respect to each asset at the end of the reporting period. Where the Business has a specific intention to sell a property in the foreseeable future, deferred taxes on the building portion of the investment property are measured based on the tax consequences following from the disposition of the property. Otherwise, deferred taxes are measured on the basis the carrying value of the investment property will be recovered substantially through use. Judgment is required in determining the manner in which the carrying amount of each investment property will be recovered.

The Business also makes judgments with respect to the taxation of gains inherent in its investments in foreign subsidiaries and joint ventures. While the Business believes that the recovery of its original investment in these foreign subsidiaries and joint ventures will not result in additional taxes, certain unremitted gains inherent in those entities could be subject to foreign taxes depending on the manner of realization.

 

  (iv) Leases

The company’s policy for revenue recognition on operating properties is described in Note 2(h)(i). In applying this policy, the Business makes judgments with respect to whether tenant improvements

 

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provided in connection with a lease enhance the value of the leased property which determines whether such amounts are treated as additions to operating property as well as the point in time at which revenue recognition under the lease commences. In addition, where a lease allows a tenant to elect to take all or a portion of any unused tenant improvement allowance as a rent abatement, the Business must exercise judgment in determining the extent to which the allowance represents an inducement that is amortized as a reduction of lease revenue over the term of the lease.

The Business also makes judgments in determining whether certain leases, in particular those tenant leases with long contractual terms where the lessee is the sole tenant in a property and long-term ground leases where the Business is lessor, are operating or finance leases. The Business has determined that all of its leases are operating leases.

 

  (v) Financial instruments

The company’s accounting policies relating to financial instruments are described in Note 2(i). The critical judgments inherent in these policies relate to applying the criteria set out in IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”) to designate financial instruments as amortized cost, fair value through profit or loss (“FVTPL”) or available for sale (“AFS”), assessment of the effectiveness of hedging relationships, determining whether the Business has significant influence over investees with which it has contractual relationships in addition to the financial instrument it holds and identification of embedded derivatives subject to fair value measurement in certain hybrid instruments.

The Business has determined that, notwithstanding its 22% common equity interest, it does not exercise significant influence over Canary Wharf Group plc, a privately held commercial property investment and development company in the United Kingdom, as it is not able to elect a member of the board or otherwise influence its financial and operating decisions.

 

  (vi) Level of Control

When determining the appropriate basis of accounting for the company’s investments, the company uses the following critical judgments and assumptions: the degree of control or influence that the company exerts; the amount of potential voting rights which provide the company or unrelated parties voting powers; the ability to appoint directors, the ability of other investors to remove the company as a manager or general partner in a controlled partnership; and the amount of benefit that the company receives relative to other investors. Other critical estimates and judgments utilized in the preparation of the company’s financial statements are: assessment of net recoverable amounts; net realizable values; depreciation and amortization rates and useful lives; value of goodwill and intangible assets; ability to utilize tax losses and other tax measurements; and the determination of functional currency. Critical estimates and judgments also include the determination of effectiveness of financial hedges for accounting purposes; the likelihood and timing of anticipated transactions for hedge accounting; the fair value of assets held as collateral and the company’s ability to hold financial assets, and the selection of accounting policies.

 

  (vii) Common control transactions

IFRS does not include specific measurement guidance for transfers of businesses or subsidiaries between entities under common control. Accordingly, the Business has developed a policy to account for such transactions taking into consideration other guidance in the IFRS framework and pronouncements of other standard-setting bodies. The company’s policy is to record assets and liabilities recognized as a result of transfers of businesses or subsidiaries between entities under common control at the carrying value on the transferor’s financial statements. Differences between the carrying amount of the consideration given or received, where the Business is the transferor, and the carrying amount of the assets and liabilities transferred are recorded directly in equity.

 

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o) Critical accounting estimates and assumptions

The company makes estimates and assumptions that affect carried amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amount of earnings for the period. Actual results could differ from estimates. The estimates and assumptions that are critical to the determination of the amounts reported in the financial statements relate to the following:

 

  (i) Investment property

The critical estimates and assumptions underlying the valuation of operating properties and property developments are set out in Note 5.

 

  (ii) Financial instruments

As discussed in Note 9, the Business determines the fair value of its warrants to acquire common shares of General Growth Properties (“GGP”) using a Black-Scholes option pricing model wherein it is required to make estimates and assumptions regarding the expected future volatility of GGP’s shares and the term of the warrants.

The Business also has certain financial assets and liabilities with embedded participation features related to the values of investment properties whose fair values are based on the fair values of the related properties.

The Business holds other financial instruments that represent equity interests in investment property entities that are measured at fair value as these financial instruments are designated as FVTPL or AFS. Estimation of the fair value of these instruments is also subject to the estimates and assumptions associated with investment properties.

The fair value of interest rate caps is determined based on generally accepted pricing models using quoted market interest rates for the appropriate term. Interest rate swaps are valued at the present value of estimated future cashflows and discounted based on applicable yield curves derived from market interest rates.

Application of the effective interest method to certain financial instruments involves estimates and assumptions about the timing and amount of future principal and interest payments.

 

p) Earnings per share

The company’s historical capital structure is not indicative of its prospective structure since no direct ownership relationship existed among all the various units comprising the Business. Accordingly, historical earnings per share has not been presented in the financial statements.

NOTE 3: ADOPTION OF ACCOUNTING STANDARD

On November 4, 2009, the IASB issued a revised version of IAS 24, “Related Party Disclosures” (“IAS 24”). IAS 24 requires entities to disclose in their financial statements information about transactions with related parties. Generally, two parties are related to each other if one party controls, or significantly influences, the other party. IAS 24 has simplified the definition of a related party and removed certain of the disclosures required by the predecessor standard. The revised standard is effective for annual periods beginning on or after January 1, 2011. The related party disclosures included in these financial statements have been prepared in accordance with the revised standard.

NOTE 4: FUTURE ACCOUNTING POLICY CHANGES

The following are the accounting policies that the Business expects to adopt in the future:

  (a) Financial Instruments

IFRS 9, “Financial Instruments” (“IFRS 9”) is a multi-phase project to replace IAS 39. IFRS 9 introduces new requirements for classifying and measuring financial assets. In October 2010 the IASB reissued IFRS 9, incorporating new requirements on accounting for financial liabilities and carrying

 

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over from IAS 39 the requirements for de-recognition of financial assets and financial liabilities. In December 2011, the IASB issued “Mandatory Effective Date of IFRS 9 and Transition Disclosures”, which amended the effective date of IFRS 9 to annual periods beginning on or after January 1, 2015, and modified the relief from restating comparative periods and the associated disclosures in IFRS 7. Early adoption is permitted. The IASB intends to expand IFRS 9 to add new requirements for impairment of financial assets measured at amortized cost and hedge accounting. On completion of these various phases, IFRS 9 will be a complete replacement of IAS 39.

 

  (b) Consolidated Financial Statements

IFRS 10, “Consolidated Financial Statements” (“IFRS 10”) establishes principles for the preparation of an entity’s financial statements when it controls one or more other entities. The standard defines the principle of control and establishes control as the basis for determining which entities are consolidated in the financial statements of the reporting entity. The standard also sets out the accounting requirements for the preparation of consolidated financial statements.

 

  (c) Joint Arrangements

IFRS 11, “Joint Arrangements” (“IFRS 11”) replaces the existing IAS 31, “Interests in Joint Ventures” (“IAS 31”). IFRS 11 requires that reporting entities consider whether a joint arrangement is structured through a separate vehicle, as well as the terms of the contractual arrangement and other relevant facts and circumstances, to assess whether the venture is entitled to only the net assets of the joint arrangement (a “joint venture”) or to its share of the assets and liabilities of the joint arrangement (a “joint operation”). Joint ventures are accounted for using the equity method, whereas joint operations are accounted for using proportionate consolidation.

 

  (d) Disclosure of Interests in Other Entities

IFRS 12, “Disclosure of Interests in Other Entities” (“IFRS 12”) applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. The standard requires the reporting entity to disclose information that enables users of financial statements to evaluate: i.) the nature of, and risks associated with, the reporting entity’s interests in other entities; and ii.) the effects of those interests on the reporting entity’s financial position, financial performance and cashflows.

 

  (e) Fair Value Measurement

IFRS 13, “Fair Value Measurement” (“IFRS 13”) replaces the current guidance on fair value measurement in IFRS with a single standard. The standard defines fair value, provides guidance on its determination and requires disclosures about fair value measurements but does not change the requirements about the items that should be measured and disclosed at fair value.

 

  (f) Income Taxes

Amendments have been made to IAS 12, “Income Taxes” (“IAS 12”), that are applicable to the measurement of deferred tax liabilities and deferred tax assets where investment property is measured using the fair value model in IAS 40, “Investment Property”. The amendments introduce a rebuttable presumption that, for purposes of determining deferred tax consequences associated with temporary differences relating to investment properties, the carrying amount of an investment property is recovered entirely through a sale. This presumption is rebutted if the investment property is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through a sale.

Each of the above are effective for annual periods beginning on or after January 1, 2013, except for IFRS 9 and the amendment to IAS 12 which are effective for annual periods beginning on or after January 1, 2015 and January 1, 2012, respectively. Earlier application is permitted for each standard. The Business anticipates adopting each of the above in the first quarter of the year for which the standard is applicable and is currently evaluating the impact of each to its financial statements.

 

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NOTE 5: INVESTMENT PROPERTIES

 

      Dec. 31, 2011      Dec. 31, 2010  
(US$ Millions)    Operating
properties
     Development
properties
    Total      Operating
properties
     Development
properties
     Total  
 

Balance at beginning of year

   $ 19,395       $ 1,565      $ 20,960       $ 17,073       $ 1,297       $ 18,370   

Additions (1)

     6,424         158        6,582         1,266         124         1,390   

Dispositions (2)

     (1,661)         -        (1,661)         (704)         -         (704)   

Reclassification of development to operating

     166         (166)        -         -         -         -   

Capitalized construction costs

     293         251        544         135         135         270   

Capitalized interest costs

     37         90        127         -         63         63   

Fair value gains (losses) (3)

     1,374         (15)        1,359         895         (97)         798   

Foreign currency translation and other changes

     (298)         (19)        (317)         730         43         773   

Balance at end of year

   $ 25,730       $ 1,864      $ 27,594       $ 19,395       $ 1,565       $ 20,960   
(1) 

Additions include property acquisitions and investment, capital expenditures and initial direct leasing costs.

(2) 

Dispositions represent fair value at time of sale, or the selling price.

(3) 

Fair value gains (losses) includes realized gains of $365 million (2010 - $250 million).

The Business determines the fair value of each operating property based upon, among other things, rental income from current leases and assumptions about rental income from future leases reflecting market conditions at the applicable balance sheet dates, less future cash outflows in respect of such leases. Fair values are primarily determined by discounting the expected future cashflows, generally over a term of 10 years including a terminal value based on the application of a capitalization rate to estimated year 11 cashflows. Certain operating properties are valued using a direct capitalization approach whereby a capitalization rate is applied to estimated current year cashflows. Developments properties under active development are also measured using a discounted cashflow model, net of costs to complete, as of the balance sheet date. Development sites in the planning phases are measured using comparable market values for similar assets. In accordance with its policy, the Business measures its operating properties and development properties using valuations prepared by management. In connection with determining these values, the Business obtains valuations of selected operating properties and development properties prepared by qualified external valuation professionals and considers the results of such valuations in arriving at its own conclusions on values. Investment properties with an aggregate fair value of $11,910 million were valued by qualified external valuation professionals during the year ended December 31, 2011 (2010 - $6,806 million).

The key valuation metrics for operating properties, including properties accounted for under the equity method, are set out in the following tables:

 

          December 31, 2011     December 31, 2010  
(US$ Millions)   Valuation Method   Discount
Rate
    Terminal
Capitalization
Rate
    Investment
Horizon
(yrs)
    Discount
Rate
    Terminal
Capitalization
Rate
    Investment
Horizon
(yrs)
 
 

Office

             

United States

  DCF     7.5%        6.3%        12        8.1%        6.7%        10   

Canada

  DCF     6.7%        6.2%        11        6.9%        6.3%        11   

Australia

  DCF     9.1%        7.5%        10        9.2%        7.7%        10   

Europe

  Direct Capitalization     6.1%   (1)      n/a        n/a        6.5%  (1)      n/a        n/a   
 

Retail

             

United States

  Direct Capitalization     6.0%   (1)      n/a        n/a        6.7%  (1)      n/a        n/a   

Australia

  DCF     9.8%        8.9%        10        9.8%        9.0%        10   

Brazil

  DCF     9.6%        7.3%        10        10.0%        7.3%        10   

Europe

  Direct Capitalization     -        -        -        8.1%  (1)      n/a        n/a   
 

Multi-Family and Industrial

             

United States

  DCF     8.6%        8.3%        10        8.4%        6.6%        10   

Canada

  DCF     8.7%        7.7%        10        9.0%        7.6%        10   
 

Opportunistic Investments

             

United States

  DCF     8.2%        8.1%        10        8.7%        8.1%        10   
(1) 

The valuation method used is the direct capitalization method. The amounts presented as the discount rate relate to the implied capitalization rate. The terminal capitalization rate and investment horizon are not applicable.

 

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Values are most sensitive to changes in discount rates and timing or variability of cashflows.

Included in operating properties is $308 million (2010 - $255 million) of net straight line rent receivables arising from the recognition of rental revenue on a straight line basis over the lease term in accordance with IAS 17, “Leases.”

Operating properties with a fair value of approximately $4.9 billion (2010 - $4.8 billion) are situated on land held under leases or other agreements largely expiring after the year 2065. Investment properties do not include any properties held under operating leases.

During the year ended December 31, 2011, the Business capitalized a total of $341 million (2010 - $198 million) of costs related to property developments. Included in this amount is $251 million (2010 - $135 million) of construction and related costs and $90 million (2010 - $63 million) of borrowing costs capitalized. The weighted average rate used for the capitalization of borrowing costs to development properties is 7.1% (2010 - 6.7%).

Investment properties with a fair value of $22.0 billion (2010 - $16.1 billion) are pledged as security for property debt.

NOTE 6: INVESTMENT IN U.S. OFFICE FUND

The company’s interest in the U.S. Office Fund is held through an indirect interest in TRZ Holdings LLC (“TRZ Holdings”), an entity originally established by the company and a joint venture partner (the “JV partner”). Under the terms of a joint venture agreement, the JV partner held an option, commencing January 2011 for nine months, to call certain properties sub-managed by the JV partner in exchange for its equity interest in TRZ Holdings; in the event the JV partner did not first exercise its option, the Business had an option, commencing in 2013 for a period of 14 months, to put the JV partner’s sub-managed properties to the JV partner in redemption of its interest in TRZ Holdings (collectively, the “U.S. Office Fund Option”).

On August 9, 2011, the JV partner exercised the U.S. Office Fund Option, redeeming its equity interest in TRZ Holdings in exchange for its sub-managed properties and repayment of TRZ Holdings’ debt associated with those properties. Prior to the exercise of the U.S. Office Fund Option, the Business and the JV partner had joint control over the strategic financial and operating policy decisions of TRZ Holdings and it was accounted for as a jointly controlled entity following the equity method of accounting. Following the exercise of the U.S. Office Fund Option, the Business held an 82.72% equity interest in TRZ Holdings and obtained control over the strategic financial and operating policy decisions of the entity. Accordingly, the Business has consolidated its interest in TRZ Holdings effective August 9, 2011 and recognized the assets, liabilities and non-controlling interests in TRZ Holdings at fair value as at that date in accordance with IFRS 3, “Business Combinations”.

The following is a summary of the amounts assigned to each major class of asset and liability of TRZ Holdings at the date the Business obtained control:

 

(US$ Millions)    As at August 9, 2011  

Commercial properties and developments

   $                                  4,953   

Cash and cash equivalents

     32   

Restricted cash

     44   

Accounts receivable and other assets

     40   

Equity accounted investments

     685   

Accounts payable and other

     (225

Commercial property debt assumed

     (3,293

Total

   $ 2,236   

Brookfield’s net interest

   $ 1,870   

Non-controlling interest(1)

   $ 366   

(1) Includes $24 million of non-controlling interest in net liabilities of an intermediary subsidiary.

 

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The Business recognized the non-controlling interests in the net assets of TRZ Holdings at a fair value of $366 million determined based on the non-controlling interests proportionate ownership in the net assets.

The Business did not provide any consideration upon the change in control except for the payment of the U.S. Office Fund true-up consideration payable under the joint venture agreement with the JV partner. Accordingly, the excess of the fair value of the net assets of TRZ Holdings at the date control was obtained over the carrying amount of the company’s investment in the U.S. Office Fund measured under the equity method of accounting of $212 million has been recognized in fair value gains (losses) (refer to Note 20).

The company’s carve-out statement of income includes revenues and net earnings from TRZ Holdings from August 9, 2011 through December 31, 2011 of $226 million and $195 million, respectively. Prior to the exercise of the U.S. Office Fund Option, the company’s share of the earnings of TRZ Holdings were included in share of net earnings (losses) from equity accounted investments.

Summarized financial information with respect to TRZ Holdings for the period during which it was accounted for as a jointly controlled entity is set out below:

 

(US$ Millions)   Dec. 31, 2010  

Non-current assets

 

Commercial properties

  $                 7,500   

Commercial developments

    44   

Current assets

    258   

Total assets

    7,802   

Non-current liabilities

 

Commercial property debt

    5,516   

Current liabilities

    288   

Total liabilities

    5,804   

Net assets

  $ 1,998   

Company’s share of net assets(1)

  $ 1,285   
(1)

Comparative amount at December 31, 2010 includes $63 million representing the excess of the company’s carrying amount over its share of the net assets of the venture.

 

(US$ Millions)    2011(1)     2010  

Revenue

   $                 476      $                 865   

Expenses

     (345     (623

Earnings before fair value gains

     131        242   

Fair value gains (losses)

     585        459   

Net earnings

   $ 716      $ 701   

Company’s share of net earnings(2,3)

   $ 383      $ 366   
(1) 

For the period from January 1, 2011 to August 8, 2011.

 

(2)

Includes non-controlling interests share of earnings (losses) of $76 million for the year ended December 31, 2011 (2010 – $75 million).

 

(3)

Net of $63 million for the year ended December 31, 2011 (2010 – $79 million) representing the amortization of the excess of the company’s carrying amount over its share of the net assets of the venture.

During the fourth quarter of 2011, the U.S. Office Fund sold Newport Tower in Jersey City for gross proceeds of $378 million.

During the second quarter of 2011, the U.S. Office Fund sold its interest in 1400 Smith Street in Houston for gross proceeds of $340 million. The loss associated with the sale of this property of $1 million is included in the company’s share of net earnings (losses) of equity accounted investments. The loss is related to the selling costs associated with the sale.

 

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NOTE 7: EQUITY ACCOUNTED INVESTMENTS

The following table presents principal business activity, ownership interest and carrying value of the company’s investments in equity accounted jointly controlled entities and associates:

 

(US$ Millions)           Ownership interest          Carrying value  
Name of Property / Investees   Principal Business      Dec. 31, 2011     Dec. 31, 2010          Dec. 31, 2011     Dec. 31, 2010  

Joint controlled entities

              

U.S. Office Fund(1)

    Office Properties         -        47%          $ -      $ 1,285   

Grace Building, New York (1)

    Office Properties         50%        -            618        -   

245 Park Avenue, New York

    Office Properties         51%        51%            619        580   

Four World Financial Center, New York

    Office Properties         -        51%            -        303   

First Canadian Place, Toronto

    Office Properties         -        25%            -        4   

Bourke Place Trust, Sydney

    Office Properties         43%        43%            187        183   

Darling Park Complex, Sydney

    Office Properties         30%        50%            349        350   

E&Y Complex, Sydney

    Office Properties         50%        50%            275        282   

Various

    Various         13% - 75%        25-60%            728        384   
                                   2,776        3,371   

Investments in associates

              

General Growth Properties (2)

    Retail Properties         23%        10%            4,099        1,014   

Various

    Various         25% - 40%        25-40%            13        17   
                                        4,112        1,031   

Total

                                    $     6,888      $     4,402   

(1) U.S. Office fund properties are consolidated beginning in Q3 2011, with the exception of several assets which continue to be equity accounted. The Grace Building carrying value was included in the U.S. Office Fund at December 31, 2010.

(2) The 23% ownership interest relates to the Company’s consolidated ownership in GGP which includes the interests of fund investors controlled by the Company and which are required to be consolidated in the Company’s financial statements. The Company’s net economic interest in GGP is 21%.

Other jointly controlled entities hold individual operating properties and property developments that the Business owns together with co-owners where the strategic financial and operating decisions require approval of the co-owners.

In November 2010, a consortium led by Brookfield sponsored the recapitalization of GGP and acquired a 27% economic interest in the reorganized GGP on a fully diluted basis, with 10% being owned by Brookfield. In February 2011, Brookfield acquired an additional 11% economic interest in GGP for consideration of $1.7 billion. The fair value of the company’s interest in GGP as of December 31, 2011 is $4.1 billion (2010 - $1.0 billion). A portion of the company’s shares in GGP are subject to certain restrictions regarding transfer or sale. There are no published prices for the company’s other equity accounted investments.

Summarized financial information in respect of the company’s equity accounted investments is provided below:

 

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

Non-current assets

     $             43,861         $               42,127   

Current assets

       1,595           4,100   

Total assets

       45,456           46,227   

Non-current liabilities

       23,893           27,382   

Current liabilities

       271           2,488   

Total liabilities

       24,164           29,870   

Net assets

     $ 21,292         $ 16,357   

 

(US$ Millions)   2011        2010        2009  

Revenue

  $               5,309         $               2,096         $               1,920   

Expenses

    3,737           1,548           1,455   

Income before fair value gains (losses)

    1,572           548           465   

Fair value gains (losses)

    5,962           885           (1,464)   

Net income (loss)

    7,534           1,433           (999)   

Company’s share of net earnings (losses)

  $ 2,104         $ 870         $ (461)   

 

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NOTE 8: JOINTLY CONTROLLED ASSETS

The Business has recorded its proportionate share of the related assets, liabilities, revenue and expenses of properties subject to joint control following the proportionate consolidation method. Summarized financial information in respect of the company’s interest in jointly controlled assets is set out below:

 

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

Non-current assets

   $               2,605       $               2,782   

Current assets

     38         39   

Total assets

     2,643         2,821   

Non-current liabilities

     850         976   

Current liabilities

     186         157   

Total liabilities

     1,036         1,133   

Net assets

   $ 1,607       $ 1,688   

 

(US$ Millions)   2011     2010     2009  

Revenue

  $             256      $                  250      $                  208   

Expenses

    171        152        112   

Income before fair value gains (losses)

    85        98        96   

Fair value gains (losses)

    78        71        (253)   

Net income (loss)

  $ 163      $ 169      $ (157)   

NOTE 9: OTHER NON-CURRENT ASSETS

The components of other non-current assets are as follows:

 

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

Securities designated as FVTPL

  $                  856      $                  698   

Derivative assets

    210        507   

Securities designated as AFS

    194        259   

Goodwill

    150        174   

Other non-current assets

    1,122        316   
    $ 2,532      $ 1,954   

Included in equity securities designated as FVTPL is a 22% common equity interest in Canary Wharf Group plc, a privately held commercial property investment and development company in the United Kingdom.

Derivative assets include the carrying amount of warrants to purchase shares of common stock of GGP and The Howard Hughes Corporation (“HHC”) with a carrying amount of $210 million (2010 - $197 million). The fair value of the warrants is determined using a Black-Scholes option pricing model, assuming a 6 year term, 37% volatility, and a risk free interest rate of 1.1%. Included in derivative assets in 2010 is $310 million in respect of the U.S. Office Fund Option. In the third quarter of 2011, the U.S. Office Fund Option, having a carrying amount of $241 million, was derecognized as a result of the exercise of the option by the company’s JV partner (refer to Note 6) with a corresponding adjustment to fair value gains (losses) in the carve-out statement of income (loss).

Securities designated as AFS include $107 million (2010 - $106 million) representing the company’s common and preferred equity interest in an office property in Washington, D.C. which is pledged as security for a loan payable to the issuer of $92 million (2010 - $93 million) recognized in other non-current liabilities. Also included in securities designated as AFS are commercial mortgage-backed securities (“CMBS”) with an estimated fair value of $46 million (2010 - $107 million) and common shares with a fair value of based on quoted market prices of $41 million (2010 - $46 million).

Goodwill represents a portfolio premium recognized in connection with the purchase of the company’s Brazilian retail assets.

 

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Included in other non-current assets is a hotel and casino operating asset of $820 million (2010 - nil) that was acquired subsequent to foreclosure on debt owned by our finance fund during 2011. In addition, there is a $145 million (2010 - $145 million) receivable from Brookfield upon the earlier of the exercise by Brookfield Office Properties Inc. (“BPO”), a 51% owned subsidiary of Brookfield that is included in the Business, of its option to acquire direct ownership of certain properties in the Australian portfolio from a subsidiary of Brookfield on the maturity of the related loans. See Note 24 for related party disclosures.

NOTE 10: LOANS AND NOTES RECEIVABLE

Loans and notes receivable reside primarily in the company’s real estate finance funds and are generally secured by commercial and other income producing real property.

 

(US$ Millions) Type    Interest Rate    Maturity Date    Dec. 31, 2011      Dec. 31, 2010  

Variable rate

   LIBOR plus 1.00% to 11.00%    2010 to 2014    $ 1,009       $ 2,008   

Fixed rate

   6.52% to 8.00%    2010 to 2012      715         34   

Other

   Non-Interest Bearing    On Demand      34         38   
               $ 1,758       $ 2,080   

Current

      2010 to 2011    $ 773       $ 1,543   

Non-current

      2012 to 2014      985         537   
               $ 1,758       $ 2,080   

Included in loans and notes receivable is $107 million (2010 - $110 million) of loans receivable in Euros of €83 million (2010 - €83 million). Loans receivable of $0.7 billion have been pledged as collateral for borrowings under credit facilities (2010 - $1.0 billion). Also included in notes receivable is $470 million (2010 - nil) related to the unsecured promissory notes of C$480 million as partial proceeds for the disposition of the company’s residential development segment to Brookfield Residential Properties Inc. (“BRPI”).

At December 31, 2010, loans receivable included $504 million representing the company’s interest in debt securities issued by the U.S. Office Fund, which has been settled during 2011.

A summary of loans and notes receivable by collateral asset class as of December 31, 2011 and 2010, is as follows:

 

(US$ Millions)   December 31, 2011          December 31, 2010  
     Unpaid Principal Balance     Percentage of Portfolio  (1)          Unpaid Principal Balance      Percentage of Portfolio (1)  

Asset Class

            

Hotel

    $            401        33 %          $            520         25%   

Office

    814        67 %          1,249         60%   

Retail

    -        -            17         1%   

Nursing homes

    -        -            153         7%   

Residential

    -        -            141         7%   

Total collateralized

    $        1,215        100 %          $        2,080         100%   

(1) Represents percentage of collateralized loans.

In the year ended December 31, 2011, an impairment charge of nil (2010 - $53 million; 2009 - $58 million) was recognized in respect of the company’s loans and notes receivable.

NOTE 11: ACCOUNTS RECEIVABLE AND OTHER

The components of receivables and other assets are as follows:

 

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

Accounts receivable(1)

   $                     393       $                     479   

Restricted cash

     185         165   

Other current assets

     218         128   
     $ 796       $ 772   
(1) 

Includes related party receivables in the amount of $49 million (2010 - $77 million) – see Note 24 for related party disclosures.

 

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NOTE 12: PROPERTY DEBT

Property debt includes the following:

 

      Dec. 31, 2011    Dec. 31, 2010  
(US$ Millions)    Weighted Average Rate      Debt Balance            Weighted Average Rate      Debt Balance  

Unsecured Facilities

                

BPO revolving facility

     2.4%       $ 264              -       $ -   

BPO Canada revolving facility

     3.3%         117              -         -   

Bridge facility(1)

     -         -              3.3%         428   
 

Secured Property Debt

                

Fixed rate

     5.9%         7,946              6.0%         6,803   

Variable rate

     6.8%         7,060              6.6%         4,733   
       6.2%       $ 15,387              6.1%       $ 11,964   

Current

      $ 1,409               $ 2,791   

Non-current

              13,978                       9,173   
              $ 15,387                     $ 11,964   
(1)

See Note 24 for related party disclosures.

Property debt is secured and non-recourse to the Business. Unsecured facilities are recourse to the assets of the operating subsidiaries issuing such debt.

Property debt includes foreign currency denominated debt payable in the functional currencies of the borrowing subsidiaries. Property debt by currency is as follows:

 

      Dec. 31, 2011    Dec. 31, 2010  
(US$ Millions)    US$ Balance      Local Currency Balance            US$ Balance      Local Currency Balance  

U.S. dollars

   $ 8,753       $ 8,753            $ 5,319       $ 5,319   

Canadian dollars

     2,033       C$ 2,078              1,767       C$ 1,764   

Australian dollars

     3,148       A$ 3,085              2,660       A$ 2,599   

Brazilian reais

     1,011       R$         1,896              1,262       R$         2,102   

British pounds

     442       £ 284              699       £ 448   

New Zealand dollars

     -       $ -              257       NZ$ 330   
     $           15,387                     $           11,964            

Included in property debt is an embedded derivative representing a lender’s right to participate in the appreciation in value of a notional 25% equity interest in the property secured by its mortgage that can be settled, at the company’s option, in cash or equity in the underlying property on maturity of the debt in 2014. The embedded derivative is measured at FVTPL with changes in fair value reported in earnings as fair value gains (losses). The carrying amount of the embedded derivative at December 31, 2011 is $56 million (2010 - $54 million).

 

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NOTE 13: CAPITAL SECURITIES

Capital securities includes certain of the Class AAA preferred shares issued by BPO which are presented as liabilities on the basis that they may be settled, at the issuer’s option, in cash or the equivalent value of a variable number of the issuer’s common shares.

 

(US$ Millions, except share information)    Shares
Outstanding
     Cumulative
Dividend Rate
           Dec. 31, 2011(1)      Dec. 31, 2010(1)  

Class AAA Series F

     8,000,000         6.00%          $                     196       $ 200   

Class AAA Series G

     4,400,000         5.25%            110         110   

Class AAA Series H

     8,000,000         5.75%            196         200   

Class AAA Series I

     6,130,022         5.20%            150         179   

Class AAA Series J

     8,000,000         5.00%            196         200   

Class AAA Series K

     6,000,000         5.20%              146         149   

Total

                          $ 994       $                 1,038   
(1) 

Net of transaction costs of $1 million at December 31, 2011 (2010 - $2 million) which are amortized to interest expense over the life of the securities using the effective interest method.

Capital securities includes $884 million (2010 - $928 million) repayable in Canadian dollars of C$903 million (2010 – C$926 million).

The redemption terms of the Class AAA Preferred Shares are as follows:

 

      Redemption  Date(1)    Redemption  Price(2)    Company’s  Option(3)    Holder’s  Option(4)

Series F

   September 30, 2009    C$25.75    September 30, 2009    March 31, 2013

Series G

   June 30, 2011    US$26.00    June 30, 2011    September 30, 2015

Series H

   December 31, 2011    C$26.00    December 31, 2011    December 31, 2015

Series I

   December 31, 2008    C$25.75    December 31, 2008    December 31, 2010

Series J

   June 30, 2010    C$26.00    June 30, 2010    December 31, 2014

Series K

   December 31, 2012    C$26.00    December 31, 2012    December 31, 2016
(1) 

Subject to applicable law and rights of the company, the company may, on or after the dates specified above, redeem Class AAA preferred shares for cash as follows: the Series F at a price of C$25.75, if redeemed during the 12 months commencing September 30, 2009 and decreasing by C$0.25 each 12-month period thereafter to a price per share of C$25.00 if redeemed on or after September 30, 2012; the Series G at a price of US$26.00, if redeemed during the 12 months commencing June 30, 2011 and decreasing by US$0.33 each 12-month period thereafter to a price per share of US$25.00 if redeemed on or after June 30, 2014; the Series H at a price of C$26.00, if redeemed during the 12 months commencing December 31, 2011 and decreasing by C$0.33 each 12-month period thereafter to a price per share of C$25.00 if redeemed on or after December 31, 2014; the Series I at a price of C$25.75, if redeemed during the 12 months commencing December 31, 2008 and decreasing by C$0.25 each 12-month period thereafter to a price per share of C$25.00 if redeemed on or after December 31, 2010; the Series J at a price of C$26.00 if redeemed during the 12 months commencing June 30, 2010 and decreasing by C$0.25 each 12-month period thereafter to a price per share of C$25.00 if redeemed on or after June 30, 2014; the Series K at a price of C$26.00 if redeemed during the 12 months commencing December 31, 2012 and decreasing by C$0.33 each 12-month period thereafter to a price per share of C$25.00 if redeemed on or after December 31, 2015.

(2) 

Subject to applicable law and rights of the company, the company may purchase Class AAA preferred shares for cancellation at the lowest price or prices at which, in the opinion of the Board of Directors of BPO such shares are obtainable.

(3) 

Subject to the approval of the Toronto Stock Exchange the company may, on or after the dates specified above, convert the Class AAA, Series F, G, H, I, J and K into common shares of the company. The Class AAA, Series F, G, H, I, J and K preferred shares may be converted into that number of common shares determined by dividing the then-applicable redemption price by the greater of C$2.00 (Series G - US$2.00) or 95% of the weighted average trading price of common shares at such time.

(4) 

Subject to the company’s right to redeem or find substitute purchasers, the holder may, on or after the dates specified above, convert Class AAA, Series F, G, H, I, J and K preferred shares into that number of common shares determined by dividing the then-applicable redemption price by the greater of C$2.00 (Series G - US$2.00) or 95% of the weighted average trading price of common shares at such time.

Cumulative preferred dividends are payable quarterly, when declared by the Board of Directors of BPO, on the last day of March, June, September and December.

 

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NOTE 14: OTHER NON-CURRENT LIABILITIES

The components of the company’s other non-current liabilities are as follows:

 

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

Other secured debt

   $ 150       $ 754   

Deferred gain

     -         172   

Other non-current financial liabilities

     343         181   
     $                      493       $                      1,107   

Other secured debt represent obligations of the company’s real estate finance funds which are secured by loans and notes receivable having a carrying value of $0.7 billion (2010 - $1.0 billion). The liabilities are recourse only to the assets of the finance subsidiary. The other secured debt is at variable rates with basis in the one-month or three-month LIBOR averages. As of December 31, 2011, the average weighted rate was 1.3% (2010 – 1.8%).

A deferred gain of $172 million was recorded in connection with the reorganization of the U.S. Office Fund in the second quarter of 2009 and relates to the initial value of the U.S. Office Fund Option assumed by the Business at the date of the reorganization as such value was determined pursuant to a valuation methodology using unobservable inputs. The gain was recognized in earnings within fair value gains (losses) upon the derecognition of the U.S. Office Fund Option (See Note 20).

NOTE 15: INCOME TAXES

The sources of deferred income tax balances are as follows:

 

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

Non-capital losses (Canada)

   $         73       $         35   

Capital losses (Canada)

     120         132   

Net operating losses (U.S.)

     26         37   

Difference in basis

     (947)         (759)   

Total net deferred tax (liability)

   $ (728)       $ (555)   

The deferred tax balance movements are as follows:

 

(US$ Millions)            Recognized in      Reclassified          
      Dec. 31, 2010      Income     Equity     Other      OCI              Dec. 31, 2011  
Deferred tax assets related to non-capital losses and capital losses    $ 204       $ (8   $ (7   $ -       $ 30       $            -       $             219   
Deferred tax liabilities related to difference in tax and book basis, net      (759      (267     9        16         70         (16      (947 ) 

Net deferred tax liabilities

   $ (555    $ (275   $ 2      $ 16       $ 100       $ (16    $ (728 ) 

 

(US$ Millions)            Recognized in      Reclassified          
      Dec. 31, 2009      Income     Equity     Other     OCI              Dec. 31, 2010  
Deferred tax assets related to non-capital losses and capital losses    $ 130       $ 85      $ (19   $ -      $ 8       $ -       $             204   
Deferred tax liabilities related to difference in tax and book basis, net      (824      (47     74        (1     (6      45         (759

Net deferred tax liabilities

   $ (694    $ 38      $ 55      $ (1   $ 2       $         45       $ (555

The Business has net operating losses with no expiry of $169 million at December 31, 2011 (2010 - $163 million), the benefit of which has not been recognized in these financial statements.

 

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The major components of income tax (expense) benefit include the following:

 

(US$ Millions)    2011      2010      2009  

Total current income tax

   $ (164)       $ (117)       $ (60)   

Total deferred income tax

     (275)         39         195   

Total income tax (expense) benefit

   $ (439)       $ (78)       $ 135   

The company’s effective tax rate is different from the company’s domestic statutory income tax rate due to the differences set out below:

 

(US$ Millions)    2011      2010      2009  

Statutory income tax rate

     28%         31%         33%   

Increase (reduction) in rate resulting from:

        

Portion of income not subject to tax

     (12)         (3)         -   

International operations subject to different tax rates

     (4)         (12)         (20)   

Change in tax rates on temporary differences

     -         -         3   

Increase in tax basis within flow through joint venture

     -         (7)         -   

Foreign exchange gains and losses

     -         -         1   

Tax asset previously not recognized

     -         (3)         -   

Other

     (2)         (2)         (2)   

Effective income tax rate

     10%         4%         15%   

The aggregate amount of temporary differences associated with investments in subsidiaries for which deferred tax liabilities have not been recognized as at December 31, 2011 is $3.5 billion (2010 – $2.2 billion).

NOTE 16: ACCOUNTS PAYABLE AND OTHER LIABILITIES

The components of the company’s accounts payable and other liabilities are as follows:

 

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

Accounts payable and accrued liabilities

   $ 1,094       $ 700   

Other secured debt

     61         -   

Other liabilities

     66         59   
     $ 1,221       $ 759   

NOTE 17: EQUITY IN NET ASSETS

Equity in net assets consists of the following:

 

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

Equity in net assets attributable to parent company

   (a)      $ 11,881       $ 7,464   

Non-controlling interests

   (b)        9,613         7,680   
              $ 21,494       $ 15,144   

 

(a) Equity in net assets attributable to parent company

Equity in net assets attributable to parent company consists of the following:

 

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

Equity in net assets

   $ 11,375       $ 6,593   

Accumulated other comprehensive income

     506         871   
     $ 11,881       $ 7,464   

 

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(b) Non-controlling interests

Non-controlling interests consist of the following:

 

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

Preferred equity

   $ 1,190       $ 945   

Other non-controlling interests

     8,423         6,735   
     $ 9,613       $ 7,680   

 

(c) Other comprehensive income (loss)

Other comprehensive income consists of the following:

 

(US$ Millions)    2011      2010      2009  

Foreign currency translation

        

Unrealized foreign currency translation (losses) gains in respect of foreign operations

   $     (363)       $     542       $     963   

Losses on hedges of net investments in foreign operations, net of income taxes of $8 million
(2010 – $23 million; 2009 – nil)

     (24)         (112)         (119)   

Reclassification to earnings of net foreign exchange losses

     -         -         3   
       (387)         430         847   

Available-for-sale securities

        

Change in unrealized gains (losses) on available-for-sale securities, net of income taxes of $3 million (2010 – nil; 2009 – nil)

     4         (9)         (25)   

Reclassification to earnings of (gains) losses on available-for-sale securities, net of income taxes of nil (2010 – $2 million; 2009 – nil)

     -         7         -   
       4         (2)         (25)   

Cash flow hedges

        

Gains on derivatives designated as cash flow hedges, net of income taxes of $32 million (2010 – $24 million; 2009 – $6 million)

     (260)         95         13   

Reclassification to earnings of losses on derivatives designated as cash flow hedges, net of income taxes of $1 million (2010 – $5 million; 2009 – nil)

     2         (28)         1   
       (258)         67         14   

Other comprehensive income(loss)

   $ (641)       $ 495       $ 836   

NOTE 18: REVENUE AND PROPERTY NET OPERATING INCOME

(a) Revenue

The components of revenue are as follows:

 

(US$ Millions)    2011      2010      2009  

Revenue from operations

   $ 2,589       $ 2,102       $ 1,919   

Investment and other revenue(1)

     231         168         80   
     $ 2,820       $ 2,270       $ 1,999   

(1) Excludes foreign exchange gains and losses associated with translation of the company’s net foreign currency denominated monetary assets and expenses associated with fee income.

 

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(b) Property net operating income

Net operating income represents revenue from operations of consolidated properties less direct operating costs. Direct operating costs include all attributable expenses except interest expense, depreciation and amortization, income taxes and fair value gains (losses). NOI does not have standardized meanings prescribed by IFRS and therefore may differ from similar metrics used by other companies. The details are as follows:

 

     2011          2010          2009  
(US$ Millions)   Revenue from
operations
    Operating
expenses
    Property
NOI
         Revenue from
operations
    Operating
expenses
    Property
NOI
         Revenue from
operations
    Operating
expenses
    Property
NOI
 

Office

  $           1,909      $ 793      $ 1,116          $          1,521      $ 615      $ 906          $          1,456      $ 610      $ 846   

Retail

    193        55        138            199        69        130            187        85        102   

Multi-Family and Industrial

    108        62        46            54        32        22            25        12        13   

Opportunistic Investments

    379        172        207            328        136        192            251        88        163   
    $ 2,589      $     1,082      $ 1,507          $ 2,102      $      852      $ 1,250          $ 1,919      $      795      $ 1,124   

The Business leases properties under operating leases generally with lease terms of between 1 and 15 years, with options to extend up to a further 5 years. Minimum rental commitments on non-cancellable tenant operating leases are as follows:

 

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

Not later than 1 year

   $         1,577       $         1,378   

Later than 1 year and not longer than 5 years

     5,854         4,628   

Later than 5 years

     6,248         4,549   
     $ 13,679       $ 10,555   

Property operating costs for the year ended December 31, 2011 includes $21 million (2010 - $21 million; 2009 - $22 million) representing rent expense associated with operating leases for land on which certain of the company’s operating properties are situated. The Business does not have an option to purchase the leased land at the expiry of the lease periods. Future minimum lease payments under these arrangements are as follows:

 

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

Not later than 1 year

   $ 33       $ 22   

Later than 1 year and not longer than 5 years

     119         81   

Later than 5 years

     1,591         1,095   
     $         1,743       $         1,198   

NOTE 19: INVESTMENT AND OTHER INCOME

The components of investment and other income are as follows:

 

(US$ Millions)    2011     2010     2009  

Fee income

   $ 22      $ 59      $ 17   

Dividend income

     28        28        -   

Interest income

     129        62        38   

Foreign exchange

     (2     11        55   

Other

     -        (18     (12
     $             177      $             142      $             98   

Fee income is net of $52 million of expenses for the year ended December 31, 2011 (2010 - $37 million; 2009 - $37 million).

 

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NOTE 20: FAIR VALUE GAINS (LOSSES)

The components of fair value adjustment are as follows:

 

(US$ Millions)    2011     2010      2009  

Investment properties

   $ 993      $ 548       $ (996

Financial instruments

     165        17         (53

Other

     (46     9                         162   
     $             1,112      $                 574       $ (887

For the year ended December 31, 2009 other includes a $133 million bargain purchase gain, net of transaction costs of $5 million, in connection with the reorganization of the investors’ interests in the U.S. Office Fund, principally representing the excess of the fair value of the interest in the venture that the Business received under the reorganization over the deemed cost, which was the carrying amount of the company’s pre-existing investment in a subsidiary venture.

Included within investment properties are certain items recognized in connection with the exercise of the U.S. Office Fund Option as follows:

 

(US$ Millions)        

Excess of net assets of TRZ Holdings recognized on assumption of control over the carrying amount of the equity accounted

investment in the U.S. Office Fund (refer to Note 6)

   $ 212   

Carrying amount of U.S. Office Fund Option derecognized

     (241

Deferred gain realized (refer to Note 14)

     172   

Excess of consideration paid to settle the U.S. Office Fund true-up consideration payable over carrying amount

     (3

Related tax effects

     10   

Total

   $             150   

NOTE 21: GUARANTEES, CONTINGENCIES AND OTHER

In the normal course of operations, the Business and its consolidated entities execute agreements that provide for indemnification and guarantees to third parties in transactions such as business dispositions, business acquisitions, sales of assets and sales of services.

The company’s operating subsidiaries have also agreed to indemnify its directors and certain of its officers and employees. The nature of substantially all of the indemnification undertakings prevent the Business from making a reasonable estimate of the maximum potential amount that it could be required to pay third parties as the agreements do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. Historically, neither the Business nor its consolidated subsidiaries have made significant payments under such indemnification agreements.

The Business does not conduct its operations, other than those of equity-accounted investments, through entities that are not fully or proportionately consolidated in these financial statements, and has not guaranteed or otherwise contractually committed to support any material financial obligations not reflected in these financial statements.

The Business and its operating subsidiaries are contingently liable with respect to litigation and claims that arise from time to time in the normal course of business or otherwise. A specific litigation is being pursued against one of the company’s subsidiaries related to security on a defaulted loan. At this time, the amount of contingent cash outflow related to the litigation and claims currently being pursued against the subsidiary is uncertain and could be up to C$42 million in the event the Business is completely unsuccessful in defending the claims.

The Business maintains insurance on its properties in amounts and with deductibles that it believes are in line with what owners of similar properties carry. The Business maintains all risk property insurance and rental value coverage (including coverage for the perils of flood, earthquake and named windstorm).

 

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NOTE 22: CAPITAL MANAGEMENT AND LIQUIDITY

The capital of the Business consists of property debt, capital securities, other secured debt and equity.

The parent company’s objectives when managing this capital are to maintain an appropriate balance between holding a sufficient amount of capital to support its operations and to reduce its weighted average cost of capital and improve the returns on equity through value enhancement initiatives and the consistent monitoring of the balance between debt and equity financing of the subsidiaries. As at December 31, 2011, the recorded values of capital in the financial statements totaled $38 billion (2010 - $28 billion). Its principal liquidity needs for the next year are to:

 

   

fund recurring expenses;

   

meet debt service requirements;

   

make dividend payments;

   

fund those capital expenditures deemed mandatory, including tenant improvements;

   

fund current development costs not covered under construction loans; and

   

fund investing activities which could include:

  ¡    

discretionary capital expenditures; and

  ¡    

property acquisitions.

Most of the company’s borrowings are in the form of long term asset-specific financings with recourse only to the specific assets. Limiting recourse to specific assets ensures that poor performance within one area does not compromise the company’s ability to finance the balance of its operations.

The company’s operating subsidiaries are subject to limited covenants in respect of their corporate debt and are in full compliance with all such covenants at December 31, 2011. The company’s operating subsidiaries are also in compliance with all covenants and other capital requirements related to regulatory or contractual obligations of material consequence to the company.

The parent company’s strategy is to satisfy its liquidity needs in respect of the Business using the company’s cash on hand, cashflows generated from operating activities and provided by financing activities, as well as proceeds from asset sales. The operating subsidiaries of the Business also generate liquidity by accessing capital markets on an opportunistic basis.

The company’s principal liquidity needs for periods beyond the next year are for scheduled debt maturities, distributions, recurring and non-recurring capital expenditures, development costs and potential property acquisitions. The Business plans to meet these needs with one or more of: cashflows from operations; construction loans; creation of new funds; proceeds from sales of assets; proceeds from sale of non-controlling interests in subsidiaries; and credit facilities and refinancing opportunities.

The following table presents the contractual maturities of the company’s financial liabilities at December 31, 2011:

 

(US$ Millions)            Payments Due By Period  
      Total      Less than 1 Year      2 – 3 years      4 – 5 Years     

After 5

Years

 

Property and other secured debt

   $     15,598       $     1,433       $     6,812       $     2,063       $     5,290   

Capital securities

     994         150         392         452         -   

Other financial liabilities

     1,170         1,170         -         -         -   

Interest expense(1)

              

Property and other secured debt

     4,746         984         1,820         1,015         927   

Capital securities

     152         49         72         31         -   

(1)Represents aggregate interest expense expected to be paid over the term of the obligations. Variable interest rate payments have been calculated based on current rates.

 

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NOTE 23: FINANCIAL INSTRUMENTS

(a) Derivatives and hedging activities

The company’s subsidiaries use derivative and non-derivative instruments to manage financial risks, including interest rate, commodity, equity price and foreign exchange risks. The use of derivative contracts is governed by documented risk management policies and approved limits. The Business does not use derivatives for speculative purposes. The Business uses the following derivative instruments to manage these risks:

   

Foreign currency forward contracts to hedge exposures to Canadian dollar, Australian dollar and British pound denominated investments in foreign subsidiaries and foreign currency denominated financial assets;

   

Interest rate swaps to manage interest rate risk associated with planned refinancings and existing variable rate debt;

   

Interest rate caps to hedge interest rate risk on certain variable rate debt; and

   

Total return swaps on BPO’s shares to economically hedge exposure to variability in its share price under its deferred share unit plan.

The company also designates Canadian Dollar financial liabilities of certain of its operating entities as hedges of its net investments in its Canadian operations.

Interest rate hedging

The company has derivatives outstanding that are designated as cash flow hedges of variability in interest rates associated with forecasted fixed rate financings and existing variable rate debt.

As at December 31, 2011, the company had derivatives representing a notional amount of US$1,599 million in place to fix rates on forecasted fixed rate financings with maturities between 2014 and 2024 at rates between 2.6% and 5.2%. As at December 31, 2010, the company had derivatives representing a notional amount of $85 million in place to fix rates on forecasted fixed rate financings with a maturity between 2011 and 2021. The hedged forecasted fixed rate financings are denominated in US$, C$ and A$.

As at December 31, 2011, the company had derivatives with a notional amount of US$5,343 million in place to fix rates on existing variable rate debt at between 0.3% and 9.9% for debt maturities between 2012 and 2014. As at December 31, 2010, the company had derivatives with a notional amount of $2,662 million in place to fix rates on existing variable rate debt at between 0.3% and 10.2% for debt maturities between 2011 and 2016.

The fair value of the company’s outstanding interest rate derivative positions as at December 31, 2011 is a loss of $271 million (2010 – gain of $2 million). For the years ended December 31, 2011, and 2010, the amount of hedge ineffectiveness recorded in interest expense in connection with the company’s interest rate hedging activities was not significant.

Foreign currency hedging

The company has derivatives designated as net investment hedges of its investments in foreign subsidiaries. As at December 31, 2011, the company had hedged a notional amount of £45 million at £0.64/US$ and A$135 million at A$0.98/US$ using foreign currency forward contracts maturing between January and March of 2012. As at December 31, 2010, the company had designated a notional amount of £45 million at GBP0.64/US$, C$500 at C$1.00/US$ and A$1,100 at A$0.98/US$ using foreign currency contracts maturing in March 2011.

The fair value of the company’s outstanding foreign currency forwards as at December 31, 2011 is a loss of $4 million (2010 – loss of $64 million).

In addition, as of December 31, 2011, the company had designated C$903 million (2010 – C$950 million) of Canadian dollar financial liabilities as hedges of its net investment in Canadian operations.

 

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Other derivatives

The following other derivatives have been entered into to manage financial risks and have not been designated as hedges for accounting purposes.

At December 31, 2011, the company had a total return swap under which it received the return on a notional amount of 1.2 million BPO common shares in connection with BPO’s deferred share unit plan. The fair value of the total return swap at December 31, 2011 was a gain of $2 million (2010 – loss of $19 million) and a loss of $17 million in connection with the total return swap was recognized in general and administrative expense in the year then ended (2010 – gain of $6 million).

At December 31, 2011, the company had foreign exchange contracts outstanding to swap a €83 million notional amount to British Pounds (2010 – €83 million). The fair value of these contracts as at December 31, 2011 was nil (2010 – nil) and a gain of $4 million was recognized in investment and other income in connection with these contracts in the year ended December 31, 2011 (2010 – $4 million).

At December 31, 2010, the company had interest rate swaps in place to fix interest rates on a notional amount of $1,789 million of debt at interest rates between 1.4% and 6.8%, maturing in 2011. The company also had an interest rate swap to fix a notional amount of A$862 million debt at a fixed rate of 5.9% maturing in 2011 and interest rate caps to cap a notional amount of $691 million LIBOR based debt at between 2.0% and 3.7% maturing in 2011. The fair value of these contracts at December 31, 2010 was a loss of $7 million and $7 million of gains related to these contracts were recognized in fair value gains (losses) in the year ended December 31, 2010.

 

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(b) Measurement and classification of financial instruments

Classification and measurement

The following table outlines the classification and measurement basis, and related fair value for disclosures, of the financial assets and liabilities in the carve-out financial statements:

 

                  December 31, 2011      December 31, 2010  
(US$ Millions)    Classification    Measurement basis    Carrying
value
     Fair value      Carrying
value
     Fair value  
 

Financial Assets

                   

Loans and notes receivable

   Loans & Receivables    Amortized Cost(1)    $ 1,758       $ 1,675       $ 2,080       $ 2,033   

Other non-current assets

                   

Securities designated as FVTPL

   FVTPL    Fair Value      856         856         698         698   

Derivative assets

   FVTPL    Fair Value      210         210         507         507   

Securities designated as AFS

   AFS    Fair Value      194         194         259         259   

Other receivables

   Loans & Receivables    Amortized Cost      201         201         178         178   

Accounts receivable and other

   Loans & Receivables    Amortized Cost      796         796         772         772   

Cash and cash equivalents

   Loans & Receivables    Amortized Cost      749         749         399         399   
               $ 4,764       $ 4,681       $ 4,893       $ 4,846   
 

Financial Liabilities

                   

Property debt

   Other Liabilities    Amortized Cost(2)    $ 15,387       $ 15,765       $ 11,964       $ 12,110   

Capital securities

   Other Liabilities    Amortized Cost      994         1,054         1,038         1,067   

Other non-current liabilities

                   

Other secured debt

   Other Liabilities    Amortized Cost      150         150         754         719   

Other non-current financial liabilities

   Other Liabilities    Amortized Cost(3)      343         343         181         181   

Accounts payable and other liabilities

   Other Liabilities    Amortized Cost(4)      1,221         1,221         759         759   
               $ 18,095       $ 18,533       $ 14,696       $ 14,836   
(1) 

Includes loans and notes receivable classified as FVTPL and measured at fair value of $138 million (2010 - nil).

(2) 

Includes embedded derivatives classified as FVTPL and measured at fair value of $56 million (2010 - $54 million).

(3) 

Includes embedded derivatives classified as FVTPL and measured at fair value of $83 million (2010 - $142 million).

(4) 

Includes embedded derivatives classified as FVTPL and measured at fair value of $228 million (2010 - nil).

Fair value hierarchy

The Business values instruments carried at fair value using quoted market prices, where available. Quoted market prices represent a Level 1 valuation. When quoted market prices are not available, the Business maximizes the use of observable inputs within valuation models. When all significant inputs are observable, the valuation is classified as Level 2. Valuations that require the significant use of unobservable inputs are considered Level 3.

 

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The following table outlines financial assets and liabilities measured at fair value in the carve-out financial statements and the level of the inputs used to determine those fair values in the context of the hierarchy as defined above:

 

      December 31, 2011      December 31, 2010  
(US$ Millions)    Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3      Total  
 

Financial Assets

                       

Other non-current assets

                       

Securities designated as FVTPL

   $ -       $ -       $ 856       $ 856       $ -       $ -       $ 698       $ 698   

Loans receivable designated as FVTPL

     -         -         138         138         -         -         -         -   

Securities designated as AFS

     41         -         153         194         46         -         213         259   

Derivative assets

     -         -         210         210         -         -         507         507   
     $           41       $ -       $     1,357       $     1,398       $           46       $ -       $     1,418       $     1,464   
 

Financial Liabilities

                       

Property debt

   $ -       $ -       $ 56       $ 56       $ -       $ -       $ 54       $ 54   

Other non-current liabilities

     -         83         -         83         -         9         133         142   

Accounts payable and other liabilities

     -         228         -         228         -         -         -         -   
     $ -       $     311       $ 56       $ 367       $ -       $         9       $ 187       $ 196   

 

(c) Market risk

Interest Rate risk

The Business faces interest rate risk on its variable rate financial assets and liabilities. In addition, there is interest rate risk associated with the company’s fixed rate debt due to the expected requirement to refinance such debt in the year of maturity. The following table outlines the impact on interest expense from continuing operations of a 100 basis point increase or decrease in interest rates on the company’s variable rate assets and liabilities and fixed rate debt maturing within one year:

 

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

Parent company bridge loan

   $                         -       $                         4   

BPO Corporate revolving facilities

     4         -   

Variable rate property debt

     71         47   

Fixed rate property debt due within one year

     3         3   

Total

   $ 78       $ 54   

The Business manages interest rate risk by primarily entering into fixed rate operating property debt and staggering the maturities of its mortgage portfolio over a 10-year horizon when the market permits. The company also makes use of interest rate derivatives to manage interest rate risk on specific variable rate debts and on anticipated refinancing of fixed rate debt.

 

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Foreign currency risk

The Business is structured such that its foreign operations are primarily conducted by entities with a functional currency which is the same as the economic environment in which the operations take place. As a result, the net income impact of currency risk associated with financial instruments is limited as its financial assets and liabilities are generally denominated in the functional currency of the subsidiary that holds the financial instrument. However, the Business is exposed to foreign currency risk on the net assets of its foreign currency denominated operations. The company’s exposures to foreign currencies and the sensitivity of net income and other comprehensive income, on a pre-tax basis, to a 10% change in the exchange rates relative to the US dollar is summarized below:

 

     December 31, 2011          December 31, 2010          December 31, 2009  
(Millions)   Equity
attributable
to parent
    OCI     Net
Income
        

Equity
attributable

to parent

    OCI     Net
Income
        

Equity
attributable

to parent

    OCI     Net
Income
 

Canadian Dollar

  C$             935      $         (84)      $             -          C$             820      $         (74)      $             -          C$             1,032      $         (89)      $             -   

Australian Dollar

  A$ 2,005        (186)        -          A$ 1,863        (173)        -          A$ 1,997        (163)        -   

British Pound

  £ 641        (90)        -          £ 482        (69)        -          £ 255        (37)        -   

Euro

  83        -        (10 )        83        -        (10       83        -        (11

Brazilian Real

  R$ 586        (28)        -          R$ 265        (14)        -          R$ 223        (12)        -   

Total

          $ (388)      $ (10 )                $ (330)      $ (10               $ (301)      $ (11

Equity price risk

The Business faces equity price risk in connection with a total return swap under which it receives the returns on a notional 1,286,473 of BPO’s common shares. A $1 increase or decrease in BPO’s share price would result in a $1 million gain or loss being recognized in general and administrative expense.

The Business also faces equity price risk related to its 22% common equity interest in Canary Wharf Group plc. A $1 increase in Canary Wharf Group plc’s share would result in a $141 million gain being recognized in fair value gains.

 

(d) Credit risk

The company’s maximum exposure to credit risk associated with financial assets is equivalent to the carrying value of each class of financial assets as separately presented in loans and notes receivable, other non-current assets, accounts receivables and other, and cash and cash equivalents.

Credit risk arises on loans and notes receivables in the event that borrowers default on the repayment to the Business. The Business mitigates this risk by attempting to ensure that adequate security has been provided in support of such loans and notes.

Credit risk related to accounts receivable arises from the possibility that tenants may be unable to fulfill their lease commitments. The Business mitigates this risk through diversification, ensuring that borrowers meet minimum credit quality requirements and by ensuring that its tenant mix is diversified and by limiting its exposure to any one tenant. The Business maintains a portfolio that is diversified by property type so that exposure to a business sector is lessened. Currently no one tenant represents more than 10% of operating property revenue.

The majority of the company’s trade receivables are collected within 30 days. The balance of accounts receivable and loans and notes receivable past due is not significant.

 

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NOTE 24: RELATED PARTIES

In the normal course of operations, the Business enters into various transactions on market terms with related parties, which have been measured at exchange value and are recognized in the financial statements. The following table summarizes transactions with related parties:

 

(US$ Millions)    Year ended Dec. 31,  
Transactions for the period of    2011      2010      2009  

Lease revenue

   $             2       $             2       $     2   

Interest income

     101         71         17   

Interest expense

     41         7         1   

Management fees paid

     30         52         43   

Management fees received

     15         5         -   

 

Balances outstanding as at    Dec. 31, 2011      Dec. 31, 2010  

BRPI promissory notes (1)

   $               470       $                 -   

Loans receivable designated as FVTPL (2)

     138         -   

Loans and notes receivable (3)

     452         1,221   

Other current receivables (4)

     57         13   

Capitalized interest paid to Brookfield

     40         39   

Property debt payable

     64         113   

Other liabilities (5)

     22         476   
(1) 

Refer to Note 10 for details of the related put arrangement.

(2) 

Includes senior unsecured note receivable from a subsidiary of Brookfield that matures on December 19, 2014. The principal and interest payments on the note receivable are based on the returns of a reference debenture which is, in turn, secured by an equity interest in a publicly traded real estate entity based in Australia.

(3) 

The balance includes BPO’s $145 million receivable from Brookfield (refer to Note 9) and BPO’s $200 million loan receivable related to Brookfield’s ownership of BPO’s Class AAA Series E capital securities earning a rate of 108% of bank prime. In 2010, the balance also included BPO’s $504 million loan receivable in cash collateralized total return swaps entered into with Brookfield bearing interest at a weighted average rate of LIBOR plus 2.9% and BREF’s $262 million loan receivable related to its ownership of Trizec debt bearing a weight average rate of LIBOR plus 2.8%.

(4) 

The 2011 balance includes a $49 million loan receivable from a subsidiary of Brookfield that is due on March 15, 2012 and secured by commercial office property.

(5) 

In 2010, other liabilities included BPO’s bridge facility payable to Brookfield which matured in November 2011.

NOTE 25: SEGMENTED INFORMATION

The Business has four operating segments which are independently reviewed and managed by the chief operating decision maker (“CODM”), who is identified as the company’s chief executive officer. The operating segments are office, retail, multi-family and industrial, and opportunistic investments, located in the United States, Canada, Australia, Brazil and Europe.

Information on the company’s reportable segments is presented below:

The office segment owns and manages commercial office portfolios, located in major financial, energy, resource and government center cities in the United States, Canada, Australia and Europe. Included in the office segment is office development which entails developing office properties on a selective basis throughout North America, Australia and Europe in close proximity to the company’s existing properties.

The retail segment owns interests in retail shopping centers in the United States, Australia and Brazil. The largest investment is a portfolio of U.S. super-regional shopping mall properties held through the company’s economic interest in GGP.

The multi-family and industrial segment currently owns interests in multi-family and industrial properties through Brookfield’s private funds.

The opportunistic investments segment includes interests in Brookfield-sponsored real estate finance and opportunity funds.

 

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The CODM measures and evaluates segment performance based on equity attributable to parent company, net operating income (“NOI”) and funds from operations (“FFO”). NOI and FFO do not have standardized meanings prescribed by IFRS and therefore may differ from similar metrics used by other companies. The Business defines these measures as follows:

 

   

NOI means revenues from operations of consolidated properties less direct operating costs; and

   

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.

The following summary presents segmented financial information for the company’s principal geographic areas of business:

 

(US$ Millions)    Total assets          Total liabilities          Equity attributable to parent  
      Dec. 31, 2011      Dec. 31, 2010          Dec. 31, 2011      Dec. 31, 2010          Dec. 31, 2011      Dec. 31, 2010  
   

Office

                       

United States (1)

   $       15,741               $       10,541                  $         7,710               $         4,456                  $         7,395               $         5,678           

Canada (2)

     4,718                 4,393                    2,247                 2,042                    2,044                 2,081           

Australia (3)

     5,186                 4,683                    2,681                 2,529                    2,315                 2,028           

Europe

     1,515                 1,348                    557                 565                    958                 783           

Developments

     1,713                 1,404                    738                 530                    560                 509           

Unallocated (4)

     -                 -                    1,375                 1,466                    (6,735)                 (5,787)           
       28,873                 22,369                    15,308                 11,588                    6,537                 5,292           

Retail

                       

United States

     4,282                 1,192                    51                 1                    3,938                 980           

Australia

     407                 441                    185                 194                    200                 247           

Brazil

     2,430                 2,412                    1,186                 1,432                    311                 159           

Europe

     -                 315                    -                 272                    -                 43           
       7,119                 4,360                    1,422                 1,899                    4,449                 1,429           

Multi-Family and Industrial (5)

     1,112                 1,148                    584                 625                    157                 164           

Opportunistic Investments (6)

     3,213                 2,690                    1,509                 1,311                    738                 579           
     $     40,317               $     30,567                  $     18,823               $     15,423                  $     11,881               $     7,464           
1. Equity attributable to parent is net of non-controlling interests of $636 million (2010 - $407 million).
2. Equity attributable to parent is net of non-controlling interests of $427 million (2010 - $270 million).
3. Equity attributable to parent is net of non-controlling interests of $190 million (2010 - $126 million).
4. Unallocated liabilities include corporate debt and capital securities. Equity attributable to parent includes non-controlling interests.
5. Operations primarily in North America.
6. Operations primarily in North America with interests in Europe, Australia, and Brazil.

 

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(US$ Millions)    Revenue   Net operating income          Funds from operations  
      2011      2010      2009          2011      2010      2009          2011      2010      2009  
   

Office

                              

United States (1)

   $ 1,124       $ 768       $ 823        $ 561       $ 418       $ 459          $ 435       $ 427       $ 463   

Canada (2)

     525         540         404          259         243         202            213         227         162   

Australia

     438         320         286          264         214         154            134         91         75   

Europe (3)

     49         61         30          32         31         31            20         27         18   

Unallocated (4)

     -         -         -          -         -         -            (490)         (405)         (395)   
       2,136         1,689         1,543            1,116         906         846            312         367         323   

Retail

                              

United States

     -         6         -          -         -         -            206         (11)         -   

Australia

     30         39         40          26         24         22            11         11         18   

Brazil

     167         136         112          111         94         67            (8)         (3)         3   

Europe

     1         16         26            1         12         13            (1)         (2)         (2)   
     198         197         178          138         130         102            208         (5)         19   

Multi-Family and Industrial (5)

     108         54         26          46         22         13            (5)         3         8   

Opportunistic Investments (5)

     378         330         252          207         192         163            61         61         41   
     $     2,820       $     2,270       $     1,999          $     1,507       $     1,250       $     1,124          $     576       $     426       $     391   
1. 2011 funds from operations includes equity accounted income of $172 million (2010 - $232 million; 2009 - $237 million) and is net of non-controlling interests of $53 million (2010 - $34 million; 2009 - $22 million).
2. 2011 funds from operations is net of non-controlling interests of $23 million (2010 - $16 million; 2009 - $13 million).
3. 2011 funds from operations includes a dividend of $16 million from Canary Wharf (2010 - $26 million; 2009 - nil).
4. Funds from operations includes unallocated interest expense, operating costs and non-controlling interest.
5. Operations primarily in North America.
6. Operations primarily in North America with interests in Europe, Australia, and Brazil.

The following table provides a reconciliation of total NOI and FFO to income before income taxes and net income (loss) attributable to parent company for each of the years ended December 31, 2011, 2010, and 2009:

 

      2011      2010      2009  

Net operating income

   $     1,507       $     1,250       $     1,124   

Share of equity accounted funds from operations

     492         309         249   

Investment and other income

     177         142         98   
     2,176         1,701         1,471   

Interest expense

     (977)         (790)         (635)   

General and administrative expense

     (84)         (88)         (131)   

Depreciation and amortization

     (20)         (21)         (16)   

Non-controlling interests in funds from operations

     (519)         (376)         (298)   

Funds from operations

     576         426         391   

Fair value gains (losses)

     1,112         574         (887)   

Share of equity accounted fair value gains

     1,612         561         (710)   

Realized gains

     365         250         39   

Non-controlling interests in funds from operations

     519         376         298   

Income (loss) before income taxes

     4,184         2,187         (869)   

Income tax (expense) benefit

     (439)         (78)         135   

Net income (loss)

     3,745         2,109         (734)   

Non-controlling interests

     (1,422)         (1,083)         257   

Net income (loss) attributable to parent company

   $ 2,323       $ 1,026       $ (477)   

 

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The following summary presents financial information by the company’s principal geographic regions in which it operates:

 

(US$ Millions)    Total revenue          Total non-current assets as at  
      2011      2010      2009          Dec. 31, 2011      Dec. 31, 2010  
 

United States

   $ 1,610       $ 1,158       $ 1,101          $ 23,079       $ 13,829   

Canada

     525         540         404            4,714         4,331   

Australia

     468         359         326            6,474         5,717   

Brazil

     167         136         112            2,175         2,280   

Europe

     50         77         56            1,557         1,696   
     $     2,820       $     2,270       $     1,999          $   37,999       $   27,853   

NOTE 26: APPROVAL OF FINANCIAL STATEMENTS

The financial statements were approved by the board of directors and authorized for issue on March 27, 2012.

 

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Schedule III –

Supplemental Schedule of Investment Property Information

The table below presents the number of operating properties, the related fair value, debt and weighted average year of acquisition by segment as of December 31, 2011.

 

      Number of properties       

Fair Value (2)

($ millions)

      

Debt (3)

($ millions)

     Weighted Average Year
of Acquisition (1)
 

Office Properties

               

United States

     54         $ 12,911         $ 6,171         2001   

Canada

     28           4,571           1,840         1999   

Australia

     34           3,787           2,416         2007   

Europe

     1           521           442         2003   
       117           21,790           10,869         2002   

Retail Properties

               

Brazil

     10           1,850           1,011         2000   

Australia

     8           364           186         2008   
       18           2,214           1,197         2001   

Multi-Family and Industrial

               

United States

     9           903           467         2009   
       9           903           467         2009   

Opportunistic Investments

               

United States

     11           794           336         2007   

Canada

     1           29           20         2006   
       12           823           356         2007   

Total

     156         $                 25,730         $                 12,889         2002   
(1) 

Weighted against the current fair value of the properties.

(2) 

Excludes development properties with a fair value of $1,864 million in the United States, Australia, Canada, Europe, and Brazil.

(3) 

Excludes debt related to the development properties in the amount of $832 million in United States, Australia and Brazil.

 

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COMMERCIAL PROPERTY OPERATIONS OF BROOKFIELD

ASSET MANAGEMENT INC.

Unaudited condensed carve-out financial statements for the Commercial Property

Operations of Brookfield Asset Management Inc. as at March 31, 2012

and December 31, 2011 and for the three month periods ended

March 31, 2012 and March 31, 2011

 

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Commercial Property Operations of Brookfield Asset Management Inc.

Condensed Carve-out Balance Sheets

 

Unaudited (US$ Millions)    Note      Mar. 31, 2012      Dec. 31, 2011  

Assets

          

Non-current assets

          

Investment properties

   3        $  28,138         $  27,594   

Equity accounted investments

   4        7,466         6,888   

Other non-current assets

   5        2,331         2,532   

Loans and notes receivable

   6        1,096         985   
              39,031         37,999   

Current assets

          

Loans and notes receivable

   6        548         773   

Accounts receivable and other

   7        773         796   

Cash and cash equivalents

            697         749   
              2,018         2,318   

Total assets

            $  41,049         $  40,317   

Liabilities and equity in net assets

          

Non-current liabilities

          

Property debt

   8        $  14,006         $  13,978   

Capital securities

   9        862         994   

Other non-current liabilities

   10        288         493   

Deferred tax liability

   11        805         728   
              15,961         16,193   

Current liabilities

          

Property debt

   8        1,260         1,409   

Accounts payable and other liabilities

   12        1,229         1,221   
              2,489         2,630   

Equity in net assets

          

Equity in net assets attributable to parent company

   13        12,575         11,881   

Non-controlling interests

   13        10,024         9,613   

Total equity in net assets

            22,599         21,494   

Total liabilities and equity in net assets

            $  41,049         $  40,317   

See accompanying notes to the condensed carve-out financial statements

 

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Commercial Property Operations of Brookfield Asset Management Inc.

Condensed Carve-out Statements of Income

 

Unaudited (US$ Millions) Three months ended Mar. 31,    Note    2012      2011  

Revenue

   14    $ 775       $ 603   

Property net operating income

   14      409         318   

Investment and other income

   15      39         33   

Expenses:

        

Interest expense

        246         215   

General and administrative expense

        21         23   

Depreciation and amortization

          39         6   
Income before fair value gains, realized gains (losses), share of net earnings from equity accounted investments and income taxes         142         107   

Fair value gains, net

   16      287         303   

Realized gains (losses)

        78         (2)   

Share of net earnings from equity accounted investments

   4      442         195   

Income before income taxes

        949         603   

Income tax expense

   11      239         71   

Net income

        $ 710       $ 532   

Net income attributable to

        

Parent company

      $ 383       $ 337   

Non-controlling interests

          327         195   
          $ 710       $ 532   

See accompanying notes to the condensed carve-out financial statements

 

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Commercial Property Operations of Brookfield Asset Management Inc.

Condensed Carve-out Statements of Comprehensive Income

 

Unaudited (US$ Millions) Three months ended Mar. 31,    Note    2012      2011  

Net income

        $ 710       $ 532   

Other comprehensive income

   13 (c)      

Foreign currency translation

        161         91   

Cash flow hedges

        42         (5)   

Available-for-sale securities

          3         2   
            206         88   

Comprehensive income

        $ 916       $ 620   

Comprehensive income attributable to

        

Parent company

        

Net income

      $ 383       $ 337   

Other comprehensive income

          112         47   
            495         384   

Non-controlling interests

        

Net income

        327         195   

Other comprehensive income

          94         41   
            421         236   

Total comprehensive income

        $ 916       $ 620   

See accompanying notes to the condensed carve-out financial statements

 

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Commercial Property Operations of Brookfield Asset Management Inc.

Condensed Carve-out Statements of Changes in Equity

 

Unaudited

(US$ Millions)

         Accumulated Other Comprehensive Income                       
  Equity in net
assets
    Foreign currency
translation
    Cash flow
hedges
    Available-for-sale
securities
    Total     Equity in net
assets
attributable to
parent
company
    Non-controlling
interests
    Total equity
in net assets
 

Balance as at December 31, 2011

  $ 11,375      $ 606      $ (104)      $ 4      $ 506      $     11,881      $ 9,613      $ 21,494   

Net income

    383        -        -        -        -        383        327        710   

Other comprehensive income (loss)

    -        87        22        3        112        112        94        206   

Contributions

    294        -        -        -        -        294        149        443   

Distributions

    (95)        -        -        -        -        (95)        (159)        (254)   

Balance as at March 31, 2012

  $     11,957      $         693      $ (82)      $ 7      $ 618      $ 12,575      $     10,024      $ 22,599   
               

Balance as at December 31, 2010

  $ 6,593      $ 824      $ 51      $ (4)      $ 871      $ 7,464      $ 7,680      $ 15,144   

Net income

    337        -                      -                                   -                -        337        195        532   

Other comprehensive income (loss)

    -        53        (6)        -        47        47        41        88   

Contributions

    2,229        -        -        -        -        2,229        131        2,360   

Distributions

    (207)        -        -        -        -        (207)        (272)        (479)   

Balance as at March 31, 2011

  $ 8,952      $ 877      $ 45      $ (4)      $ 918      $ 9,870      $ 7,775      $ 17,645   

See accompanying notes to the condensed carve-out financial statements

 

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Commercial Property Operations of Brookfield Asset Management Inc.

Condensed Carve-out Statements of Cashflow

 

Unaudited (US$ Millions) Three months ended Mar. 31,    2012      2011  

Operating activities

     

Net income

   $ 710       $ 532   

Share of net earnings from equity accounted investments

     (442)         (195)   

Fair value gains, net

     (287)         (303)   

Deferred income taxes

     183         45   

Realized (gains) losses

     (78)         2   

Depreciation and amortization

     39         6   

Initial direct leasing costs

     (4)         (1)   

Working capital and other

     90         77   
       211         163   

Financing activities

     

Property debt, issuance

     458         430   

Property debt, repayments

     (957)         (745)   

Other secured debt, issuance

     324         36   

Other secured debt, repayments

     (119)         (67)   

Capital securities redeemed

     (153)         (21)   

Non-controlling interests, issued

     104         115   

Non-controlling interests, purchased

     (2)         -   

Non-controlling interests, distributions

     (155)         (134)   

Contributions from parent company

     169         20   

Distributions to parent company

     (71)         (152)   
       (402)         (518)   

Investing activities

     

Investment properties, proceeds of dispositions

     294         406   

Investment properties, investments

     -         (59)   

Investment in equity accounted investments

     (215)         (26)   

Proceeds from sale of investments

     99         26   

Foreign currency hedges of net investments

     (11)         (29)   

Loans and notes receivables, collected

     115         92   

Loans and notes receivables, advanced

     (60)         -   

Loan receivable from parent company, collected

     108         2   

Restricted cash and deposits

     (59)         36   

Capital expenditures - development and redevelopment

     (73)         (72)   

Capital expenditures - operating properties

     (59)         (53)   
       139         323   

Decrease in cash and cash equivalents

     (52)         (32)   

Cash and cash equivalents, beginning of period

     749         399   

Cash and cash equivalents, end of period

   $         697       $         367   

See accompanying notes to the condensed carve-out financial statements

 

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Notes to the Condensed Carve-out Financial Statements

NOTE 1: NATURE AND DESCRIPTION OF THE OPERATIONS

The Commercial Property Operations of Brookfield Asset Management Inc. (“Brookfield” or the “parent company”) consist of substantially all of Brookfield’s commercial property operations, including office, retail, multi-family and industrial and opportunistic investments, located in the United States, Canada, Australia, Brazil and Europe that have historically been owned and operated, both directly and through its operating entities, by Brookfield (collectively, the “Business” or the “company”). These operations include interests in 124 office properties and 182 retail properties. In addition, Brookfield has interests in a multi-family and industrial platform and an 18 million square foot commercial office development pipeline.

Brookfield will effect a reorganization so that an interest in the Business is acquired by holding entities, which will be owned by a subsidiary of Brookfield Property Partners L.P. (the “partnership”), a newly formed limited partnership. Brookfield intends to transfer the Business through a special dividend to holders of its Class A limited voting shares and Class B limited voting shares of a portion of the partnership’s non-voting limited partnership units (the “spin-off’). The partnership’s sole direct investment will be a limited partner interest in Brookfield Property L.P. (the “property partnership”) which will control the Business through holding entities. It is currently anticipated that immediately following the spin-off, the holders of Class A limited voting shares and Class B limited voting shares will own approximately 10% of the issued and outstanding units of the company on a fully-exchanged basis and Brookfield will hold units of the company and units of the property partnership that, taken together on a fully-exchanged basis represent approximately 90% of the units of the Company. The partnership will control the strategic, financial and operating policy decisions of the property partnership pursuant to a voting agreement to be entered into between the partnership and Brookfield. Wholly-owned subsidiaries of Brookfield will serve as the general partners for both the partnership and the property partnership.

The parent company’s registered head office is Brookfield Place, 181 Bay Street, Suite 300, Toronto, Ontario, M5J 2T3.

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

a) Basis of presentation

These interim condensed carve-out financial statements represent a carve-out of the assets, liabilities, revenues, expenses, and cashflows of the Business that will be contributed to the partnership. These interim condensed carve-out financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 34, “Interim Financial Reporting” (“IAS 34”), as issued by the International Accounting Standards Board (“IASB”). Accordingly, certain information and footnote disclosure normally included in annual financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the IASB, have been omitted or condensed.

The interim condensed carve-out financial statements have been prepared using the same accounting policies and methods as those used in the carve-out financial statements for the year ended December 31, 2011, except for the impact of the adoption of the accounting standard described below. The interim condensed carve-out financial statements have been presented in U.S. dollars rounded to the nearest million unless otherwise indicated.

Due to the inherent limitations of carving out the assets, liabilities, operations and cashflows from larger entities, these financial statements may not necessarily reflect the company’s financial position, results of operations and cashflow for future periods, nor do they reflect the financial position, results of operations and cashflow that would have been realized had the Business been a stand-alone entity during the periods presented.

These interim condensed carve-out financial statements should be read in conjunction with the carve-out financial statements of the Business for the year ended December 31, 2011.

 

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(b) Adoption of Accounting Standards

The company adopted amendments to IAS 12, “Income Taxes” (“IAS 12”), effective January 1, 2012. These amendments are applicable to the measurement of deferred tax liabilities and deferred tax assets where investment property is measured using the fair value model in IAS 40, “Investment Property” (“IAS 40”). The amendments introduce a rebuttable presumption that, for purposes of determining deferred tax consequences associated with temporary differences relating to investment properties, the carrying amount of an investment property is recovered entirely through sale. This presumption is rebutted if the investment property is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale. The company has determined that based on its business model, the rebuttable presumption introduced by the amendments to IAS 12 has been overcome and has continued to measure deferred taxes on the basis that the carrying amount of investment properties will be recovered through use except where there is a specific plan to sell a property in the foreseeable future. Therefore, the amendments to IAS 12 did not have an impact on the measurement of the company’s deferred tax liabilities.

 

(c) Estimates

The preparation of financial statements in accordance with IAS 34 requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying the parent company’s accounting policies. The critical accounting estimates and judgments have been set out in Note 2 to the Business’ carve-out financial statements for the year ended December 31, 2011.

NOTE 3: INVESTMENT PROPERTIES

 

      Mar. 31, 2012      Dec. 31, 2011  
(US$ Millions)    Operating
properties
     Development
properties
    Total      Operating
properties
     Development
properties
     Total  
 

Balance at beginning of period

   $ 25,730       $ 1,864      $ 27,594       $ 19,395       $ 1,565       $ 20,960   

Property acquisitions

     53         -        53         6,411         158         6,569   

Property dispositions (1)

     (302)         -        (302)         (1,661)         -         (1,661)   

Capital expenditures (2)

     57         68        125         343         341         684   

Reclassification of development to operating

     -         -        -         166         (166)         -   

Fair value gains (losses) (3)

     395         (6)        389         1,374         (15)         1,359   

Foreign currency translation and other changes

     262         17        279         (298)         (19)         (317)   

Balance at end of period

   $ 26,195       $ 1,943      $ 28,138       $ 25,730       $ 1,864       $ 27,594   
(1) 

Property dispositions represent fair value at time of sale, or the selling price.

(2)

Capital expenditures include capitalized borrowing costs of $20 million (2011 - $90 million) and initial direct leasing costs of $4 million (2011 - $37 million).

(3)

Fair value gains (losses) include realized gains of $78 million (2011 - $365 million).

The Business determines the fair value of each operating property based upon, among other things, rental income from current leases and assumptions about rental income from future leases reflecting market conditions at the applicable balance sheet dates, less future cash outflows in respect of such leases. Fair values are primarily determined by discounting the expected future cashflows, generally over a term of 10 years including a terminal value based on the application of a capitalization rate to estimated year 11 cashflows. Certain operating properties are valued using a direct capitalization approach whereby a capitalization rate is applied to estimated current year cashflows. Developments properties under active development are also measured using a discounted cashflow model, net of costs to complete, as of the balance sheet date. Development sites in the planning phases are measured using comparable market values for similar assets. In accordance with its policy, the Business measures its operating properties and development properties using valuations prepared by management. From time to time, the Business obtains valuations of selected operating and development properties prepared by qualified external valuation professionals in connection with financing transactions or pursuant to other contractual arrangements. These valuations, which are prepared for purposes other than financial reporting and are not necessarily prepared as of the balance sheet date, are taken into consideration by management but do not form the basis for the company’s reported values.

 

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The key valuation metrics for operating properties, including properties accounted for under the equity method, are set out in the following tables:

 

          Mar. 31, 2012          Dec. 31, 2011  
(US$ Millions)   Valuation Method   Discount
Rate
    Terminal
Capitalization
Rate
    Investment
Horizon
(yrs)
         Discount
Rate
    Terminal
Capitalization
Rate
    Investment
Horizon
(yrs)
 

Office

                 

United States

  Discounted Cash Flow     7.5%        6.3%        12            7.5%        6.3%        12   

Canada

  Discounted Cash Flow     6.7%        5.9%        11            6.7%        6.2%        11   

Australia

  Discounted Cash Flow     9.1%        7.4%        10            9.1%        7.5%        10   

Europe

  Direct Capitalization     6.1%  (1)      n/a        n/a            6.1%  (1)      n/a        n/a   
 

Retail

                 

United States

  Direct Capitalization     5.8%  (1)      n/a        n/a            6.0%  (1)      n/a        n/a   

Australia

  Discounted Cash Flow     9.7%        8.7%        10            9.8%        8.9%        10   

Brazil

  Discounted Cash Flow     9.5%        7.3%        10            9.6%        7.3%        10   
 

Multi-Family and Industrial

                 

United States

  Discounted Cash Flow     8.5%        8.5%        8            8.6%        8.3%        10   

Canada

  Discounted Cash Flow     8.7%        7.4%        10            8.7%        7.7%        10   
 

Opportunistic Investments

                 

United States

  Discounted Cash Flow     8.6%        7.4%        10            8.2%        8.1%        10   
(1) 

The valuation method used is the direct capitalization method. The amounts presented as the discount rate related to the implied overall capitalization rate. The terminal capitalization rate and investment horizon are not applicable.

During the three months ended March 31, 2012, the Business capitalized a total of $68 million (2011 - $341 million) of costs related to property developments. Included in this amount is $48 million (2011 - $251 million) of construction and related costs and $20 million (2011 - $90 million) of borrowing costs capitalized. The weighted average interest rate used for the capitalization of borrowing costs to development properties is 6.1% (2011 - 7.1%).

NOTE 4: EQUITY ACCOUNTED INVESTMENTS

Summarized financial information in respect of the company’s equity accounted investments is provided below:

 

(US$ Millions)      Mar. 31, 2012        Dec. 31, 2011  

Non-current assets

     $             45,060         $               43,861   

Current assets

       1,875           1,595   

Total assets

       46,935           45,456   

Non-current liabilities

       23,057           23,893   

Current liabilities

       316           271   

Total liabilities

       23,373           24,164   

Net assets

       23,562           21,292   

Company’s share of net assets

     $ 7,466         $ 6,888   

 

(US$ Millions) Three months ended Mar. 31,      2012        2011  

Revenue

     $               1,018         $                1,328   

Expenses

       839           913   

Income before fair value gains

       179           415   

Fair value gains

       1,334           208   

Net income

       1,513           623   

Company’s share of net earnings

     $ 442         $ 195   

In the three-month period ended March 31, 2012, one of company’s equity accounted investments, General Growth Properties (“GGP”), completed the spin-off of 30 properties into the newly formed Rouse Properties (“Rouse”), the shares of which were distributed to GGP shareholders. The Business initially recognized the Rouse shares received in the spin-off transaction at the carrying amount of its ownership interest in the net assets

 

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distributed by GGP. The Business subsequently acquired an additional 16.2% interest for $160 million through its participation in a common equity rights offering by Rouse. Following the spin-off and participation in the rights offering, the Business owns an approximately 37% interest in Rouse as at March 31, 2012. The Business accounts for its investment in Rouse as an equity accounted investment.

The company’s share of net earnings from jointly controlled entities for the three months ended March 31, 2011, includes the following earnings of TRZ Holdings LLC (“TRZ Holdings”) which was a jointly controlled entity prior to the company’s acquisition of control in the third quarter of 2011:

 

(US$ Millions) Three months ended Mar. 31,    2011  

Revenue

   $                 204   

Expenses

     (146)   

Earnings before fair value gains

     58   

Fair value gains

     120   

Net earnings

   $ 178   

Company’s share of net earnings

   $ 92   

NOTE 5: OTHER NON-CURRENT ASSETS

The components of other non-current assets are as follows:

 

(US$ Millions)    Mar. 31, 2012      Dec. 31, 2011  

Securities designated as fair value through profit or loss (“FVTPL”)

   $                  886       $                  856   

Derivative assets

     252         210   

Securities designated as available-for-sale (“AFS”)

     212         194   

Goodwill

     155         150   

Other non-current assets

     826         1,122   
     $ 2,331       $ 2,532   

NOTE 6: LOANS AND NOTES RECEIVABLE

Loans and notes receivable reside primarily in the company’s real estate finance funds and are generally secured by commercial and other income producing real property.

 

(US$ Millions)    Interest Rate    Maturity Date    Mar. 31, 2012      Dec. 31, 2011  

Variable rate

   LIBOR plus 1.00% to 14.00%    2011 to 2014    $ 970       $ 1,009   

Fixed rate(1)

   0.82% to 8.50%    2014 to 2020      639         715   

Other

   Non-Interest Bearing    On Demand      35         34   
               $ 1,644       $ 1,758   

Current

      2011 to 2012    $ 548       $ 773   

Non-current(1)

        2013 to 2020      1,096         985   
               $ 1,644       $ 1,758   
(1) 

See Note 19 for related party disclosures.

NOTE 7: ACCOUNTS RECEIVABLE AND OTHER

The components of accounts receivable and other are as follows:

 

(US$ Millions)    Mar. 31, 2012      Dec. 31, 2011  

Accounts receivable(1)

   $                     165       $                     255   

Loans receivable designated as FVTPL(1)

     143         138   

Restricted cash

     244         185   

Other current assets

     221         218   
     $ 773       $ 796   
(1) 

See Note 19 for related party disclosures.

 

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NOTE 8: PROPERTY DEBT

Property debt includes the following:

 

     Mar. 31, 2012   Dec. 31, 2011  
(US$ Millions)   Weighted Average Rate     Debt Balance          Weighted Average Rate     Debt Balance  

Unsecured Facilities

           

Brookfield Office Properties’ revolving facility

    2.4%      $ 271            2.4%      $ 264   

Brookfield Office Properties’ Canadian revolving facility

    3.2%        120            3.3%        117   

Brookfield Office Properties’ Senior Notes

    4.3%        199            -        -   
 

Secured Property Debt

           

Fixed rate

    6.1%        7,313            5.9%        7,946   

Variable rate

    5.8%        7,363            6.8%        7,060   
      5.8%      $ 15,266                  $ 15,387   

Current

    $ 1,260            $ 1,409   

Non-current

            14,006                    13,978   
            $ 15,266                  $ 15,387   

Property debt includes foreign currency denominated debt payable in the functional currencies of the borrowing subsidiaries. Property debt by currency is as follows:

 

      Mar. 31, 2012    Dec. 31, 2011  
(US$ Millions)    US$ Balance      Local Currency Balance            US$ Balance      Local Currency Balance  

U.S. dollars

   $ 8,696       $ 8,696            $ 8,753       $ 8,753   

Canadian dollars

     2,256       C$ 2,250              2,033       C$ 2,078   

Australian dollars

     2,996       A$ 2,896              3,148       A$         3,085   

Brazilian reais

     863       R$         1,572              1,011       R$ 1,896   

British pounds

     455       £ 284              442       £ 284   
     $           15,266                     $           15,387            

NOTE 9: CAPITAL SECURITIES

Capital securities include the following Class AAA preferred shares issued by Brookfield Office Properties:

 

(US$ Millions, except share information)    Shares
Outstanding
     Cumulative
Dividend Rate
           Mar. 31, 2012      Dec. 31, 2011 (1)  

Class AAA Series F

     8,000,000         6.00%          $                     201       $ 196   

Class AAA Series G

     4,400,000         5.25%            110         110   

Class AAA Series H

     8,000,000         5.75%            201         196   

Class AAA Series I

     -         5.20%            -         150   

Class AAA Series J

     8,000,000         5.00%            201         196   

Class AAA Series K

     6,000,000         5.20%              149         146   

Total

                          $ 862       $                 994   
(1) 

Net of transaction costs of $1 million which are amortized to interest expense over the life of the securities using the effective interest rate method.

On March 30, 2012, Brookfield Office Properties redeemed all of the outstanding Class AAA Series I shares for cash of C$25.00 per share at their carrying amount.

Capital securities includes $752 million (2011 – $884 million) repayable in Canadian dollars of C$750 million (2011 – C$903 million).

Cumulative preferred dividends are payable quarterly, when declared by the Board of Directors, on the last day of March, June, September and December. On May 3, 2012 the Board of Directors of Brookfield Office Properties declared quarterly dividends payable for the Class AAA Series F, G, H, J and K preferred shares.

 

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NOTE 10: OTHER NON-CURRENT LIABILITIES

The components of other non-current liabilities are as follows:

 

(US$ Millions)    Mar. 31, 2012      Dec. 31, 2011  

Other secured debt

   $ 111       $ 150   

Other non-current financial liabilities

     177         343   
     $                      288       $                      493   

NOTE 11: INCOME TAXES

The sources of deferred income tax balances are as follows:

 

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

Non-capital losses (Canada)

   $                     74       $                     73   

Capital losses (Canada)

     119         120   

Net operating losses (U.S.)

     23         26   

Difference in basis

     (1,021)         (947)   

Total net deferred tax liability

   $ (805)       $ (728)   

The deferred tax balance movements are as follows:

 

(US$ Millions)            Recognized in      Reclassified          
      Dec. 31, 2011      Income      Equity      Other      OCI              Mar. 31, 2012  
Deferred tax assets related to non-capital losses and capital losses    $ 219       $ (12)       $ -       $ -       $ 9       $             -       $             216   
Deferred tax liabilities related to difference in tax and book basis, net      (947)         (171)         (7)         100         (9)         13         (1,021)   

Net deferred tax liabilities

   $ (728)       $ (183)       $ (7)       $ 100       $ -       $ 13       $ (805)   

The major components of income tax expense include the following:

 

(US$ Millions) Three months ended Mar. 31,    2012      2011  

Current income tax

   $ 56       $ 26   

Deferred income tax

     183         45   

Income tax expense

   $ 239       $ 71   

The company’s effective tax rate is different from the company’s domestic statutory income tax rate due to the differences set out below:

 

(US$ Millions) Three months ended Mar. 31,    2012      2011  

Statutory income tax rate

     26%         28%   

Reduction in rate resulting from:

     

Portion of income not subject to tax

     (14)         (2)   

International operations subject to different tax rates

     13         (13)   

Other

     -         (1)   

Effective income tax rate

     25%         12%   

NOTE 12: ACCOUNTS PAYABLE AND OTHER LIABILITIES

The components of accounts payable and other liabilities are as follows:

 

(US$ Millions)    Mar. 31, 2012      Dec. 31, 2011  

Accounts payable and accrued liabilities

   $ 1,065       $ 1,094   

Other secured debt

     30         61   

Other liabilities

     134         66   
     $ 1,229       $ 1,221   

Accounts payable and accrued liabilities include derivative liabilities associated with the company’s derivatives and hedging activities of $255 million (2011 – $271 million).

 

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NOTE 13: EQUITY IN NET ASSETS

Equity in net assets consists of the following:

 

(US$ Millions)    Note          Mar. 31, 2012      Dec. 31, 2011  

Equity in net assets attributable to parent company

   (a)       $ 12,575       $ 11,881   

Non-controlling interests

   (b)         10,024         9,613   
               $ 22,599       $ 21,494   

 

(a) Equity in net assets attributable to parent company

Equity in net assets attributable to parent company consists of the following:

 

(US$ Millions)    Mar. 31, 2012      Dec. 31, 2011  

Equity in net assets

   $ 11,957       $ 11,375   

Accumulated other comprehensive income

     618         506   
     $ 12,575       $ 11,881   

 

(b) Non-controlling interests

Non-controlling interests consist of the following:

 

(US$ Millions)    Mar. 31, 2012      Dec. 31, 2011  

Preferred equity

   $ 1,193       $ 1,190   

Other non-controlling interests

     8,831         8,423   
     $ 10,024       $ 9,613   

 

(c) Other comprehensive income

Other comprehensive income consists of the following:

 

(US$ Millions) Three months ended Mar. 31 ,   2012      2011  

Foreign currency translation

    

Unrealized foreign currency translation gains in respect of foreign operations

  $     187       $     175   

Losses on hedges of net investments in foreign operations, net of income taxes of nil (2011 – nil)

    (26)         (55)   

Reclassification to earnings of net foreign exchange gains

    -         (29)   
    161         91   

Cash flow hedges

    

Gains (losses) on derivatives designated as cash flow hedges, net of income taxes of $4.3 million (2011 –$6.2 million)

    40         (5)   

Reclassification to earnings of losses on derivatives designated as cash flow hedges, net of income taxes of nil and nil

    2         -   
    42         (5)   

Available-for-sale securities

    

Unrealized gains on available-for-sale securities, net of income taxes of nil (2011 – nil)

    3         2   

Other comprehensive income

  $ 206       $ 88   

NOTE 14: REVENUE AND PROPERTY NET OPERATING INCOME

(a) Revenue

The components of revenue are as follows:

 

(US$ Millions) Three months ended Mar. 31,   2012      2011  

Revenue from operations

  $     723       $     564   

Investment and other revenue(1)

    52         39   
    $ 775       $ 603   
(1) 

Excludes foreign exchange gains and losses associated with translation of the company’s net foreign currency denominated monetary assets and expenses associated with fee income.

 

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(b) Property net operating income

Property net operating income (“NOI”) represents revenue from operations of consolidated properties less direct operating costs. Direct operating costs include all expenses attributable to the commercial property operations such as property maintenance, utilities, insurance, realty taxes and property administration costs and exclude interest expense, income taxes, fair value gains (losses) and administrative expenses that do not relate directly to operations of a commercial property. NOI does not have standardized meanings prescribed by IFRS and therefore may differ from similar metrics used by other companies. The details are as follows:

 

Three months ended Mar. 31,   2012          2011  
(US$ Millions)   Revenue from
operations
    Operating
expenses
    Property
NOI
         Revenue from
operations
    Operating
expenses
    Property
NOI
 

Office

  $             572      $             230      $ 342          $             409      $             167      $ 242   

Retail

    42        13        29            46        20        26   

Multi-Family and Industrial

    19        8        11            39        27        12   

Opportunistic Investments

    90        63        27            70        32        38   
    $ 723      $ 314      $ 409          $ 564      $ 246      $ 318   

NOTE 15: INVESTMENT AND OTHER INCOME

The components of investment and other income are as follows:

 

(US$ Millions) Three months ended Mar. 31,    2012      2011  

Fee income

   $ 3       $ 11   

Dividend income

     10         -   

Interest income

     24         22   

Foreign exchange

     (1)         3   

Other

     3         (3)   
     $             39       $             33   

Fee income is net of $12 million of expenses for the three months ended March 31, 2012 (2011 - $9 million).

NOTE 16: FAIR VALUE GAINS, NET

The components of fair value gains, net, are as follows:

 

(US$ Millions) Three months ended Mar. 31,    2012      2011  

Investment properties

   $ 311       $ 167   

Financial instruments

     5         136   

Other

     (29)         -   
     $                 287       $                 303   

Other fair value losses for the three months ended March 31, 2012 relate primarily to the impairment of property debt and assets included within other non-current assets.

NOTE 17: GUARANTEES, CONTINGENCIES AND OTHER

In the normal course of operations, the Business and its consolidated entities execute agreements that provide for indemnification and guarantees to third parties in transactions such as business dispositions, business acquisitions, sales of assets and sales of services.

NOTE 18: FINANCIAL INSTRUMENTS

Interest rate hedging

The company has derivatives outstanding that are designated as cash flow hedges of variability in interest rates associated with forecasted fixed rate financings and existing variable rate debt.

 

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As at March 31, 2012, the company had derivatives representing a notional amount of $1,241 million in place to fix rates on forecasted fixed rate financings with maturities between 2022 and 2024 at rates between 2.6% and 4.7%. As at December 31, 2011, the company had derivatives representing a notional amount of $1,599 million in place to fix rates on forecasted fixed rate financings with a maturity between 2014 and 2024. The hedged forecasted fixed rate financings are denominated in US$ and C$.

As at March 31, 2012, the company had derivatives with a notional amount of $6,139 million in place to fix rates on existing variable rate debt at between 0.3% and 10.4% for debt maturities between 2012 and 2016. As at December 31, 2011, the company had derivatives with a notional amount of $5,343 million in place to fix rates on existing variable rate debt at between 0.3% and 9.9% for debt maturities between 2012 and 2016.

The fair value of the company’s outstanding interest rate derivative positions as at March 31, 2012 was a loss of $255 million (2011 – loss of $271 million). For the three months ended March 31, 2012 and 2011, the amount of hedge ineffectiveness recorded in interest expense in connection with the company’s interest rate hedging activities was not significant.

Foreign currency hedging

The company has derivatives designated as net investment hedges of its investments in foreign subsidiaries. As at March 31, 2012, the company had hedged a notional amount of £45 million at £0.63/US$ and A$135 million at A$0.95/US$ using foreign currency forward contracts maturing between April and June of 2012. As at December 31, 2011, the company had hedged a notional amount of £45 million at £0.64/US$ and A$135 million at A$0.98/US$ using foreign currency forward contracts maturing between January and March of 2012.

The fair value of the company’s outstanding foreign currency forwards as at March 31, 2012 was a gain of $3 million (2011 – loss of $4 million).

In addition, as of March 31, 2012, the company had designated C$750 million (2011 – C$903 million) of Canadian dollar financial liabilities as hedges of its net investment in Canadian operations.

For the three months ended March 31, 2012, the amount of hedge ineffectiveness recorded in earnings in connection with the company’s foreign currency hedging activities was not significant.

Other derivatives

The following other derivatives have been entered into to manage financial risks and have not been designated as hedges for accounting purposes.

At March 31, 2012, the company had a total return swap under which it received the return on a notional amount of 1.3 million Brookfield Office Properties common shares in connection with Brookfield Office Properties’ deferred share unit plan. The fair value of the total return swap at March 31, 2012 was a gain of $4 million (2011 – gain of $2 million) and a gain of $2 million in connection with the total return swap was recognized in general and administrative expense in the three months then ended (2011 – loss of $17 million).

At March 31, 2012, the company had foreign exchange contracts outstanding to swap a €83 million notional amount to GBP (2011 – €83 million). The fair value of these contracts as at March 31, 2012 was nil (2011 – nil).

 

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NOTE 19: RELATED PARTIES

In the normal course of operations, the company enters into various transactions on market terms with related parties, which have been measured at exchange value and are recognized in the financial statements. The following table summarizes transactions with related parties:

 

(US$ Millions) Three months ended Mar. 31,    2012      2011  

Lease revenue

   $             1       $             1   

Interest income

     13         18   

Management fees paid

     5         9   

 

Balances outstanding as at    Mar. 31, 2012      Dec. 31, 2011  

BRPI promissory notes (1)

   $             481       $             470   

Loans receivable designated as FVTPL (2)

     143         138   

Loans and notes receivable (3)

     382         452   

Other current receivables

     8         57   

Capitalized interest paid to Brookfield

     5         40   

Property debt payable

     30         79   

Other liabilities

     30         22   
(1) 

Included in notes receivable is $481 million (2011 - $470 million) related to unsecured promissory notes of C$480 million receivable from Brookfield Residential Properties Inc. (“BRPI”), a subsidiary of the parent company. Under the terms of a put agreement, the Business has the right to put up to $365 million of the promissory notes, at various dates beginning December 31, 2012, to Brookfield for cash proceeds equal to the outstanding principal amount.

(2) 

Includes a senior unsecured note receivable from a subsidiary of Brookfield that matures on December 19, 2014. The principal and interest payments on the note receivable are based on the returns of a reference debenture which is, in turn, secured by an equity interest in a publicly traded real estate entity based in Australia. The debenture was not repaid on its scheduled maturity date and a default notice was issued to the borrower demanding full repayment.

(3) 

Includes $147 million receivable from Brookfield upon the earlier of the company’s exercise of its option to convert its participating loan interests into direct ownership of the Australian portfolio or the maturity of the participating loan notes. Also included is a $200 million loan receivable related to Brookfield’s ownership of Brookfield Office Properties’ Class AAA Series E capital securities earning a rate of 108% of bank prime.

NOTE 20: SEGMENTED INFORMATION

The Business’ four operating segments are office, retail, multi-family and industrial, and opportunistic investments, located in the United States, Canada, Australia, Brazil and Europe.

The following summary presents segmented financial information for the company’s principal geographic areas of business:

 

(US$ Millions)    Total assets           Total liabilities           Equity attributable to parent  
      Mar. 31, 2012      Dec. 31, 2011           Mar. 31, 2012      Dec. 31, 2011           Mar. 31, 2012      Dec. 31, 2011  

Office

                         

United States (1)

   $       15,714               $ 15,741                   $ 7,490               $ 7,710                   $ 7,588               $ 7,395           

Canada (2)

     4,903                 4,718                     2,295                 2,247                     2,149                 2,044           

Australia (3)

     5,187                 5,186                     2,457                 2,681                     2,533                 2,315           

Europe

     1,473                 1,515                     479                 557                     994                 958           

Developments

     1,817                 1,713                     799                 738                     589                 560           

Unallocated (4)

     -                 -                     1,452                 1,375                     (6,985)                 (6,735)           
       29,094                 28,873                     14,972                 15,308                     6,868                 6,537           

Retail

                         

United States

     4,866                 4,282                     182                 51                     4,272                 3,938           

Australia

     380                 407                     170                 185                     210                 200           

Brazil

     2,337                 2,430                     1,055                 1,186                     321                 311           
       7,583                 7,119                     1,407                 1,422                     4,803                 4,449           

Multi-Family and Industrial (5)

     1,215                 1,112                     753                 584                     139                 157           

Opportunistic Investments (6)

     3,157                 3,213                     1,318                 1,509                     765                 738           
     $ 41,049               $       40,317                   $       18,450               $       18,823                   $     12,575               $       11,881           
1. Equity attributable to parent is net of non-controlling interests of $636 million (2011 - $636 million).
2. Equity attributable to parent is net of non-controlling interests of $459 million (2011 - $427 million).
3. Equity attributable to parent is net of non-controlling interests of $197 million (2011 - $190 million).
4. Unallocated liabilities include corporate debt and capital securities. Equity attributable to parent includes non-controlling interests.
5. Operations primarily in North America.
6. Operations primarily in North America with interests in Europe, Australia, and Brazil.

 

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(US$ Millions)    Revenue    Net operating income           Funds from operations  
Three months ended Mar. 31,    2012      2011           2012      2011           2012      2011  
   

Office

                       

United States (1)

   $         342       $         206         $         192       $         106           $         110       $         113   

Canada (2)

     141         131           66         64             40         44   

Australia

     117         99           76         64             53         33   

Europe (3)

     17         8           8         8             10         1   

Unallocated (4)

     -         -           -         -             (117)         (116)   
       617         444             342         242             96         75   

Retail

                       

United States

     -         2           -         -             49         56   

Australia

     8         8           5         5             2         (2)   

Brazil

     38         38           24         20             (1)         (5)   

Europe

     -         1             -         1             -         1   
     46         49           29         26             50         50   

Multi-Family and Industrial (5)

     19         39           11         12             1         2   

Opportunistic Investments (6)

     93         71           27         38             (6)         9   
     $ 775       $ 603           $ 409       $ 318           $ 141       $ 136   
1. 2012 funds from operations include equity accounted income of $20 million (2011 - $54 million) and is net of non-controlling interests of $18 million (2011 - $10 million).
2. 2012 funds from operations is net of non-controlling interests of $6 million (2011 - $5 million).
3. 2012 funds from operations include a dividend of $9 million from Canary Wharf (2011 - nil).
4. Funds from operations include unallocated interest expense, operating costs and non-controlling interest.
5. Operations primarily in North America.
6. Operations primarily in North America with interests in Europe, Australia, and Brazil.

The following table provides a reconciliation of total NOI and funds from operations (“FFO”) to income before income taxes and net income attributable to parent company for the three months ended March 31, 2012 and 2011:

 

(US$ Millions) Three months ended Mar. 31,    2012      2011  

Net operating income

   $     409       $     318   

Share of equity accounted funds from operations

     89         138   

Investment and other income

     39         33   
     537         489   

Interest expense

     (246)         (215)   

General and administrative expense

     (21)         (23)   

Depreciation and amortization

     (39)         (6)   

Non-controlling interests in funds from operations

     (90)         (109)   

Funds from operations

     141         136   

Fair value gains, net

     287         303   

Share of equity accounted fair value gains

     353         57   

Realized gains (losses)

     78         (2)   

Non-controlling interests in funds from operations

     90         109   

Income before income taxes

     949         603   

Income tax expense

     (239)         (71)   

Net income

     710         532   

Non-controlling interests

     (327)         (195)   

Net income attributable to parent company

   $ 383       $ 337   

 

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The following summary presents financial information by the company’s principal geographic regions in which it operates:

 

(US$ Millions)    Total revenue three months ended
Mar. 31,
         Total non-current assets as at  
      2012      2011          Mar. 31, 2012      Dec. 31, 2011  
 

United States

   $ 454       $ 318          $ 23,930       $ 23,079   

Canada

     141         131            4,929         4,714   

Australia

     125         107            6,563         6,474   

Brazil

     38         38            2,101         2,175   

Europe

     17         9            1,508         1,557   
     $     775       $     603          $     39,031       $     37,999   

NOTE 21: SUBSEQUENT EVENT

In April 2012, one of the company’s real estate finance funds obtained control over an operating resort property by foreclosing on a loan receivable. The carrying amount of the loan receivable at March 31, 2012 was $174 million.

NOTE 22: APPROVAL OF FINANCIAL STATEMENTS

The financial statements were approved by the board of directors and authorized for issue on June 8, 2012.

 

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BROOKFIELD PROPERTY PARTNERS L.P.

Balance sheet

as at May 31, 2012

 

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Report of Independent Registered Chartered Accountants

To the Directors of

Brookfield Property Partners L.P.

We have audited the accompanying balance sheet of Brookfield Property Partners L.P. (the “Partnership”) as at May 31, 2012 and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Balance Sheet

Management is responsible for the preparation and fair presentation of the balance sheet in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of a balance sheet that is free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on this balance sheet based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the balance sheet. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the balance sheet, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the balance sheet in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the balance sheet.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the balance sheet presents fairly, in all material respects, the financial position of the Partnership as at May 31, 2012, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

/s/ Deloitte & Touche LLP

Independent Registered Chartered Accountants

Licensed Public Accountants

Toronto, Canada

June 11, 2012

 

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BROOKFIELD PROPERTY PARTNERS L.P.

BALANCE SHEET

(all dollar amounts are in U.S. dollars)

 

 

     As at
May 31,
2012
 

Assets

  

Investment (Note 3)

   $             1,000   
  

 

 

 
   $ 1,000   
  

 

 

 

Partners’ capital

   $ 1,000   
  

 

 

 
   $ 1,000   
  

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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BROOKFIELD PROPERTY PARTNERS L.P.

NOTES TO THE BALANCE SHEET

1.     ORGANIZATION

Brookfield Property Partners L.P. (the “Partnership”) was formed as a limited partnership established under the laws of Bermuda, pursuant to a limited partnership agreement dated January 3, 2012. The general partner of the Partnership, Brookfield Property Partners Limited, contributed $100 and Brookfield Asset Management Inc. (as a limited partner) contributed $900. The Partnership has been established to serve as the general partner’s primary vehicle to own and operate real property assets on a global basis.

The Partnership’s registered head office is 73 Front Street, Hamilton, HM 12, Bermuda.

The financial statements were approved by the board of directors and authorized for issue on June 8, 2012.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The balance sheet has been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Separate Statements of Income, Changes in Partners’ Capital and Cash Flows have not been presented as there have been no activities for this entity.

3.     INVESTMENT

The Partnership made an initial capital contribution of $1,000 to Brookfield Property L.P. (the “Property Partnership”), a limited partnership formed under the laws of Bermuda, in exchange for 1,000 limited partner units of the Property Partnership.

 

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BROOKFIELD PROPERTY PARTNERS LIMITED

Balance sheet

as at May 31, 2012

 

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Report of Independent Registered Chartered Accountants

To the Directors of

Brookfield Property Partners Limited

We have audited the accompanying balance sheet of Brookfield Property Partners Limited (the “Company”) as at May 31, 2012 and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Balance Sheet

Management is responsible for the preparation and fair presentation of the balance sheet in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of a balance sheet that is free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on this balance sheet based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the balance sheet. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the balance sheet, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the balance sheet in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the balance sheet.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the balance sheet presents fairly, in all material respects, the financial position of the Company as at May 31, 2012, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

/s/ Deloitte & Touche LLP

Independent Registered Chartered Accountants

Licensed Public Accountants

Toronto, Canada

June 11, 2012

 

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BROOKFIELD PROPERTY PARTNERS LIMITED

BALANCE SHEET

(all dollar amounts are in U.S. dollars)

 

     As at
May  31,
2012
 

Assets

  

Cash

           $             100   
  

 

 

 
           $ 100   
  

 

 

 

Shareholder’s Equity

  

Common Shares – unlimited shares authorized, one issued and outstanding

           $ 100   
  

 

 

 
           $ 100   
  

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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BROOKFIELD PROPERTY PARTNERS LIMITED

NOTES TO THE BALANCE SHEET

 

1. ORGANIZATION

Brookfield Property Partners Limited (the “Company”) was formed as a company under the Companies Act 1981 of Bermuda pursuant to a memorandum of association dated December 20, 2011. The Company issued one share of par value $100 upon incorporation. The Company was incorporated to serve as the general partner of Brookfield Property Partners L.P.

The Company’s registered head office is 73 Front Street, Hamilton, HM 12, Bermuda.

The financial statements were approved by the board of directors and authorized for issue on June 8, 2012.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The balance sheet has been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Separate Statements of Income, Changes in Shareholder’s Equity and Cash Flows have not been presented as there have been no activities for this entity.

 

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GENERAL GROWTH PROPERTIES, INC.

Consolidated financial statements of General Growth Properties, Inc. as of December 31, 2011 and 2010 and for each of the three years in the period ended December 31, 2011

 

 

 

 

 

 

 

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GENERAL GROWTH PROPERTIES, INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

General Growth Properties, Inc.

Chicago, Illinois

We have audited the accompanying consolidated balance sheets of General Growth Properties, Inc. and subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income (loss), equity, and cash flows for the year ended December 31, 2011 and for the period from November 10, 2010 through December 31, 2010 (Successor Company operations), and for the period from January 1, 2010 through November 9, 2010 and for the year ended December 31, 2009 (Predecessor Company operations). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of GGP/Homart II L.L.C. and GGP-TRS L.L.C., the Company’s investments in which are accounted for by use of the equity method. The Company’s equity of $800,784,000 and $846,369,000 in GGP/Homart II L.L.C.’s net assets as of December 31, 2011 and 2010, respectively, and of $(4,740,000), $(1,109,000), and $(307,000) in GGP/Homart II L.L.C.’s net income (loss) for each of the three years in the respective period ended December 31, 2011 are included in the accompanying financial statements. The Company’s equity of $229,519,000 and $190,375,000 in GGP-TRS L.L.C.’s net assets as of December 31, 2011 and 2010, respectively, and of $(4,620,000), $(16,403,000) and $(8,624,000) in GGP-TRS L.L.C.’s net income (loss) for each of the three years in the respective period ended December 31, 2011 are included in the accompanying financial statements. The financial statements of GGP/Homart II L.L.C. and GGP-TRS L.L.C. related to the periods listed above were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for such companies, is based on the reports of the other auditors and the procedures that we considered necessary in the circumstances with respect to the inclusion of the Company’s equity investments and equity method income in the accompanying consolidated financial statements taking into consideration (1) the basis adjustments of the equity method investments as a result of the revaluation of the investments to fair value discussed in Note 4 and (2) the allocation of the equity method investment income from the operations of these investees between the two periods within the calendar year 2010 for the Predecessor Company and Successor Company.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other auditors, the Successor Company consolidated financial statements present fairly, in all material respects, the financial position of General Growth Properties, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the year ended December 31, 2011 and the period from November 10, 2010 through December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, based on our audits and the reports of the other auditors, the Predecessor Company consolidated financial statements referred to above present fairly, in all material respects, the results of their operations and their cash flows for the period from January 1, 2010 through November 9, 2010 and the year ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, on October 21, 2010, the Bankruptcy Court entered an order confirming the plan of reorganization which became effective on November 9, 2010.

 

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Accordingly, the accompanying financial statements have been prepared in conformity with ASC 852-10, Reorganizations, and ASC 805-10, Business Combinations, for the Successor Company as a new entity including assets, liabilities, and a capital structure with carrying values not comparable with prior periods as described in Note 4 to the consolidated financial statements.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report (not presented herein) dated February 29, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Chicago, Illinois

February 29, 2012 (June 27, 2012 as to the effects of the 2012 discontinued operations described in Note 5)

 

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Report of Independent Registered Public Accounting Firm

The Members

GGP/Homart II L.L.C.:

We have audited the consolidated balance sheets of GGP/Homart II L.L.C. (a Delaware Limited Liability Company) and subsidiaries (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of income, changes in capital, and cash flows for each of the years in the three-year period ended December 31, 2011 (not presented separately herein). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GGP/Homart II L.L.C. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011 in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Chicago, Illinois

February 27, 2012

 

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Report of Independent Registered Public Accounting Firm

The Members

GGP-TRS L.L.C.:

We have audited the consolidated balance sheets of GGP-TRS L.L.C. (a Delaware Limited Liability Company) and subsidiaries (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of income, changes in members’ capital, and cash flows for each of the years in the three-year period ended December 31, 2011 (not presented separately herein). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GGP-TRS L.L.C. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011 in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Chicago, Illinois

February 27, 2012

 

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GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

 

            December 31,       
2011
           December 31,       
2010
 
     (Dollars in thousands, except share amounts)  

Assets:

  

Investment in real estate:

    

Land

   $ 4,623,944      $ 4,722,674   

Buildings and equipment

     19,837,750        20,300,355   

Less accumulated depreciation

     (974,185     (129,794

Construction in progress

     135,807        117,137   
  

 

 

   

 

 

 

Net property and equipment

     23,623,316        25,010,372   

Investment in and loans to/from Unconsolidated Real Estate Affiliates

     3,052,973        3,153,698   
  

 

 

   

 

 

 

Net investment in real estate

     26,676,289        28,164,070   

Cash and cash equivalents

     572,872        1,021,311   

Accounts and notes receivable, net

     218,749        114,099   

Deferred expenses, net

     170,012        175,669   

Prepaid expenses and other assets

     1,805,535        2,300,452   

Assets held for disposition

     74,694        591,778   
  

 

 

   

 

 

 

Total assets

   $ 29,518,151      $ 32,367,379   
  

 

 

   

 

 

 

Liabilities:

    

Mortgages, notes and loans payable

   $ 17,143,014      $ 17,841,757   

Accounts payable and accrued expenses

     1,445,738        1,893,571   

Dividend payable

     526,332        38,399   

Deferred tax liabilities

     29,220        36,463   

Tax indemnification liability

     303,750        303,750   

Junior Subordinated Notes

     206,200        206,200   

Warrant liability

     985,962        1,041,004   

Liabilities held for disposition

     74,795        592,122   
  

 

 

   

 

 

 

Total liabilities

     20,715,011        21,953,266   
  

 

 

   

 

 

 

Redeemable noncontrolling interests:

    

Preferred

     120,756        120,756   

Common

     103,039        111,608   
  

 

 

   

 

 

 

Total redeemable noncontrolling interests

     223,795        232,364   
  

 

 

   

 

 

 

Commitments and Contingencies

     -        -   

Redeemable Preferred Stock: as of December 31, 2011 and December 31, 2010, $0.01 par value, 500,000 shares authorized, none issued and outstanding

     -        -   

Equity:

    

Common stock: as of December 31, 2011, $0.01 par value, 11,000,000,000 shares authorized and 935,307,487 shares issued and outstanding; as of December 31, 2010, $0.01 par value, 11,000,000,000 shares authorized and 941,880,014 shares issued and outstanding

     9,353        9,419   

Additional paid-in capital

     10,405,318        10,681,586   

Retained earnings (accumulated deficit)

     (1,883,569     (612,075

Accumulated other comprehensive (loss) income

     (47,773     172   
  

 

 

   

 

 

 

Total stockholders’ equity

     8,483,329        10,079,102   

Noncontrolling interests in consolidated real estate affiliates

     96,016        102,647   
  

 

 

   

 

 

 

Total equity

     8,579,345        10,181,749   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 29,518,151      $ 32,367,379   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-74


Table of Contents

GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

    Successor    

 

  Predecessor  
    Year Ended
December 31,
2011
    Period from
November 10, 2010
through
December 31, 2010
   

 

  Period from
January 1, 2010
through
November 9, 2010
    Year Ended
December 31,
2009
 
    (Dollars in thousands, except for per share amounts)  

Revenues:

           

Minimum rents

  $ 1,583,609      $ 232,592          $ 1,373,945      $ 1,619,074   

Tenant recoveries

    723,257        99,376            625,197        742,791   

Overage rents

    61,803        17,903            31,757        43,580   

Management fees and other corporate revenues

    61,173        8,883            54,351        75,304   

Other

    75,755        14,496            56,193        70,423   
 

 

 

   

 

 

       

 

 

   

 

 

 

Total revenues

    2,505,597        373,250            2,141,443        2,551,172   
 

 

 

   

 

 

       

 

 

   

 

 

 

Expenses:

           

Real estate taxes

    230,876        32,694            196,779        226,753   

Property maintenance costs

    95,835        17,869            78,391        88,520   

Marketing

    34,021        10,814            21,651        28,550   

Other property operating costs

    395,770        58,821            337,125        400,951   

Provision for doubtful accounts

    5,621        50            13,294        22,901   

Property management and other costs

    188,022        29,801            137,108        170,093   

General and administrative

    30,866        22,247            24,392        94,493   

Provisions for impairment

    64,337        -            4,516        315,968   

Depreciation and amortization

    899,584        125,150            507,886        621,097   
 

 

 

   

 

 

       

 

 

   

 

 

 

Total expenses

    1,944,932        297,446            1,321,142        1,969,326   
 

 

 

   

 

 

       

 

 

   

 

 

 

Operating income

    560,665        75,804            820,301        581,846   

Interest income

    2,429        722            1,466        1,571   

Interest expense

    (892,099     (128,841         (1,182,999     (1,210,937

Warrant liability adjustment

    55,042        (205,252         -        -   
 

 

 

   

 

 

       

 

 

   

 

 

 

Loss before income taxes, equity in income (loss) of Unconsolidated Real Estate Affiliates, reorganization items, discontinued operations and noncontrolling interests

    (273,963     (257,567         (361,232     (627,520

(Provision for) benefit from income taxes

    (8,723     8,992            60,962        (5,693

Equity in income (loss) of Unconsolidated Real Estate Affiliates

    2,898        (504         21,857        32,843   

Reorganization items

    -        -            (356,928     76,929   
 

 

 

   

 

 

       

 

 

   

 

 

 

Loss from continuing operations

    (279,788     (249,079         (635,341     (523,441

Discontinued operations

    (27,093     (7,005         (577,067     (781,275
 

 

 

   

 

 

       

 

 

   

 

 

 

Net loss

    (306,881     (256,084         (1,212,408     (1,304,716

Allocation to noncontrolling interests

    (6,291     1,868            26,650        20,027   
 

 

 

   

 

 

       

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (313,172   $ (254,216       $ (1,185,758   $ (1,284,689
 

 

 

   

 

 

       

 

 

   

 

 

 

Basic Loss Per Share:

           

Continuing operations

  $ (0.30   $ (0.26       $ (1.96   $ (1.61

Discontinued operations

    (0.03     (0.01         (1.78     (2.50
 

 

 

   

 

 

       

 

 

   

 

 

 

Total basic loss per share

  $ (0.33   $ (0.27       $ (3.74   $ (4.11
 

 

 

   

 

 

       

 

 

   

 

 

 

Diluted Loss Per Share:

           

Continuing operations

  $ (0.34   $ (0.26       $ (1.96   $ (1.61

Discontinued operations

    (0.03     (0.01         (1.78     (2.50
 

 

 

   

 

 

       

 

 

   

 

 

 

Total diluted loss per share

  $ (0.37   $ (0.27       $ (3.74   $ (4.11
 

 

 

   

 

 

       

 

 

   

 

 

 

Dividends declared per share

  $ 0.83      $ 0.38          $ -      $ 0.19   

Comprehensive Loss, Net:

           

Net loss

  $ (306,881   $ (256,084       $ (1,212,408   $ (1,304,716

Other comprehensive (loss) income:

           

Net unrealized gains on financial instruments

    -        129            15,024        18,148   

Accrued pension adjustment

    -        -            1,745        763   

Foreign currency translation

    (48,545     75            (16,552     47,008   

Unrealized gains (losses) on available-for-sale securities

    263        (32         38        533   
 

 

 

   

 

 

       

 

 

   

 

 

 

Other comprehensive (loss) income

    (48,282     172            255        66,452   
 

 

 

   

 

 

       

 

 

   

 

 

 

Comprehensive loss

    (355,163     (255,912         (1,212,153     (1,238,264

Comprehensive loss allocated to noncontrolling interests

    (5,954     1,869            26,604        (10,573
 

 

 

   

 

 

       

 

 

   

 

 

 

Comprehensive loss, net, attributable to common stockholders

  $ (361,117   $ (254,043       $ (1,185,549   $ (1,248,837
 

 

 

   

 

 

       

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-75


Table of Contents

GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF EQUITY

 

     Common
Stock
    Additional
Paid-In
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Noncontrolling
Interests in
Consolidated
Real Estate
Affiliates
    Total Equity  
     (Dollars in thousands)  

Balance at January 1, 2009 (Predecessor)

   $ 2,704      $ 3,454,903      $ (1,488,586   $ (56,128   $   (76,752   $ 24,266      $ 1,860,407   

Net (loss) income

         (1,284,689         1,822          (1,282,867

Distributions declared ($0.19 per share)

         (59,352           (59,352

Distributions to noncontrolling interests in consolidated Real Estate Affiliates

               (1,712     (1,712

Conversion of operating partnership units to common stock (43,408,053 common shares)

     434        324,055                324,489   

Issuance of common stock (69,309 common shares)

     1        42                43   

Restricted stock grant, net of forfeitures and compensation expense (372 common shares)

     (1     2,669                2,668   

Other comprehensive income

           55,879            55,879   

Adjustment for noncontrolling interest in operating partnership

       13,200                13,200   

Adjust noncontrolling interest in operating partnership units

       (65,416             (65,416
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2009 (Predecessor)

   $ 3,138      $ 3,729,453      $ (2,832,627   $ (249   $ (76,752   $ 24,376      $ 847,339   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

         (1,173,028         1,545        (1,171,483

Distributions to noncontrolling interests in consolidated Real Estate Affiliates

               (1,927     (1,927

Restricted stock grants, net of forfeitures and compensation expense (87,059 common shares)

     1        8,309                8,310   

Issuance of common stock - payment of dividend (4,923,287 common shares)

     49        53,346                53,395   

Other comprehensive income

           47,684            47,684   

Adjust noncontrolling interest in operating partnership units

       (38,854             (38,854

Distribution of HHC

         (1,487,929     1,268          (808     (1,487,469
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at November 9, 2010 (Predecessor)

   $ 3,188      $ 3,752,254      $ (5,493,584   $ 48,703      $ (76,752   $ 23,186      $ (1,743,005
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effects of acquisition accounting:

              

Elimination of Predecessor common stock

     (3,188     (3,752,254         76,752        (23,186     (3,701,876

Elimination of Predecessor accumulated deficit and accumulated other comprehensive income

         5,506,314        (48,703         5,457,611   

Issuance of common stock pursuant to the Plan (643,780,488 common shares, net of 120,000,000 stock warrants issued and stock issuance costs)

     6,438        5,569,060                5,575,498   

Issuance of common stock to existing common shareholders pursuant to the Plan

     3,176        4,443,515                4,446,691   

Restricted stock grants, net of forfeitures and compensation expense (1,725,000 common shares)

     17        (17             -   

Change in basis for noncontrolling interests in consolidated real estate affiliates

               102,169        102,169   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at November 10, 2010 (Successor)

   $ 9,631      $   10,012,558      $ 12,730      $ -      $ -      $ 102,169      $ 10,137,088   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-76


Table of Contents

GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF EQUITY (Continued)

 

    Common
Stock
    Additional
Paid-In
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Noncontrolling
Interests in
Consolidated

Real Estate
Affiliates
    Total Equity  
    (Dollars in thousands)  

Balance at November 10, 2010 (Successor)

  $   9,631      $ 10,012,558      $ 12,730      $ -      $ -      $ 102,169      $   10,124,358   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

        (254,216         534        (253,682

Issuance of common stock (154,886,000 common shares, net of stock issuance costs)

    1,549        2,145,488                2,147,037   

Clawback of common stock pursuant to the Plan (179,276,244 common shares)

    (1,792     (1,797,065             (1,798,857

Restricted stock grants, net of forfeitures and compensation expense (1,315,593 common shares)

    13        5,026                5,039   

Stock options exercised (1,828,369 common shares)

    18        4,978                4,996   

Distributions to noncontrolling interests in consolidated Real Estate Affiliates

              (416     (416

Other comprehensive income

          172            172   

Adjustment for noncontrolling interest in operating partnership

      (11,522             (11,522

Issuance of subsidiary preferred shares (360 preferred shares)

              360        360   

Cash distributions declared ($0.038 per share)

        (35,736           (35,736

Stock distributions declared ($0.342 per share)

      322,123        (322,123           -   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010 (Successor)

  $ 9,419      $ 10,681,586      $ (612,075   $ 172      $ -      $ 102,647      $ 10,181,749   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

        (313,172         (1,075     (314,247

Distributions to noncontrolling interests in consolidated Real Estate Affiliates

              (5,556     (5,556

Issuance of common stock - payment of dividend (22,256,121 common shares)

    223        (244     21              -   

Restricted stock grant, net of forfeitures and compensation expense (341,895 common shares)

    (3     11,578        (307           11,268   

Stock options exercised (121,439 common shares)

    1        834                835   

Purchase and cancellation of common shares (35,833,537 common shares)

    (358     (398,590     (154,562           (553,510

Cash dividends reinvested (DRIP) in stock (7,225,345 common shares)

    71        115,292                115,363   

Other comprehensive loss

          (47,945         (47,945

Cash distributions declared ($0.40 per share)

      (16     (376,824           (376,840

Cash redemptions for common units in excess of carrying value

      (648             (648

Adjustment for noncontrolling interest in operating partnership

      (4,474             (4,474

Dividend for RPI Spin-off (Note 11)

        (426,650           (426,650
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011 (Successor)

  $ 9,353      $ 10,405,318      $ (1,883,569   $ (47,773   $ -      $ 96,016      $ 8,579,345   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-77


Table of Contents

GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Successor      Predecessor  
    Year Ended
December 31,
2011
    Period from
November 10,
2010 through
December 31,
2010
     Period from
January 1,
2010 through
November 9,
2010
    Year Ended
December 31,
2009
 
    (In thousands)  

Cash Flows from Operating Activities:

        

Net loss

  $ (306,881   $ (256,084    $ (1,212,408   $ (1,304,716

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

        

Equity in (income) loss of Unconsolidated Real Estate Affiliates

    (2,898     504         (28,064     (49,350

Provision for impairment from Equity in income of Unconsolidated Real Estate Affiliates

    -        -         20,200        44,511   

Provision for doubtful accounts

    7,944        480         19,472        30,331   

Distributions received from Unconsolidated Real Estate Affiliates

    18,226        4,745         52,150        37,403   

Depreciation

    942,400        137,820         565,330        707,183   

Amortization

    43,286        4,454         38,323        47,978   

Amortization/write-off of deferred finance costs

    2,705        -         27,885        34,621   

(Accretion) amortization/write-off of debt market rate adjustments

    (60,093     (2,898      80,733        -   

Amortization of intangibles other than in-place leases

    144,239        15,977         3,977        833   

Straight-line rent amortization

    (89,728     (3,204      (31,101     (26,582

Deferred income taxes including tax restructuring benefit

    (3,148     (6,357      (497,890     833   

Non-cash interest expense on Exchangeable Senior Notes

    -        -         21,618        27,388   

Non-cash interest expense resulting from termination of interest rate swaps

    -        -         9,635        (9,635

Non-cash interest income related to properties held for sale

    -        -         (33,417     -   

(Gain) loss on dispositions

    (4,332     4,976         (6,684     966   

Provisions for impairment

    68,382        -         35,893        1,223,810   

Loss on HHC distribution

    -        -         1,117,961        -   

Payments pursuant to Contingent Stock Agreement

    -        (220,000      (10,000     (4,947

Land/residential development and acquisitions expenditures

    -        -         (66,873     (78,240

Cost of land and condominium sales

    -        -         74,302        22,019   

Revenue recognition of deferred land and condominium sales

    -        -         (36,443     -   

Warrant liability adjustment

    (55,042     205,252         -        -   

Reorganization items - finance costs related to emerged entities/DIP Facility

    -        -         180,790        69,802   

Non-cash reorganization items

    -        -         12,503        (266,916

Glendale Matter deposit

    -        -         -        67,054   

Net changes:

        

Accounts and notes receivable

    (30,239     14,751         79,636        (22,601

Prepaid expenses and other assets

    13,741        26,963         (113,734     (11,123

Deferred expenses

    (67,719     (6,282      (16,517     (34,064

Decrease (increase) in restricted cash

    17,407        (78,489      (76,513     -   

Accounts payable and accrued expenses

    (135,448     (203,084      (137,618     355,025   

Other, net

    -        1,869         (32,128     9,683   
 

 

 

   

 

 

    

 

 

   

 

 

 

Net cash provided by (used in) operating activities

    502,802        (358,607      41,018        871,266   
 

 

 

   

 

 

    

 

 

   

 

 

 

 

F-78


Table of Contents

GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

 

    Successor     Predecessor  
    Year Ended
December 31,
2011
    Period from
November 10,
2010 through
December 31,
2010
    Period from
January 1,
2010 through
November 9,
2010
    Year Ended
December 31,
2009
 
    (In thousands)  

Cash Flows from Investing Activities:

       

Acquisition/development of real estate and property additions/improvements

    (253,276     (54,083     (223,373     (252,844

Proceeds from sales of investment properties

    627,872        108,914        39,450        6,416   

Proceeds from sales of investment in Unconsolidated Real Estate Affiliates

    74,906        -        94        -   

Contributions to Unconsolidated Real Estate Affiliates

    (92,101     (6,496     (51,448     (154,327

Distributions received from Unconsolidated Real Estate Affiliates in excess of income

    131,290        19,978        160,624        74,330   

Loans to Unconsolidated Real Estate Affiliates, net

    -        -        -        (9,666

(Increase) decrease in restricted cash

    (2,975     (4,943     (10,363     6,260   

Distributions of HHC

    -        -        (3,565     -   

Other, net

    (293     -        (579     (4,723
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    485,423        63,370        (89,160     (334,554
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

       

Proceeds from refinance/issuance of the DIP facility

    -        -        -        400,000   

Proceeds from (repayment of) Pershing Note (Note 2)

    -        (350,000     350,000        -   

Clawback of common stock pursuant to the Plan (Note 2)

    -        (1,798,857     -        -   

Principal payments on mortgages, notes and loans payable pursuant to the Plan

    -        -        (2,258,984     -   

Proceeds from refinance/issuance of mortgages, notes and loans payable

    2,145,848        -        431,386        -   

Principal payments on mortgages, notes and loans payable

    (2,797,540     (226,319     (758,182     (379,559

Deferred finance costs

    (19,541     -        -        (2,614

Finance costs related to the Plan

    -        -        (180,790     (69,802

Cash distributions paid to common stockholders

    (319,799     -        (5,957     -   

Cash dividends reinvested (DRIP) in common stock

    115,363        -        -        -   

Cash distributions paid to holders of common units

    (6,802     -        -        (1,327

Cash dividends paid to holders of perpetual and convertible preferred units

    -        -        (16,199     -   

Purchase and cancellation of common shares

    (553,510     -        -        -   

Proceeds from issuance of common stock and warrants, including from common stock plans

    -        2,147,037        3,371,769        43   

Other, net

    (683     7,088        (1,698     1,950   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (1,436,664     (221,051     931,345        (51,309
 

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

    (448,439     (516,288     883,203        485,403   

Cash and cash equivalents at beginning of period

    1,021,311        1,537,599        654,396        168,993   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 572,872      $ 1,021,311      $ 1,537,599      $ 654,396   
 

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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GENERAL GROWTH PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

 

     Successor      Predecessor  
     Year Ended
December 31,
2011
    Period from
November 10,
2010 through
December 31,
2010
     Period from
January 1,
2010 through
November 9,
2010
    Year Ended
December 31,
2009
 
     (In thousands)  

Supplemental Disclosure of Cash Flow Information:

         

Interest paid

   $ 903,758      $ 93,987       $ 1,409,681      $ 1,061,512   

Interest capitalized

     1,914        208         2,627        53,641   

Income taxes paid

     9,422        179         5,247        19,826   

Reorganization items paid

     128,070        154,668         317,774        120,726   

Third party property and cash exchange

     44,672        -         -        -   

Non-Cash Transactions:

         

Change in accrued capital expenditures included in accounts payable and accrued expenses

   $ (13,810   $ 5,928       $ (73,618   $ (86,367

Common stock issued in exchange for Operating Partnership Units

     -        -         3,224        324,489   

Change in deferred contingent property acquisition liabilities

     -        -         161,622        (174,229

Deferred finance costs payable in conjunction with the DIP facility

     -        -         -        19,000   

Mortgage debt market rate adjustments related to Emerged Debtors prior to the Effective Date

     -        -         323,318        342,165   

Recognition of note payable in conjunction with land held for development and sale

     -        -         -        6,520   

Gain on Aliansce IPO

     -        -         9,652        -   

Debt payoffs via deeds in-lieu

     161,524        -         97,539        -   

Non-Cash Stock Transactions related to the Plan

         

Stock issued for paydown of the DIP facility

     -        -         400,000        -   

Stock issued for debt paydown pursuant to the Plan

     -        -         2,638,521        -   

Stock issued for reorganization costs pursuant to the Plan

     -        -         960        -   

Rouse Properties, Inc. Dividend:

         

Non-cash dividend for RPI Spin-Off

     426,650        -         -        -   

Non-Cash Distribution of HHC Spin-Off:

         

Assets

     -        -         3,618,819        -   

Liabilities and equity

     -        -         (3,622,384     -   

Decrease in assets and liabilities resulting from the contribution of two wholly-owned malls into two newly-formed unconsolidated joint ventures

         

Assets

   $ (349,942   $ -       $ -      $ -   

Liabilities

     (234,962     -         -        -   

Supplemental Disclosure of Cash Flow Information Related to Acquisition Accounting:

         

Non-cash changes related to acquisition accounting:

         

Land

   $ -      $ -       $ 1,726,166      $ -   

Buildings and equipment

     -        -         (1,605,345     -   

Less accumulated depreciation

     -        -         4,839,700        -   

Investment in and loans to/from Unconsolidated Real Estate Affiliates

     -        -         1,577,408        -   

Deferred expenses, net

     -        -         (258,301     -   

Mortgages, notes and loans payable

     -        -         (421,762     -   

Equity

     -        -         (6,421,548     -   

The accompanying notes are an integral part of these consolidated financial statements.

 

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GENERAL GROWTH PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 ORGANIZATION

General

General Growth Properties, Inc. (“GGP”, the “Successor” or the “Company”), a Delaware corporation, formerly known as New GGP, Inc., was organized in July 2010 and is a self-administered and self-managed real estate investment trust, referred to as a “REIT”. GGP is the successor registrant, by merger, on November 9, 2010 (the “Effective Date”) to GGP, Inc. (the “Predecessor”). The Predecessor had filed for bankruptcy protection under Chapter 11 of Title 11 of the United States Code (“Chapter 11”) in the Southern District of New York (the “Bankruptcy Court”) on April 16, 2009 (the “Petition Date”) and emerged from bankruptcy, pursuant to a plan of reorganization (the “Plan”) on the Effective Date as described below. In these notes, the terms “we,” “us” and “our” refer to GGP and its subsidiaries or, in certain contexts, the Predecessor and its subsidiaries.

GGP, through its subsidiaries and affiliates, operates, manages, develops and acquires retail and other rental properties, primarily regional malls, which are predominantly located throughout the United States. GGP also holds assets in Brazil through investments in Unconsolidated Real Estate Affiliates (as defined below). Prior to the Effective Date, the Predecessor had also developed and sold land for residential, commercial and other uses primarily in large-scale, long-term master planned community projects in and around Columbia, Maryland; Summerlin, Nevada; and Houston, Texas, as well as one residential condominium project located in Natick (Boston), Massachusetts.

Substantially all of our business is conducted through GGP Limited Partnership (the “Operating Partnership” or “GGPLP”). As of December 31, 2011, GGP holds approximately a 99% common equity ownership (without giving effect to the potential conversion of the Preferred Units as defined below) of the Operating Partnership, while the remaining 1% is held by limited partners that indirectly include family members of the original stockholders of the Predecessor and certain previous contributors of properties to the Operating Partnership.

The Operating Partnership also has preferred units of limited partnership interest (the “Preferred Units”) outstanding. The terms of the Preferred Units provide that the Preferred Units are convertible into Common Units which then are redeemable for cash or, at our option, shares of GGP common stock (Note 11).

In addition to holding ownership interests in various joint ventures, the Operating Partnership generally conducts its operations through the following subsidiaries:

 

   

The Rouse Company, LLC (“TRCLLC”), which has ownership interests in certain Consolidated Properties and Unconsolidated Properties (each as defined below) and is the borrower of certain unsecured bonds (Note 7).

 

   

General Growth Management, Inc. (“GGMI”), a taxable REIT subsidiary (a “TRS”), which manages, leases, and performs various services for some of our Unconsolidated Real Estate Affiliates (defined below) and, through July 2010, had performed such services for 19 properties owned by unaffiliated third parties, all located in the United States. GGMI also performs marketing and strategic partnership services at all of our Consolidated Properties.

We refer to our ownership interests in properties in which we own a majority or controlling interest and, as a result, are consolidated under generally accepted accounting principles in the United States of America (“GAAP”) as the “Consolidated Properties.” We also hold some properties through joint venture entities in which we own a non-controlling interest (“Unconsolidated Real Estate Affiliates”) and we refer to those properties as the “Unconsolidated Properties”.

 

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NOTE 2 CHAPTER 11 AND THE PLAN

In April 2009, the Predecessor and certain of its domestic subsidiaries (the “Debtors”) filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (“Chapter 11”) in the bankruptcy court of the Southern District of New York (the “Bankruptcy Court”).

On October 21, 2010, the Bankruptcy Court entered an order confirming the Debtors’ plan of reorganization (the “Plan”). Pursuant to the Plan, on the Effective Date, the Predecessor merged with a wholly-owned subsidiary of New GGP, Inc. and New GGP, Inc. was re-named General Growth Properties, Inc. Also pursuant to the Plan, prepetition creditor claims were satisfied in full and equity holders received newly issued common stock in New GGP, Inc. and in Howard Hughes Corporation (“HHC”), a newly formed company. After that distribution, HHC became a publicly-held company, majority-owned by the Predecessor’s previous stockholders. GGP does not own any interest in HHC as of the Effective Date.

The Plan was based on the agreements (collectively, as amended and restated, the “Investment Agreements”) with REP Investments LLC, an affiliate of Brookfield Asset Management Inc. (the “Brookfield Investor”), an affiliate of Fairholme Funds, Inc. (“Fairholme”) and an affiliate of Pershing Square Capital Management, L.P. (“Pershing Square” and together with the Brookfield Investor and Fairholme, the “Plan Sponsors”), pursuant to which the Predecessor would be divided into two companies, New GGP, Inc. and HHC, and the Plan Sponsors would invest in the Company’s standalone emergence plan. In addition, the Predecessor entered into an investment agreement with Teachers Retirement System of Texas (“Texas Teachers”) to purchase shares of GGP common stock at $10.25 per share. The Plan Sponsors also entered into an agreement with affiliates of the Blackstone Group (“Blackstone”) whereby Blackstone subscribed for equity in New GGP, Inc. and agreed to purchase shares of GGP common stock at $10.00 per share and also invest in HHC.

Pursuant to the Investment Agreements, the Plan Sponsors and Blackstone purchased on the Effective Date $6.3 billion of New GGP, Inc. common stock at $10.00 per share and $250.0 million of HHC common stock at $47.61904 per share. Also, pursuant to the Investment Agreement with Pershing Square, 35 million shares (representing $350 million of Pershing Square’s equity capital commitment) were designated as “put shares”. The payment for these 35 million shares was fulfilled on the Effective Date by the payment of cash at closing in exchange for unsecured notes to Pershing Square which were scheduled to be payable six months from the Effective Date (the “Pershing Square Bridge Notes). The Pershing Square Bridge Notes were pre-payable at any time without premium or penalty. In addition, we had the right (the “put right”) to sell up to 35 million shares of common stock, subject to reduction as provided in the Investment Agreement, to Pershing Square at $10.00 per share (adjusted for dividends) within six months following the Effective Date to fund the repayment of the Pershing Square Bridge Notes to the extent that they had not already been repaid. In connection with our reserving shares for repurchase after the Effective Date, we paid to Fairholme and/or Pershing Square, as applicable, in cash on the Effective Date, an amount equal to approximately $38.75 million. No fee was required to be paid to Texas Teachers. In addition, pursuant to agreement, the Texas Teachers purchased on the Effective Date $500 million of New GGP, Inc. common stock at $10.25 per share.

Pursuant to the terms of the Investment Agreements, the Plan Sponsors and Blackstone were issued warrants (the “Warrants”), which included eight million warrants to purchase common stock of HHC at an exercise price of $50.00 per share and 120 million warrants to purchase common stock of GGP (Note 9).

Pursuant to the Plan, each holder of a share of Predecessor common stock received on the Effective Date a distribution of 0.098344 of a share of common stock of HHC. Following the distribution of the shares of HHC common stock, each existing share of common stock converted into and represented the right to receive one share of GGP common stock. No fractional shares of HHC or GGP, Inc. were issued (i.e., the number of shares issued to each record holder was “rounded down”). Following these transactions, the Predecessor common stock ceased to exist.

 

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After the transactions on the Effective Date, the Plan Sponsors, Blackstone (as it exercised its subscription rights described above) and Texas Teachers owned a majority of the outstanding common stock of GGP. The Predecessor common stockholders held approximately 317 million shares of GGP common stock at the Effective Date; whereas, the Plan Sponsors, Blackstone and Texas Teachers held approximately 644 million shares of GGP common stock on such date.

The Investment Agreements with Fairholme and Pershing Square permitted us to repurchase (within 45 days of the Effective Date) up to 155 million shares in the aggregate issued to those investors at a price of $10.00 per share. We had a similar right for up to 24.4 million shares issued to Texas Teachers at a price of $10.25 per share (the “Clawback”). In November 2010, we sold an aggregate of approximately 154.9 million common shares to the public at $14.75 per share and repurchased an equal number of shares from Fairholme and Pershing as permitted under the Clawback and repaid the Pershing Square Bridge Notes in full, including accrued interest. We also used a portion of the offering proceeds after such repurchase to repurchase approximately 24.4 million shares from Texas Teachers, also as permitted under the Clawback.

NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts of GGP, our subsidiaries and joint ventures in which we have a controlling interest. For consolidated joint ventures, the noncontrolling partner’s share of the assets, liabilities and operations of the joint ventures (generally computed as the joint venture partner’s ownership percentage) is included in noncontrolling interests in Consolidated Real Estate Affiliates as permanent equity of the Company. All significant intercompany balances and transactions have been eliminated.

We operate in a single reportable segment referred to as our retail and other segment, which includes the operation, development and management of retail and other rental properties, primarily regional malls. Our portfolio of regional malls represents a collection of retail properties that are targeted to a range of market sizes and consumer tastes. Each of our operating properties is considered a separate operating segment, as each property earns revenues and incurs expenses, individual operating results are reviewed and discrete financial information is available. We do not distinguish or group our consolidated operations based on geography, size or type. Further, all material operations are within the United States and no customer or tenant comprises more than 10% of consolidated revenues. As a result, the Company’s operating properties are aggregated into a single reportable segment.

Through the Effective Date in 2010, we had two reportable segments (Retail and Other and Master Planned Communities) which offered different products and services. Our segments were managed separately because each required different operating strategies or management expertise. On the Effective Date, the assets included in the Master Planned Communities segment were distributed to HHC pursuant to the Plan (Note 2) and are therefore no longer reported as a reportable segment.

Reclassifications

Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the current period presentation as a result of discontinued operations. Amounts included on the statements of operations for properties sold or to be disposed of have been reclassified to discontinued operations for all periods presented. In addition, four properties previously classified as held for sale were reclassified as held for use in the first quarter of 2012 and two properties previously classified as held for sale were reclassified as held for use in the first quarter of 2011. These properties have been included in continuing operations for all periods presented in the accompanying consolidated financial statements (Note 5). Lastly, certain prior period statement of operations disclosures in the accompanying footnotes have been restated to exclude amounts which have been reclassified to discontinued operations.

 

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Properties

Real estate assets are stated at cost less any provisions for impairments. As discussed in Note 4, the real estate assets were recorded at fair value pursuant to the application of acquisition accounting on the Effective Date. Construction and improvement costs incurred in connection with the development of new properties or the redevelopment of existing properties are capitalized to the extent the total carrying amount of the property does not exceed the estimated fair value of the completed property. Real estate taxes and interest costs incurred during construction periods are capitalized. Capitalized interest costs are based on qualified expenditures and interest rates in place during the construction period. Capitalized real estate taxes and interest costs are amortized over lives which are consistent with the constructed assets.

Pre-development costs, which generally include legal and professional fees and other third-party costs directly related to the construction assets, are capitalized as part of the property being developed. In the event a development is no longer deemed to be probable, the costs previously capitalized are expensed (see also our impairment policies in this Note 3 below).

Tenant improvements, either paid directly or in the form of construction allowances paid to tenants, are capitalized and depreciated over the shorter of the useful life or the applicable lease term. Expenditures for significant betterments and improvements are capitalized. Maintenance and repairs are charged to expense when incurred.

We periodically review the estimated useful lives of our properties. Depreciation or amortization expense is computed using the straight-line method based upon the following estimated useful lives:

 

     Years

Buildings and improvements

   45

Equipment and fixtures

   5-10

Tenant improvements

   Shorter of useful life or applicable lease term

Accumulated depreciation was reset to zero on the Effective Date as described in Note 4 in conjunction with the application of the acquisition method of accounting due to the Plan and the Investment Agreements.

Impairment

General

Carrying values of our properties were reset to fair value on the Effective Date as provided by the acquisition method of accounting. Impairment charges could be taken in the future if economic conditions change or if the plans regarding such assets change. Therefore, we can provide no assurance that material impairment charges with respect to our assets, including operating properties, investments in Unconsolidated Real Estate Affiliates and developments in progress, will not occur in future periods. Accordingly, we will continue to monitor circumstances and events in future periods to determine whether impairments are warranted.

Operating properties

Accounting for the impairment of long-lived assets requires that if impairment indicators exist and the undiscounted cash flows expected to be generated by an asset are less than its carrying amount, an impairment provision should be recorded to write down the carrying amount of such asset to its fair value. We review our consolidated assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Impairment indicators are assessed separately for each property and include, but are not limited to, significant decreases in real estate property net operating income, significant occupancy percentage changes, debt maturities, management’s intent with respect to the assets and prevailing market conditions.

 

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Impairment indicators for pre-development costs, which are typically costs incurred during the beginning stages of a potential development and developments in progress are assessed by project and include, but are not limited to, significant changes in the Company’s plans with respect to the project, significant changes in projected completion dates, tenant demand, anticipated revenues or cash flows, development costs, market factors and sustainability of development projects.

If an indicator of potential impairment exists, the asset is tested for recoverability by comparing its carrying amount to the estimated future undiscounted cash flows. The cash flow estimates used both for determining recoverability and estimating fair value are inherently judgmental and reflect current and projected trends in rental, occupancy and capitalization rates, and estimated holding periods for the applicable assets. Although the carrying amount may exceed the estimated fair value of certain assets, a real estate asset is only considered to be impaired when its carrying amount cannot be recovered through estimated future undiscounted cash flows. To the extent an impairment provision is determined to be necessary, the excess of the carrying amount of the asset over its estimated fair value is expensed to operations. In addition, the impairment provision is allocated proportionately to adjust the carrying amount of the asset group. The adjusted carrying amount, which represents the new cost basis of the asset, is depreciated over the remaining useful life of the asset.

During the respective periods, we determined there were events and circumstances indicating that certain properties were not recoverable and therefore required impairments. As such, we recorded impairment charges related to three operating properties and one non-income producing asset of $68.3 million for the year ended December 31, 2011. In 2011, these provisions reduced the carrying value of certain assets to approximately $37.5 million below the approximately $83.9 million of nonrecourse notes payable related to those assets. The Predecessor recorded impairment charges related to operating properties and properties under development of $35.3 million for the period from January 1, 2010 through November 9, 2010 and $1.08 billion for the year ended December 31, 2009. These impairment charges are included in provisions for impairment in our Consolidated Statements of Operations and Comprehensive Income (Loss), except for $4.0 million for the year ended December 31, 2011, $30.8 million for the period from January 1, 2010 through November 9, 2010 and $908.2 million for the year ended December 31, 2009, which are included in discontinued operations in our Consolidated Statements of Operations and Comprehensive Income (Loss).

Investment in Unconsolidated Real Estate Affiliates

According to the guidance related to the equity method of accounting for investments, a series of operating losses of an investee or other factors may indicate that an other-than-temporary decrease in value of our investment in the Unconsolidated Real Estate Affiliates has occurred. The investment in each of the Unconsolidated Real Estate Affiliates is evaluated periodically and as deemed necessary for valuation declines below the carrying amount. Accordingly, in addition to the property-specific impairment analysis that we perform for such joint ventures (as part of our operating property impairment process described above), we also considered whether there were other-than-temporary impairments with respect to the carrying values of our unconsolidated real estate affiliates.

In the period January 1, 2010 through November 9, 2010, the Predecessor recorded an impairment provision of approximately $21.1 million related to the sale of its interest in Turkey, recorded in equity in income (loss) of Unconsolidated Real Estate Affiliates. We did not record any provisions for impairment related to our investments in Unconsolidated Real Estate Affiliates for the year ended December 31, 2011, for the period November 10, 2010 through December 31, 2010 and for the year ended December 31, 2009.

Goodwill

The application of acquisition accounting on the Effective Date did not yield any goodwill for the Successor and all prior goodwill amounts of the Predecessor were eliminated (Note 4). With respect to the Predecessor, the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired (including

 

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identified intangible assets) and liabilities assumed was recorded as goodwill. Recorded goodwill was tested for impairment annually or more frequently if events or changes in circumstances indicated that the asset might be impaired. The Predecessor assessed fair value based on estimated future cash flow projections that utilized discount and capitalization rates which are generally unobservable in the market place (Level 3 inputs) under these principles, but approximate the inputs we believe would be utilized by market participants in assessing fair value. Estimates of future cash flows were based on a number of factors including the historical operating results, known trends, and market/economic conditions. If the carrying amount of a property, including its goodwill, exceeded its estimated fair value, the second step of the goodwill impairment test was performed to measure the amount of impairment loss, if any. In this second step, if the implied fair value of goodwill was less than the carrying amount of goodwill, an impairment charge was recorded.

As a result of the procedures performed, the Predecessor recorded provisions for impairment of goodwill of $140.6 million for the year ended December 31, 2009. During 2010, until the Effective Date, there were no events or circumstances that indicated that the then current carrying amount of goodwill might be impaired.

Acquisitions of Operating Properties

Acquisitions of properties are accounted for utilizing the acquisition method of accounting and, accordingly, the results of operations of acquired properties were included in the results of operations from the respective dates of acquisition. Estimates of future cash flows and other valuation techniques are used to allocate the purchase price of acquired property between land, buildings and improvements, equipment, debt liabilities assumed and identifiable intangible assets and liabilities such as amounts related to in-place at-market tenant leases, acquired above and below-market tenant and ground leases and tenant relationships. No significant value had been ascribed to the tenant relationships at the acquired properties in previous years by the Predecessor or by the Successor in 2010 (Note 4).

Investments in Unconsolidated Real Estate Affiliates

We account for investments in joint ventures where we own a non-controlling joint interest using the equity method. Under the equity method, the cost of our investment is adjusted for our share of the equity in earnings of such Unconsolidated Real Estate Affiliates from the date of acquisition and reduced by distributions received. Generally, the operating agreements with respect to our Unconsolidated Real Estate Affiliates provide that assets, liabilities and funding obligations are shared in accordance with our ownership percentages. Therefore, we generally also share in the profit and losses, cash flows and other matters relating to our Unconsolidated Real Estate Affiliates in accordance with our respective ownership percentages. Except for Retained Debt (as described in Note 6), differences between the carrying amount of our investment in the Unconsolidated Real Estate Affiliates and our share of the underlying equity of such Unconsolidated Real Estate Affiliates (for example, arising from the application of the acquisition method of accounting as described in Note 4) are amortized over lives ranging from five to 45 years. When cumulative distributions exceed our investment in the joint venture, the investment is reported as a liability in our consolidated financial statements. The liability is limited to our maximum potential obligation to fund contractual obligations, including recourse related to certain debt obligations.

Cash and Cash Equivalents

Highly-liquid investments with maturities at dates of purchase of three months or less are classified as cash equivalents.

Leases

We account for the majority of our leases as operating leases. Leases which transfer substantially all the risks and benefits of ownership to tenants are considered finance leases and the present values of the minimum lease

 

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payments and the estimated residual values of the leased properties, if any, are accounted for as receivables. Leases which transfer substantially all the risks and benefits of ownership to us are considered capital leases and the present values of the minimum lease payments are accounted for as assets and liabilities.

Deferred Expenses

Deferred expenses primarily consist of leasing commissions and related costs and are amortized using the straight-line method over the life of the leases. Deferred expenses also include financing fees we incurred in order to obtain long-term financing and are amortized as interest expense over the terms of the respective financing agreements using the straight-line method, which approximates the effective interest method. The acquisition method of accounting eliminated such balances of deferred financing fees and the Successor only has recorded amounts incurred subsequent to the Effective Date.

Revenue Recognition and Related Matters

Minimum rent revenues are recognized on a straight-line basis over the terms of the related operating leases. Minimum rent revenues also include amounts collected from tenants to allow the termination of their leases prior to their scheduled termination dates and accretion related to above and below-market tenant leases on properties that were fair valued at emergence and acquired properties. The following is a summary of amortization of straight-line rent, net amortization /accretion related to above and below-market tenant leases and termination income:

 

     Successor           Predecessor  
     Year Ended
December 31,
2011
    November 10,
2010 through
December 31,
2010
          January 1,
2010 through
November 9,
2010
     Year Ended
December 31,
2009
 

Amortization of straight-line rent

   $ 80,111      $ 2,804           $ 28,397       $ 25,249   

Net amortization/accretion of above and below-market tenant leases

     (107,714     (12,283          5,109         9,128   

Lease termination income

     16,535        2,227             18,434         20,952   

The following is a summary of straight-line rent receivables, which are included in Accounts and notes receivable, net in our Consolidated Balance Sheets and are reduced for allowances and amounts doubtful of collection:

 

     December 31, 2011      December 31, 2010  
     (In thousands)  

Straight-line rent receivables, net

   $ 97,565       $ 14,125   

We provide an allowance for doubtful accounts against the portion of accounts receivable, including straight-line rents, which is estimated to be uncollectible. Such allowances are reviewed periodically based upon our recovery experience. The following table summarizes the changes in allowance for doubtful accounts:

 

     Successor           Predecessor  
   2011     2010           2010     2009  
     (In thousands)  

Balance as of January 1, (November 9, 2010 for Successor)

   $ 40,746      $ 53,670           $ 69,235      $ 59,784   

Provisions for doubtful accounts

     5,621        50             13,294        22,901   

Provisions for doubtful accounts in discontinued operations

     683        430             2,576        7,430   

Write-offs

     (14,191     (13,404          (31,435     (20,880
  

 

 

   

 

 

        

 

 

   

 

 

 

Balance as of December 31, (November 9, 2010 for Predecessor)

   $ 32,859      $ 40,746           $ 53,670      $ 69,235   
  

 

 

   

 

 

        

 

 

   

 

 

 

 

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Overage rent is paid by a tenant when its sales exceed an agreed upon minimum amount, is recognized on an accrual basis once tenant sales exceed contractual tenant lease thresholds and is calculated by multiplying the sales in excess of the minimum amount by a percentage defined in the lease. Recoveries from tenants are established in the leases or computed based upon a formula related to real estate taxes, insurance and other property operating expenses and are generally recognized as revenues in the period the related costs are incurred.

In leasing tenant space, we may provide funding to the lessee through a tenant allowance. In accounting for a tenant allowance, we determine whether the allowance represents funding for the construction of leasehold improvements and evaluate the ownership, for accounting purposes, of such improvements. If we are considered the owner of the leasehold improvements for accounting purposes, we capitalize the amount of the tenant allowance and depreciate it over the shorter of the useful life of the leasehold improvements or the related lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event we are not considered the owner of the improvements for accounting purposes, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue on a straight-line basis.

Income Taxes (Note 8)

To avoid current entity level U.S. federal income taxes, we expect to distribute 100% of our capital gains and ordinary income to shareholders annually. If, with respect to any taxable year, we fail to maintain our qualification as a REIT, we would not be allowed to deduct distributions to shareholders in computing our taxable income and federal income tax. If any of our REIT subsidiaries fail to qualify as a REIT, such failure could result in our loss of REIT status. If we lose our REIT status, corporate level income tax, including any applicable alternative minimum tax, would apply to our taxable income at regular corporate rates. As a result, the amount available for distribution to holders of equity securities that would otherwise receive dividends would be reduced for the year or years involved, and we would no longer be required to make distributions. In addition, unless we were entitled to relief under the relevant statutory provisions, we would be disqualified from treatment as a REIT for four subsequent taxable years.

Deferred income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns and are recorded primarily by certain of our taxable REIT subsidiaries. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards. A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance that results from a change in circumstances, and which causes a change in our judgment about the realizability of the related deferred tax asset, is included in the current tax provision. The Successor experienced a change in control, as a result of the transactions undertaken to emerge from bankruptcy, pursuant to Section 382 of the Internal Revenue Code that could limit the benefit of deferred tax assets. In addition, we recognize and report interest and penalties, if necessary, related to uncertain tax positions within our provision for income tax expense.

 

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Transactions with Affiliates

Management fees and other corporate revenues primarily represent management and leasing fees, development fees, financing fees and fees for other ancillary services performed for the benefit of certain of the Unconsolidated Real Estate Affiliates and for properties owned by third parties up to the sale of our management services business in June 2010. The following are fees earned from the Unconsolidated Real Estate Affiliates and third party managed properties which are included in management fees and other corporate revenues on our Consolidated Statements of Operations and Comprehensive Income (Loss):

 

     Successor      Predecessor  
     Year Ended
December 31,
2011
     Period from
November 10,
2010 through
December 31,
2010
     Period from
January 1,
2010 through
November 9,
2010
     Year Ended
December 31,
2009
 
     (In thousands)  

Management fees from affiliates

   $ 60,752       $ 8,673       $ 51,257       $ 66,567   

In connection with the RPI Spin-Off (Note 19), we have entered into a Transition Services Agreement (“TSA”) with RPI. Per the terms of the TSA, we have agreed to provide certain leasing, asset management, legal and other services to RPI for established fees, which are not expected to be material.

Fair Value Measurements

The accounting principles for fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

 

   

Level 1 - defined as observable inputs such as quoted prices for identical assets or liabilities in active markets;

 

   

Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

 

   

Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table summarizes our assets and liabilities that are measured at fair value on a nonrecurring basis during the year ended December 31, 2011 and for the period January 1, 2010 through November 9, 2010. No assets or liabilities were measured at fair value during the period November 10, 2010 through December 31, 2010.

 

     Total Fair  Value
Measurement
     Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
     Significant Other
Observable  Inputs
(Level 2)
     Significant
Unobservable  Inputs
(Level 3)
 
     (In thousands)  

Year Ended December 31, 2011 (Successor)

           

Investments in real estate (1) 

   $ 46,478       $ -       $ -       $ 46,478   

For the Period January 1, 2010 through November 9, 2010 (Predecessor)

           

Investments in real estate (1) 

   $ 1,104,934       $ -       $ 141,579       $ 963,355   

Liabilities (2)

     15,794,687         -         -         15,794,687   

 

(1) Refer to Note 3 for more information regarding impairment.
(2) The fair value of debt relates to the properties that emerged from bankruptcy during the period January 1, 2010 through November 9, 2010.

 

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We estimated fair value relating to these impairment assessments based upon discounted cash flow and direct capitalization models that included all projected cash inflows and outflows over a specific holding period, or the negotiated sales price, if applicable. Such projected cash flows are comprised of unobservable inputs which include contractual rental revenues and forecasted rental revenues and expenses based upon market conditions and expectations for growth. Capitalization rates and discount rates utilized in these models were based upon observable rates that we believed to be within a reasonable range of current market rates for each property analyzed. Based upon these inputs, we determined that our valuations of properties using a discounted cash flow or a direct capitalization model were classified within Level 3 of the fair value hierarchy. For our properties for which the estimated fair value was based on estimated sales prices, we determined that our valuation was classified within Level 2 of the fair value hierarchy.

In addition, the fair value of liabilities related to debt on the properties that filed for bankruptcy and emerged during the period from April 9, 2009 through November 9, 2010 was $15.79 billion as of November 9, 2010 and were fair valued using Level 3 inputs. Fair value was determined based on the net present value of debt using current market rates.

The following table summarizes gains and losses recorded within earnings as a result of changes in fair value:

 

     Total Loss  
     Successor      Predecessor  
     Year Ended
December 31, 2011
    Period from
November 10, 2010
through

December 31, 2010
     Period from
January 1, 2010
through
November 9, 2010
    Year Ended
December 31, 2009
 
     (In thousands)  

Investments in real estate 1

   $ (68,382   $ -       $ (35,290   $ (1,031,810

Liabilities 2

     -        -         (200,921     (287,991

 

(1) Refer to Note 3 for more information regarding impairment.
(2) The fair value of liabilities relates to debt on the properties that filed for bankruptcy and emerged during the period from April 9, 2009 through November 9, 2010.

Prior to emergence, we elected the fair value option for debt related to certain properties that were held for sale. The unpaid debt balance, fair value estimates, fair value measurements, gain (in reorganization items) and interest expense as of November 9, 2010 and for the period from January 1, 2010 through November 9, 2010 and the year ended December 31, 2009, with respect to these properties are as follows:

 

    November 9, 2010                          
    Unpaid Debt
Balance of
Properties Held
for Sale
    Fair Value Estimate
of Properties Held
for Sale
    Significant
Unobservable
Inputs (Level 3)
    Total Gain Period
from January 1,
2010 through
November 9, 2010
    Total Gain for the
Year Ended
December 31, 2009
    Interest Expense
for the  Period from
January 1, 2010
through
November 9, 2010
    Interest Expense
for the  Year Ended
December 31, 2009
 
    (In thousands)  

Mortgages, notes and loans payable

  $ 644,277      $ 556,415      $ 556,415      $ 36,243      $ 54,224      $ 29,694      $ 36,737   

An entity may choose to de-elect the fair value option when a defined qualifying event occurs. As the emergence from bankruptcy and subsequent acquisition method accounting met the definition of a qualifying event to de-elect, the Successor chose as of November 9, 2010 to de-elect from the fair value option for all previously elected mortgages.

 

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Fair Value of Financial Instruments

The fair values of our financial instruments approximate their carrying amount in our consolidated financial statements except for debt. Management’s estimates of fair value are presented below for our debt as of December 31, 2011 and December 31, 2010.

 

     2011      2010  
     Carrying Amount      Estimated  Fair
Value
     Carrying Amount      Estimated  Fair
Value
 
     (In thousands)  

Fixed-rate debt

   $ 14,795,370       $ 14,978,908       $ 15,416,077       $ 15,217,325   

Variable-rate debt

     2,347,644         2,326,533         2,425,680         2,427,845   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 17,143,014       $ 17,305,441       $ 17,841,757       $ 17,645,170   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of our Junior Subordinated Notes approximates their carrying amount as of December 31, 2011 and December 31, 2010. We estimated the fair value of this debt based on recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, current London Interbank Offered Rate (“LIBOR”), U.S. treasury obligation interest rates and on the discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect our judgment as to what the approximate current lending rates for loans or groups of loans with similar maturities and credit quality would be if credit markets were operating efficiently and assume that the debt is outstanding through maturity. We have utilized market information as available or present value techniques to estimate the amounts required to be disclosed, or, in the case of the Successor, recorded due to the acquisition method of accounting (Note 4). Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist in specific loans, it is unlikely that the estimated fair value of any of such debt could be realized by immediate settlement of the obligation.

Foreign Currency Translation

The functional currencies for our international joint ventures are their local currencies. Assets and liabilities of these investments are translated at the rate of exchange in effect on the balance sheet date and operations are translated at the weighted average exchange rate for the period. Translation adjustments resulting from the translation of assets and liabilities are accumulated in stockholders’ equity as a component of accumulated other comprehensive income (loss). Translation of operations is reflected in equity in other comprehensive income.

Reorganization Items

Reorganization items are expense or income items that were incurred or realized by the Debtors as a result of the Chapter 11 Cases and are presented separately in the Consolidated Statements of Operations and Comprehensive Income (Loss) of the Predecessor. Reorganization items include legal fees, professional fees and similar types of expenses resulting from activities of the reorganization process, gains on liabilities subject to compromise directly related to the Chapter 11 Cases, and interest earned on cash accumulated by the Debtors as a result of the Chapter 11 Cases. We recognized a net expense on reorganization items of $356.9 million for the period January 1, 2010 through November 9, 2010 and a net credit of $76.9 million for the year ended December 31, 2009. These amounts exclude reorganization items that are currently included within discontinued operations. We did not recognize any reorganization items in 2011 or in the Successor period of 2010.

The terms of engagement and the timing of payment for professional services rendered during our Chapter 11 proceedings were subject to approval by the Bankruptcy Court. In addition, certain of these retained professionals had agreements that provided for success or completion fees that became payable upon the Effective Date. As of December 31, 2010 we accrued $7.1 million of success or completion fees in accounts payable and accrued expenses on the Consolidated Balance Sheet. All success fees were fully paid as of December 31, 2011.

 

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In addition, we adopted a key employee incentive program (the “KEIP”) which provided for payment to certain key employees upon successful emergence from bankruptcy. The amount payable under the KEIP was calculated based upon a formula related to the recovery to creditors and equity holders measured on the Effective Date and on February 7, 2011, 90 days after the Effective Date. Approximately $181.5 million was paid in two installments, November 12, 2010 and February 25, 2011, under the KEIP. Our liability under the Plan was recognized from the date the KEIP was approved by the Bankruptcy Court to the Effective Date. We accrued a liability for the KEIP in Accounts payable and accrued expenses on the Consolidated Balance Sheets of approximately $115.5 million and $27.5 million as of December 31, 2010 and 2009, respectively. The related expense was recognized in Reorganization items. All KEIP amounts were fully paid as of December 31, 2011.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. For example, estimates and assumptions have been made with respect to fair values of assets and liabilities for purposes of applying the acquisition method of accounting, the useful lives of assets, capitalization of development and leasing costs, provision for income taxes, recoverable amounts of receivables and deferred taxes, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to acquisitions, impairment of long-lived assets and goodwill, fair value of debt and cost ratios and completion percentages used for land sales (prior to the spin-off of HHC). Actual results could differ from these and other estimates.

NOTE 4 ACQUISITIONS, DISPOSITIONS AND INTANGIBLES

Acquisitions and Dispositions

During 2011, we acquired 11 anchor pads for approximately $78.7 million. In addition, we sold our interest in 14 consolidated properties for aggregate sales proceeds of $507.3 million, which resulted in a $114.8 million reduction in mortgage payable.

On November 10, 2011, GGP and Kimco Realty (“Kimco”) executed a joint venture partnership agreement whereby both companies would own 50% interest of Owings Mills Mall, LLC (“Owings Mills Joint Venture”), a property that was previously included in consolidated properties. As part of Owings Mills Joint Venture, GGP and Kimco will redevelop the one million square foot regional mall in Owings Mills, Maryland. Kimco purchased the 50% interest for $16.4 million which was paid directly to GGP and not contributed into the Owings Mills Joint Venture. GGP recognized a $2.1 million gain as a result of the partial sale. GGP will account for Owings Mills using the equity method of accounting as we share control over major decisions and Kimco has substantive participating rights.

On September 19, 2011, we contributed St. Louis Galleria, a wholly-owned regional mall located in St. Louis, Missouri, into a newly formed joint venture, GGP-CPP Venture, LP (“GGP-CPP”) which was formed with the Canada Pension Plan Investment Board (“CPP”). CPPIB contributed approximately $83 million of cash into GGP-CPP. GGP-CPP used the cash to purchase Plaza Frontenac, a regional mall located in Frontenac, Missouri, a suburb of St. Louis. In exchange for our contribution of St. Louis Galleria, we received a 55% economic interest in Plaza Frontenac and a 74% economic interest in St. Louis Galleria. GGP is the general partner in GGP-CPP; however, because we share control over major decisions with CPP and CPP has substantive participating rights, we will account for GGP-CPP under the equity method of accounting. No gain or loss was recorded upon the contribution of St. Louis Galleria to GGP-CPP as no cash was received in exchange for the contribution.

 

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In June 2011, we closed on a transaction with a third party in which we sold our ownership share of Superstition Springs Center and Arrowhead Towne Center, both located in Phoenix, Arizona for $120.0 million, which consisted of a sales price of $168.0 million less $48.0 million of debt assumed by the third party. In exchange we received six big-box anchor locations in Arizona, California, Illinois and Utah previously owned by the third party and $75.0 million in cash. The transaction was treated as a non-monetary exchange that resulted in a minimal gain.

In addition, we transferred eight consolidated properties to the lender in lieu of debt, which resulted in a $406.5 million reduction in mortgage notes payable.

Acquisition Method of Accounting Adjustments on the Effective Date

The structure of the Plan Sponsors’ investments triggered the acquisition method of accounting, as the Plan and consummation of the Investment Agreements and the Texas Teachers Investment Agreement constituted a business combination. New GGP, Inc. was the acquirer that obtained control as it obtained all of the common stock of the Predecessor (a business for purposes of applying the acquisition method of accounting) in exchange for issuing its stock to the Predecessor common stockholders on a one-for-one basis (excluding fractional shares). The acquisition method of accounting was applied at the Effective Date and, therefore, the Successor’s balance sheet as of December 31, 2010 and statements of operations, cash flows and equity for the period November 10, 2010 through December 31, 2010 reflects the revaluation of the Predecessor’s assets and liabilities to fair value as of the Effective Date. The acquisition method of accounting has been applied to the assets and liabilities of the Successor to reflect the acquisition of the Predecessor by the Successor as part of the Plan. The acquisition method of accounting adjustments recorded on the Effective Date reflect the allocation of the estimated purchase price as presented in the table below. Such adjustments reflect the amounts required to adjust the carrying values of our assets and liabilities, after giving effect to the transactions pursuant to the Plan and the distribution of HHC, to the fair values of such remaining assets and liabilities and redeemable noncontrolling interests, with the offset to common equity, as provided by the acquisition method of accounting. Accordingly, the accompanying financial statements have been prepared in conformity with ASC 852-10, Reorganizations, and ASC 805-10, Business Combinations, for the Successor as a new entity including assets, liabilities and a capital structure with carrying values not comparable with prior periods.

 

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Purchase Price Allocation

(in thousands)

 

                November 9, 2010    

Sources of funds

      $ 6,761,250   

Plus: Existing GGP common equity *

        4,446,691   

Plus: Assumed liabilities

     

Fair value of mortgages, notes and loans payable

        18,834,033   

Deferred tax liabilities

        39,113   

Accounts payable and accrued expenses:

     

Below-market tenant leases

     988,018      

HHC tax indemnity

     303,750      

Accounts payable to affiliates

     221,986      

Accrued payroll and bonus

     225,811      

Accounts payable

     304,794      

Real estate tax payable

     107,621      

Uncertain tax position liability

     20,247      

Above-market ground leases

     9,839      

Other accounts payable and accrued expenses

     478,293      
  

 

 

    

Total accounts payable and accrued expenses

        2,660,359   
     

 

 

 

Total assumed liabilities

        21,533,505   

Plus: Total redeemable noncontrolling interests

        220,842   

Plus: Noncontrolling interests in consolidated real estate affiliates

        102,171   
     

 

 

 

Total purchase price

      $ 33,064,459   
     

 

 

 

Land

      $ 4,858,396   

Buildings and equipment:

     

Buildings and equipment

     18,717,983      

In-place leases

     603,697      

Lease commissions and costs

     1,403,924      
  

 

 

    

Total buildings and equipment

        20,725,604   

Developments in progress

        137,055   

Investment in and loans to/from Unconsolidated Real Estate Affiliates

        3,184,739   

Cash and cash equivalents

        1,537,599   

Accounts and notes receivable, net

        129,439   

Deferred expenses:

     

Lease commissions

     154,550      

Capitalized legal/marketing costs

     26,757      
  

 

 

    

Total deferred expenses

        181,307   

Prepaid expenses and other assets:

     

Above-market tenant leases

     1,634,332      

Below-market ground leases

     259,356      

Security and escrow deposits

     153,294      

Prepaid expenses

     49,018      

Real estate tax stabilization agreement

     111,506      

Deferred tax assets

     10,576      

Other

     92,238      
  

 

 

    

Total prepaid expenses and other assets

        2,310,320   
     

 

 

 

Total fair value of assets

      $ 33,064,459   
     

 

 

 

 

* outstanding Old GGP common stock on the Effective Date at a value of $14 per share.

 

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The purchase price for purposes of the application of the acquisition method of accounting was calculated using the equity contributions of the Plan Sponsors, Blackstone and Texas Teachers and a $14.00 per share value of the common stock of New GGP, Inc. issued to the equity holders of the Predecessor plus the assumed liabilities of GGP, Inc. (at fair value). The $14.00 per share value of the common stock of GGP, Inc. reflects the “when issued” closing price of New GGP, Inc. common stock on the Effective Date. Such calculation yields a purchase price of approximately $33.1 billion. The aggregate fair value of the assets and liabilities of New GGP, Inc., after the distribution of HHC pursuant to the Plan, were computed using estimates of future cash flows and other valuation techniques, including estimated discount and capitalization rates, and such estimates and techniques were also used to allocate the purchase price of acquired property between land, buildings, equipment, tenant improvements and identifiable intangible assets and liabilities such as amounts related to in-place at-market tenant leases, acquired above and below-market tenant and ground leases. Elements of the Predecessor’s working capital have been reflected at current carrying amounts as such short-term items are assumed to be settled in cash within 12 months at such values.

The fair values of tangible assets are determined on an “if vacant” basis. The “if vacant” fair value is allocated to land, where applicable, buildings, equipment and tenant improvements based on comparable sales and other relevant information with respect to the property. Specifically, the “if vacant” value of the buildings and equipment was calculated using a cost approach utilizing published guidelines for current replacement cost or actual construction costs for similar, recently developed properties; and an income approach. Assumptions used in the income approach to the value of buildings include: capitalization and discount rates, lease-up time, market rents, make ready costs, land value, and site improvement value. We believe that the most influential assumption in the estimation of value based on the income approach is the assumed discount rate and an average one half of one percent change in the aggregate discount rates applied to our estimates of future cash flows would result in an approximate 3.5 percent change in the aggregate estimated value of our real estate investments. With respect to developments in progress, the fair value of such projects approximated the carrying value.

The estimated fair value of in-place tenant leases includes lease origination costs (the costs we would have incurred to lease the property to the current occupancy level of the property) and the lost revenues during the period necessary to lease-up from vacant to the current occupancy level. Such estimate includes the fair value of leasing commissions, legal costs and tenant coordination costs that would be incurred to lease the property to this occupancy level. Additionally, we evaluate the time period over which such occupancy level would be achieved and include an estimate of the net operating costs (primarily real estate taxes, insurance and utilities) incurred during the lease-up period, which generally ranges up to one year. The fair value of acquired in-place tenant leases is included in the balance of buildings and equipment and amortized over the remaining lease term for each tenant.

Intangible assets and liabilities were calculated for above-market and below-market tenant and ground leases where we are either the lessor or the lessee. Above-market and below-market tenant and ground lease values were valued (using an interest rate which reflects the risks associated with the leases acquired) based on the difference between the contractual amounts to be received or paid pursuant to the leases and our estimate of fair market lease rates for the corresponding leases, measured over a period equal to the remaining non-cancelable term of the leases, including below market renewal options. The variance between contract rent versus prevailing market rent is projected to expiration for each particular tenant and discounted back to the date of acquisition. Significant assumptions used in determining the fair value of leasehold assets and liabilities include: (1) the market rental rate, (2) market reimbursements, (3) the market rent growth rate and (4) discount rates. Above and below-market lease values are amortized over the remaining non-cancelable terms of the respective leases (approximately five years for tenant leases and approximately 50 years for ground leases). The remaining term of leases with lease renewal options with terms significantly below (25% or more discount to the assumed market rate of the tenant’s space at the time the renewal option is to apply) market reflect the assumed exercise of such renewal options and assume the amortization period would coincide with the extended lease term. Due to existing contacts and relationships with tenants at our currently owned properties and that there was no significant perceived difference in the renewal probability of a tenant based on such relationship, no significant value has been ascribed to the tenant relationships at the properties.

 

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Less than 1% of our leases contain renewal options exercisable by our tenants. In estimating the fair value of the related below market lease liability, we assumed that tenants with renewal options would exercise this option if the renewal rate was at least 25% below the estimated market rate at the time of renewal. We have utilized this assumption, which we believe to be reasonable, because we believe that such a discount would be compelling and that tenants would elect to renew their leases under such favorable terms. We believe that at a discount of less than 25%, the tenant also considers qualitative factors in deciding whether to renew a below-market lease and, accordingly, renewal can not be assumed. In cases where we have assumed renewal of the below-market lease, we have used the terms of the leases, as renewed, including any below market renewal options, to amortize the calculated below-market lease intangible. If we had used a discount to estimated market rates of 10% rather than 25%, there would not have been a material change in the below-market lease intangible or the amortization of such intangible.

With respect to our investments in the Unconsolidated Real Estate Affiliates, our fair value reflects the fair value of the property held by such affiliate, as computed in a similar fashion to our majority owned properties. Such fair values have been adjusted for the consideration of our ownership and distribution preferences and limitations and rights to sell and repurchase our ownership interests. We estimated the fair value of debt based on quoted market prices for publicly-traded debt, recent financing transactions (which may not be comparable), estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, the current LIBOR and U.S. treasury obligation interest rates, and on the discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect our judgment as to what the approximate current lending rates for loans or groups of loans with similar maturities and credit quality would be if credit markets were operating efficiently and assume that the debt is outstanding through maturity. We have utilized market information as available or present value techniques to estimate such amounts. Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist in specific loans, it is unlikely that the estimated fair value of any of such debt could be realized by immediate settlement of the obligation.

Intangible Assets and Liabilities

The following table summarizes our intangible assets and liabilities:

 

     Gross Asset
(Liability)
    Accumulated
(Amortization)/
Accretion
    Net Carrying
Amount
 
           (In thousands)        

As of December 31, 2011

      

Tenant leases:

      

In-place value

   $     1,252,484      $ (391,605   $ 860,879   

Above-market

     1,478,798        (315,044     1,163,754   

Below-market

     (819,056     184,254        (634,802

Ground leases:

      

Above-market

     (9,839     439        (9,400

Below-market

     204,432        (6,202     198,230   

Real estate tax stabilization agreement

     111,506        (7,211     104,295   

As of December 31, 2010

      

Tenant leases:

      

In-place value

   $ 1,342,036      $ (56,568   $     1,285,468   

Above-market

     1,561,925        (43,032     1,518,893   

Below-market

     (959,115     26,804        (932,311

Building leases:

      

Below-market

     15,268        (242     15,026   

Ground leases:

      

Above-market

     (9,839     55        (9,784

Below-market

     256,758        (904     255,854   

Real estate tax stabilization agreement

     111,506        (899     110,607   

 

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The gross asset balances of the in-place value of tenant leases are included in buildings and equipment in our Consolidated Balance Sheets. The above-market tenant leases and below-market ground leases are included in prepaid expenses and other assets; the below-market tenant leases and above-market ground leases are included in accounts payable and accrued expenses (Note 15) in our Consolidated Balance Sheets.

Amortization/accretion of these intangibles had the following effects on our loss from continuing operations:

 

     Successor           Predecessor  
     Year Ended
December 31, 2011
    Period from
November 10, 2010
through
December 31, 2010
          Period from
January 1, 2010
through
November 9, 2010
    Year Ended
December 31,  2009
 
           (In thousands)        

Amortization/accretion effect on continuing operations

   $ (489,873   $ (65,579        $ (34,678   $ (43,525

Future amortization is estimated to decrease net income by approximately $420.6 million in 2012, $336.8 million in 2013, $285.7 million in 2014, $243.2 million in 2015 and $202.6 million in 2016.

NOTE 5 Discontinued Operations AND GAINS (LOSSES) ON DISPOSITIONS OF INTERESTS IN OPERATING PROPERTIES

On March 2, 2012, we sold our interest in Village of Cross Keys for $25.0 million. We received $8.0 million in cash and entered into a secured note receivable with the buyer for $17.0 million.

On February 21, 2012, we sold Grand Traverse Mall to RPI. Prior to the sale, the lender forgave $18.9 million of the secured indebtedness. This amount is recorded as a gain on extinguishment of debt and included in discontinued operations in our Consolidated Statements of Operations and Comprehensive income (Loss). RPI assumed the remaining $62.0 million of debt on the property as consideration for the sale.

On January 12, 2012, we completed the spin-off of RPI, a 30-mall portfolio totaling approximately 21 million square feet. The RPI Spin-off was accomplished through a special dividend of the common stock of RPI to holders of GGP common stock as of December 30, 2011. Subsequent to the spin-off, we retained a 1% interest in RPI.

All of our 2011, 2010 and 2009 dispositions are included in discontinued operations in our Consolidated Statements of Operations and Comprehensive Income (Loss) and are summarized in the table below. We have one property classified as held for disposition as of December 31, 2011. This property has been approved for sale and is expected to be sold or disposed of within 12 months.

As noted above, during the three months ended March 31, 2012, we sold two operating properties and completed the spin-off of RPI. The operating results of these properties, each of which qualifies for discontinued operations, has been reclassified and reported as discontinued operations in the Consolidated Statements of Operations and Comprehensive Income (Loss) for all periods presented.

In the first quarter of 2012, we revised our intent with respect to four properties previously classified as held for sale. As we no longer met the criteria for held for sale treatment, we reclassified these four properties as held for use in our Consolidated Balance Sheet and as continuing operations in our Consolidated Statements of Operations and Comprehensive Income (Loss) for all periods presented. These properties have been measured at the lower of the carrying amount before the asset was classified as held for sale, adjusted for any depreciation and amortization expense that would have been recognized had the asset been continuously classified as held and used, and fair value at the date of decision not to sell.

 

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In March 2011, we revised our intent with respect to two properties previously classified as held for sale (Mall St. Vincent and Southland Center). As we no longer met the criteria for held for sale treatment, we reclassified these two properties as held for use in our Consolidated Balance Sheet as of March 31, 2011 and as continuing operations in our Consolidated Statements of Operations and Comprehensive Income (Loss) for all periods presented.

 

     Discontinued Operations                    
     Successor     Successor           Predecessor     Predecessor  
     Year Ended
December 31, 2011
    Period from
November 10, 2010
through
December 31, 2010
          Period from
January 1, 2010
through
November 9, 2010
    Year Ended
December 31, 2009
 
           (In thousands)        

Retail and other revenue

   $ 304,225      $ 56,263           $ 441,101      $ 540,129   

Land and condominium sales

     -        -             96,976        45,997   
  

 

 

   

 

 

        

 

 

   

 

 

 

Total revenues

     304,225        56,263             538,077        586,126   
  

 

 

   

 

 

        

 

 

   

 

 

 

Retail and other operating expenses

     248,614        41,862             275,093        391,916   

Land and condominium sales operations

     -        -             99,449        50,770   

Impairment loss

     4,096        -             30,784        906,883   
  

 

 

   

 

 

        

 

 

   

 

 

 

Total expenses

     252,710        41,862             405,326        1,349,569   
  

 

 

   

 

 

        

 

 

   

 

 

 

Operating income (loss)

     51,515        14,401             132,751        (763,443

Interest expense, net

     (82,222     (16,322          (97,286     (106,881

Other expenses

     -        (8          26,639        69,259   
  

 

 

   

 

 

        

 

 

   

 

 

 

Net (loss) income from operations

     (30,707     (1,929          62,104        (801,065

(Provision for) benefit from income taxes

     (632     (100          472,170        20,303   

Noncontrolling interest

     (86     -             (64     453   

Gains (losses) on disposition of properties

     4,332        (4,976          (1,111,277     (966
  

 

 

   

 

 

        

 

 

   

 

 

 

Net loss from discontinued operations

   $ (27,093   $ (7,005        $ (577,067   $ (781,275
  

 

 

   

 

 

        

 

 

   

 

 

 

Distribution of HHC

As described in Note 2, certain net assets of the Predecessor were distributed to its stockholders to form HHC, a newly formed publicly held real estate company. The Predecessor recorded a loss on distribution for the difference between the carrying amount and the fair value of the disposal group when the spin-off transaction was consummated. This loss on distribution of approximately $1.11 billion was recorded by the Predecessor as discontinued operations on the Effective Date based on the fair value of the disposal group calculated based on the difference between the Predecessor’s carrying value of the carve-out group of net assets distributed to HHC and the fair value based on $36.50 per share (the NYSE closing price of HHC common stock which was traded on a “when issued” basis on the Effective Date).

NOTE 6 UNCONSOLIDATED REAL ESTATE AFFILIATES

The Unconsolidated Real Estate Affiliates represents our investments in real estate joint ventures. Generally, we share in the profits and losses, cash flows and other matters relating to our investments in Unconsolidated Real Estate Affiliates in accordance with our respective ownership percentages. We manage most of the properties owned by these joint ventures. As we have joint control of these ventures with our venture partners, we account for these joint ventures under the equity method.

 

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In certain circumstances, we have debt obligations in excess of our pro rata share of the debt of our Unconsolidated Real Estate Affiliates (“Retained Debt”). This Retained Debt represents distributed debt proceeds of the Unconsolidated Real Estate Affiliates in excess of our pro rata share of the non-recourse mortgage indebtedness of such Unconsolidated Real Estate Affiliates. The proceeds of the Retained Debt which are distributed to us are included as a reduction in our investment in Unconsolidated Real Estate Affiliates. Such Retained Debt totaled $130.6 million as of December 31, 2011 and $155.6 million as of December 31, 2010, and has been reflected as a reduction in our investment in Unconsolidated Real Estate Affiliates. We are obligated to contribute funds to our Unconsolidated Real Estate Affiliates in amounts sufficient to pay debt service on such Retained Debt. If we do not contribute such funds, our distributions from such Unconsolidated Real Estate Affiliates, or our interest in, could be reduced to the extent of such deficiencies. As of December 31, 2011, we do not anticipate an inability to perform on our obligations with respect to such Retained Debt.

Indebtedness secured by our Unconsolidated Properties was $5.80 billion as of December 31, 2011 and $6.02 billion as of December 31, 2010. Our proportionate share of such debt was $2.78 billion as of December 31, 2011 and $2.67 billion as of December 31, 2010, including Retained Debt. There can be no assurance that the Unconsolidated Properties will be able to refinance or restructure such debt on acceptable terms or otherwise, or that joint venture operations or contributions by us and/or our partners will be sufficient to repay such loans.

On January 29, 2010, our Brazilian joint venture, Aliansce Shopping Centers S.A. (“Aliansce”), commenced trading on the Brazilian Stock Exchange, or BM&FBovespa, as a result of an initial public offering of Aliansce’s common shares in Brazil (the “Aliansce IPO”). Although we did not sell any of our Aliansce shares in the Aliansce IPO, our ownership interest in Aliansce was diluted from 49% to approximately 31% as a result of the stock sold in the Aliansce IPO. We continue to apply the equity method of accounting to our ownership interest in Aliansce. As an equity method investor, we accounted for the shares issued by Aliansce as if we had sold a proportionate share of our investment at the issuance price per share of the Aliansce IPO. Accordingly, the Predecessor recognized a gain of $9.7 million for the period from January 1, 2010 through November 9, 2010, which is reflected in equity in income (loss) of Unconsolidated Real Estate Affiliates.

 

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Condensed Combined Financial Information of Unconsolidated Real Estate Affiliates

Following is summarized financial information for our Unconsolidated Real Estate Affiliates. Certain 2010 and 2009 amounts have been reclassified to conform to the 2011 presentation as a result of discontinued operations.

 

     December 31,
2011
    December 31,
2010
 
     (In thousands)  

Condensed Combined Balance Sheets - Unconsolidated Real Estate Affiliates

    

Assets:

    

Land

   $ 953,603      $ 893,769   

Buildings and equipment

     7,906,346        7,810,685   

Less accumulated depreciation

     (1,950,860     (1,808,819

Developments in progress

     99,352        56,714   
  

 

 

   

 

 

 

Net property and equipment

     7,008,441        6,952,349   

Investment in unconsolidated joint ventures

     758,372        630,212   
  

 

 

   

 

 

 

Net investment in real estate

     7,766,813        7,582,561   

Cash and cash equivalents

     387,549        421,206   

Accounts and notes receivable, net

     162,822        148,059   

Deferred expenses, net

     250,865        196,809   

Prepaid expenses and other assets

     143,021        116,926   

Assets held for disposition

     -        94,336   
  

 

 

   

 

 

 

Total assets

   $ 8,711,070      $ 8,559,897   
  

 

 

   

 

 

 

Liabilities and Owners’ Equity:

    

Mortgages, notes and loans payable

   $ 5,790,509      $ 5,891,224   

Accounts payable, accrued expenses and other liabilities

     446,462        361,721   

Liabilities on assets held for disposition

     -        143,517   

Owners’ equity

     2,474,099        2,163,435   
  

 

 

   

 

 

 

Total liabilities and owners’ equity

   $ 8,711,070      $ 8,559,897   
  

 

 

   

 

 

 

Investment In and Loans To/From Unconsolidated Real Estate Affiliates, Net:

    

Owners’ equity

   $ 2,474,099      $ 2,163,435   

Less joint venture partners’ equity

     (1,417,682     (2,006,460

Capital or basis differences and loans

     1,996,556        2,996,723   
  

 

 

   

 

 

 

Investment in and loans to/from

    

Unconsolidated Real Estate Affiliates, net

   $ 3,052,973      $ 3,153,698   
  

 

 

   

 

 

 

 

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    Successor          Predecessor  
    Year ended
December 31, 2011
    Period from
November 10, 2010
through

December 31, 2010
         Period from
January 1,  2010
through
November 9, 2010
    Year ended
December 31, 2009
 
          (In thousands)        

Condensed Combined Statements of Income - Unconsolidated Real Estate Affiliates

           

Revenues:

           

Minimum rents

  $ 723,121      $ 101,266          $ 585,791        666,577   

Tenant recoveries

    297,530        41,610            245,102        300,844   

Overage rents

    26,736        6,502            9,103        13,172   

Management and other fees

    16,346        1,217            15,592        9,802   

Other

    52,721        8,491            21,414        28,631   
 

 

 

   

 

 

       

 

 

   

 

 

 

Total revenues

    1,116,454        159,086            877,002        1,019,026   
 

 

 

   

 

 

       

 

 

   

 

 

 

Expenses:

           

Real estate taxes

    98,738        11,971            73,830        91,537   

Property maintenance costs

    40,293        7,309            31,882        36,364   

Marketing

    17,791        5,215            10,894        14,543   

Other property operating costs

    162,572        23,052            130,621        160,777   

Provision for doubtful accounts

    6,826        (471         5,287        10,781   

Property management and other costs

    46,935        7,576            40,409        51,369   

General and administrative

    29,062        2,491            36,034        11,637   

Provisions for impairment

    -        -            881        18,046   

Depreciation and amortization

    267,369        36,225            211,725        240,044   
 

 

 

   

 

 

       

 

 

   

 

 

 

Total expenses

    669,586        93,368            541,563        635,098   
 

 

 

   

 

 

       

 

 

   

 

 

 

Operating income

    446,868        65,718            335,439        383,928   

Interest income

    18,355        2,309            17,932        5,488   

Interest expense

    (350,716     (47,725         (271,476     (293,852

(Provision for) benefit from for income taxes

    (794     (179         66        (1,673

Equity in income of unconsolidated joint ventures

    54,207        9,526            43,479        61,730   
 

 

 

   

 

 

       

 

 

   

 

 

 

Income from continuing operations

    167,920        29,649            125,440        155,621   

Discontinued operations

    165,323        219            50,757        (61,503

Allocation to noncontrolling interests

    (3,741     111            964        (3,453
 

 

 

   

 

 

       

 

 

   

 

 

 

Net income attributable to joint venture partners

  $ 329,502      $ 29,979          $ 177,161      $ 90,665   
 

 

 

   

 

 

       

 

 

   

 

 

 

Equity In (Loss) Income of Unconsolidated Real Estate Affiliates:

           

Net income attributable to joint venture partners

  $ 329,502      $ 29,979          $ 177,161      $ 90,665   

Joint venture partners’ share of income

    (181,213     (17,878         (67,845     (26,320

Amortization of capital or basis differences

    (145,391     (12,605         (61,302     (59,710

Gain on Aliansce IPO

    -        -            9,718        -   

Loss on Highland Mall conveyance

    -        -            (29,668     -   

Discontinued operations

    -        -            (6,207     28,208   
 

 

 

   

 

 

       

 

 

   

 

 

 

Equity in income (loss) of Unconsolidated Real Estate Affiliates

  $ 2,898      $ (504       $ 21,857      $ 32,843   
 

 

 

   

 

 

       

 

 

   

 

 

 

 

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NOTE 7 MORTGAGES, NOTES AND LOANS PAYABLE

Mortgages, notes and loans payable are summarized as follows (see Note 18 for the maturities of our long term commitments, and note that the table below includes mortgage debt related to properties that were part of the RPI spin-off as such mortgage debt is included in our Consolidated Financial Statements):

 

     December 31,
2011
     December 31,
2010
 
     (In thousands)  

Fixed-rate debt:

  

Collateralized mortgages, notes and loans payable

   $ 13,091,080       $ 13,687,452   

Corporate and other unsecured term loans

     1,704,290         1,728,625   
  

 

 

    

 

 

 

Total fixed-rate debt

     14,795,370         15,416,077   
  

 

 

    

 

 

 

Variable-rate debt:

     

Collateralized mortgages, notes and loans payable

     2,347,644         2,425,680   
  

 

 

    

 

 

 

Total Mortgages, notes and loans payable

   $ 17,143,014       $ 17,841,757   
  

 

 

    

 

 

 

Variable-rate debt:

     

Junior Subordinated Notes

   $ 206,200       $ 206,200   
  

 

 

    

 

 

 

The weighted-average interest rate excluding the effects of deferred finance costs, on our collateralized mortgages, notes and loans payable was 5.13% at December 31, 2011 and 5.24% at December 31, 2010. The weighted average interest rate, on the remaining corporate unsecured fixed and variable rate debt and the revolving credit facility was 6.18% at December 31, 2011.

We are not aware of any instance of non-compliance with our financial covenants related to our mortgages, notes and loans payable as of December 31, 2011.

During the year ended December 31, 2011, we or our Unconsolidated Real Estate Affiliates refinanced the mortgage notes on 20 Consolidated and Unconsolidated regional malls representing $3.24 billion of new mortgage notes at our proportionate share. These 20 new fixed-rate mortgage notes have a weighted average term of 10.16 years and generated cash proceeds in excess of in-place financing of approximately $619 million to GGP. We have also been able to lower the weighted average interest rate of these 20 mortgage notes from 5.83% to 5.06%, while lengthening the term by approximately seven years over the remaining term previously in place.

Collateralized Mortgages, Notes and Loans Payable

As of December 31, 2011, $22.67 billion of land, buildings and equipment and developments in progress (before accumulated depreciation) have been pledged as collateral for our mortgages, notes and loans payable. Certain of these secured loans, representing $2.92 billion of debt, are cross-collateralized with other properties. Although a majority of the $15.44 billion of fixed and variable rate collateralized mortgages, notes and loans payable are non-recourse, $2.49 billion of such mortgages, notes and loans payable are recourse due to guarantees or other security provisions for the benefit of the note holder. In addition, certain mortgage loans contain other credit enhancement provisions (primarily master leases for all or a portion of the property) which have been provided by GGP. Certain mortgages, notes and loans payable may be prepaid but are generally subject to a prepayment penalty equal to a yield-maintenance premium, defeasance or a percentage of the loan balance.

Corporate and Other Unsecured Loans

We have certain unsecured debt obligations, the terms of which are described below. As the result of a consensual agreement reached in the third quarter of 2010 with lenders of certain of our corporate debt, we recognized $83.7 million of additional interest expense for the period January1, 2010 through November 9, 2010. The results of the Plan treatment for each of these obligations is also described below.

 

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GGP Capital Trust I, a Delaware statutory trust (the “Trust”) and a wholly-owned subsidiary of GGPLP, completed a private placement of $200.0 million of trust preferred securities (“TRUPS”) in 2006. The Trust also issued $6.2 million of Common Securities to GGPLP. The Trust used the proceeds from the sale of the TRUPS and Common Securities to purchase $206.2 million of floating rate Junior Subordinated Notes of GGPLP due 2041. Distributions on the TRUPS are equal to LIBOR plus 1.45%. Distributions are cumulative and accrue from the date of original issuance. The TRUPS mature on April 30, 2041, but may be redeemed beginning on April 30, 2011 if the Trust exercises its right to redeem a like amount of the Junior Subordinated Notes. The Junior Subordinated Notes bear interest at LIBOR plus 1.45%. Though the Trust is a wholly-owned subsidiary of GGPLP, we are not the primary beneficiary of the Trust and, accordingly, it is not consolidated for accounting purposes. As a result, we have recorded the Junior Subordinated Notes as Mortgages, Notes and Loans Payable and our common equity interest in the Trust as Prepaid Expenses and Other Assets in our Consolidated Balance Sheets at December 31, 2011 and 2010. The Plan provided for reinstatement of the TRUPS.

We have publicly-traded unsecured bonds of $1.65 billion outstanding as of December 31, 2011 and December 31, 2010. Such bonds have maturity dates from September 2012 through November 2015 and interest rates ranging from 5.38% to 7.20%. The bonds have covenants, including ratios of secured debt to gross assets and total debt to total gross assets. We expect to repay the $349.5 million of bonds that are due in September 2012.

In connection with the consummation of the Plan, we entered into a revolving credit facility (the “Facility”) providing for revolving loans of up to $300 million, none of which was used to consummate the Plan. On February 25, 2011, we amended the Facility to provide for loans up to approximately $720 million and, under certain circumstances, up to $1 billion. On April 11, 2011, we further amended the Facility to provide for loans up to $750 million retaining the right, in certain circumstances, to borrow up to $1 billion. The Facility is scheduled to mature three years from the Effective Date and the Facility is guaranteed by certain of our subsidiaries and secured by (i) first lien mortgages on certain properties, (ii) first-lien pledges of equity interests in certain of our subsidiaries and (iii) various additional collateral.

No amounts have been drawn on the Facility. Borrowings under the Facility bear interest at a rate equal to LIBOR plus 4.5%. The Facility contains certain restrictive covenants which limit material changes in the nature of our business conducted, including but not limited to, mergers, dissolutions or liquidations, dispositions of assets, liens, incurrence of additional indebtedness, dividends, transactions with affiliates, prepayment of subordinated debt, negative pledges and changes in fiscal periods. In addition, we are required to maintain a maximum net debt to value ratio, a maximum leverage ratio and a minimum net cash interest coverage ratio and we are not aware of any non-compliance with such covenants as of December 31, 2011.

Letters of Credit and Surety Bonds

We had outstanding letters of credit and surety bonds of $19.1 million as of December 31, 2011 and $41.8 million as of December 31, 2010. These letters of credit and bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.

NOTE 8 INCOME TAXES

We have elected to be taxed as a REIT under sections 856-860 of the Internal Revenue Code. We intend to maintain REIT status. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including requirements to distribute at least 90% of our ordinary taxable income and to either distribute 100% of capital gains to stockholders, or pay corporate income tax on the undistributed capital gains. In addition, the Company is required to meet certain asset and income tests.

As a REIT, we will generally not be subject to corporate level Federal income tax on taxable income we distribute currently to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to

 

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Federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income or property, and to Federal income and excise taxes on our undistributed taxable income. Generally, we are currently open to audit by the Internal Revenue Service for the years ending December 31, 2007 through 2011 and are open to audit by state taxing authorities for years ending December 31, 2006 through 2011. Two of the Predecessor’s taxable REIT subsidiaries distributed as part of HHC were subject to IRS audit for the years ended December 31, 2007 and 2008. On February 9, 2011, the two taxable REIT subsidiaries received statutory notices of deficiency (“90-day letters”) seeking $144.1 million in additional tax. The two taxable REIT subsidiaries filed petitions in the U.S. Tax Court on May 6, 2011 and the government filed answers on July 6, 2011. It is the Predecessor’s position that the tax law in question has been properly applied and reflected in the 2007 and 2008 returns for these two taxable REIT subsidiaries. However, as the result of the IRS’ position, the Predecessor previously provided appropriate levels for the additional taxes sought by the IRS, through its uncertain tax position liability or deferred tax liabilities. Although the Predecessor believes the tax returns are correct, the final determination of tax examinations and any related litigation could be different than what was reported on the returns.

In the opinion of management, the Predecessor has made adequate tax provisions for the years subject to examination.

Based on our assessment of the expected outcome of examinations that are in process or may commence, or as a result of the expiration of the statute of limitations for specific jurisdictions, we do not expect that the related unrecognized tax benefits, excluding accrued interest, for tax positions taken regarding previously filed tax returns will materially change from those recorded at December 31, 2011 during the next twelve months.

As a result of the emergence transactions, the Predecessor and its subsidiaries did experience an ownership change as defined under section 382 of the Internal Revenue Code which will limit its use of certain tax attributes. As such, there are valuation allowances placed on deferred tax assets where appropriate. Most of the attributes of the Predecessor were either used in effecting the reorganization or transferred to HHC. Remaining attributes subject to limitation under Section 382 are not material.

The provision for (benefit from) income taxes for the year ended December 31, 2011, the period from November 10 through December 31, 2010, the period from January 1, 2010 through November 9, 2010 and the year ended December 31, 2009 were as follows:

 

     Successor          Predecessor  
     Year Ended
December 31, 2011
    Period from
November  10

through
December 31, 2010
         Period from
January 1, 2010
through

November 9, 2010
    Year Ended
December 31, 2009
 
           (In thousands)        

Current

   $ 11,548      $ 141          $ (6,449   $ (7,108

Deferred

     (2,825     (9,133         (54,513     12,801   
  

 

 

   

 

 

       

 

 

   

 

 

 

Total from Continuing Operations

     8,723        (8,992         (60,962     5,693   

Current

     634        (2,676         (28,791     (8,335

Deferred

     -        2,777            (443,379     (11,968
  

 

 

   

 

 

       

 

 

   

 

 

 

Total from Discontinued Operations

     634        101            (472,170     (20,303
  

 

 

   

 

 

       

 

 

   

 

 

 

Total

   $ 9,357      $ (8,891       $ (533,132   $ (14,610
  

 

 

   

 

 

       

 

 

   

 

 

 

The distribution of assets from the Predecessor in the formation of HHC significantly changed the Successor’s exposure to income taxes. The majority of taxable activities within the Predecessor were distributed in the formation of HHC with relatively insignificant taxable activities remaining with the Successor. The vast majority

 

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of the Successor’s activities are conducted within the REIT structure. REIT earnings are generally not subject to federal income taxes. As such, the Successor’s provision for (benefit from) income taxes is not a material item in its financial statements.

Total provision for (benefit from) income taxes computed for continuing and discontinued operations by applying the Federal corporate tax rate for the year ended December 31, 2011, the period from November 10 through December 31, 2010, the period from January 1, 2010 through November 9, 2010 and the year ended December 31, 2009 were as follows:

 

    Successor          Predecessor  
    Year Ended
December 31, 2011
    Period from
November  10

through
December 31, 2010
         Period from
January 1, 2010
through

November 9, 2010
    Year Ended
December 31, 2009
 
          (In thousands)        

Tax at statutory rate on earnings from continuing operations before income taxes

  $ (109,050   $ (90,011       $ (225,959   $ (175,138

Increase (decrease) in valuation allowances, net

    (497     1,491            (24,608     22,479   

State income taxes, net of Federal income tax benefit

    5,488        576            2,956        3,045   

Tax at statutory rate on REIT earnings not subject to Federal income taxes

    111,748        90,832            228,399        155,450   

Tax expense (benefit) from change in tax rates, prior period adjustments and other permanent differences

    3,076        95            1,792        954   

Tax expense (benefit) from discontinued operations

    101        18            (472,676     (21,180

Uncertain tax position expense, excluding interest

    (1,185     (8,856         (34,560     866   

Uncertain tax position interest, net of federal income tax benefit and other

    (324     (3,036         (8,476     (1,086
 

 

 

   

 

 

       

 

 

   

 

 

 

Provision for (benefit from) income taxes

  $ 9,357        (8,891         (533,132     (14,610
 

 

 

   

 

 

       

 

 

   

 

 

 

Realization of a deferred tax benefit is dependent upon generating sufficient taxable income in future periods. Our TRS net operating loss carryforwards are currently scheduled to expire in subsequent years through 2031. All of the REIT net operating loss carryforward amounts are subject to annual limitations under Section 382 of the Code, although it is not expected that there will be a significant impact as they are expected to be utilized against pre-tax income.

The amounts and expiration dates of operating loss and tax credit carryforwards for tax purposes for our TRS’s are as follows:

 

     Amount      Expiration Dates  
     (In thousands)  

Net operating loss carryforwards - State

   $ 25,944         2012-2031   

Capital loss carryforwards

     6,638         2015   

 

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Each TRS and certain REIT entities subject to state income taxes is a tax paying component for purposes of classifying deferred tax assets and liabilities. As of December 31, 2011, we had gross deferred tax assets totaling $21.6 million, of which a valuation allowance of $17.0 million has been established against certain deferred tax assets, and gross deferred tax liabilities of $29.2 million. Net deferred tax assets (liabilities) are summarized as follows:

 

     2011     2010  
     (In thousands)  

Total deferred tax assets

   $ 21,574      $ 27,998   

Valuation allowance

     (16,996     (17,493
  

 

 

   

 

 

 

Net deferred tax assets

     4,578        10,505   

Total deferred tax liabilities

     (29,220     (36,463
  

 

 

   

 

 

 

Net deferred tax liabilities

   $ (24,642   $ (25,958
  

 

 

   

 

 

 

Due to the uncertainty of the realization of certain tax carryforwards, we have established valuation allowances on those deferred tax assets that we do not reasonably expect to realize. Deferred tax assets that we believe have only a remote possibility of realization have not been recorded.

The tax effects of temporary differences and carryforwards included in the net deferred tax liabilities as of December 31, 2011 and December 31, 2010 are summarized as follows:

 

     2011     2010  
     (In thousands)  

Operating loss and tax credit carryforwards

   $ 5,489      $ 16,074   

REIT deferred state tax liability

     -        (9,653

Other TRS Property, primarily differences in basis of assets and liabilities

     (13,135     (14,886

Valuation allowance

     (16,996     (17,493
  

 

 

   

 

 

 

Net deferred tax liabilities

   $ (24,642   $ (25,958
  

 

 

   

 

 

 

We had unrecognized tax benefits recorded pursuant to uncertain tax positions of $6.1 million as of December 31, 2011, excluding interest, all of which would impact our effective tax rate. Accrued interest related to these unrecognized tax benefits amounted to $0.7 million as of December 31, 2011. The Successor had unrecognized tax benefits recorded pursuant to uncertain tax positions of $7.2 million as of December 31, 2010, excluding interest, all of which would impact our effective tax rate. Accrued interest related to these unrecognized tax benefits amounted to $1.1 million as of December 31, 2010.

 

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During the period ended November 9, 2010 and the year ended December 31, 2009 the Predecessor recognized previously unrecognized tax benefits, excluding accrued interest, of $72.9 million and $(6.2) million, respectively. The recognition of the previously unrecognized tax benefits resulted in the reduction of interest expense accrued related to these amounts.

 

      Successor          Predecessor  
     Year Ended
December  31,

2011
    Period from
November  10
through
December 31,
2010
         Period from
January 1, 2010
through
November 9,
2010
    Year Ended
December 31,
2009
 
     (In thousands)  

Unrecognized tax benefits, opening balance

   $ 7,235      $ 16,090          $ 103,975      $ 112,915   

Gross increases - tax positions in prior period

     -        -            3,671        41   

Gross increases - tax positions in current period

     1,907        -            69,216        6,969   

Gross decreases - tax positions in prior period

     -        -            -        (15,950

Lapse of statute of limitations

     (944     (8,855         (35,117     -   

Gross decreases - other (1)

     (2,145     -            (125,291     -   

Gross decreases - tax positions in current period

     -        -            (364     -   
  

 

 

   

 

 

       

 

 

   

 

 

 

Unrecognized tax benefits, ending balance

   $ 6,053      $ 7,235          $ 16,090      $ 103,975   
  

 

 

   

 

 

       

 

 

   

 

 

 

 

(1) An uncertain tax position related to the difference between the income tax method of accounting that was used and the financial statement method of accounting for prior sales of land related to the Predecessor’s Master Planned Communities business.

Based on the Successor’s assessment of the expected outcome of existing examinations or examinations that may commence, or as a result of the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the related unrecognized tax benefits, excluding accrued interest, for tax positions taken regarding previously filed tax returns will change from those recorded at December 31, 2011, although such change would not be material to the 2012 financial statements.

Earnings and profits, which determine the taxability of dividends to stockholders, differ from net income reported for financial reporting purposes due to differences for Federal income tax reporting purposes in, among other things, estimated useful lives, depreciable basis of properties and permanent and temporary differences on the inclusion or deductibility of elements of income and deductibility of expense for such purposes.

Distributions paid on our common stock and their tax status, as sent to our shareholders, is presented in the following table. The tax status of GGP distributions in 2011, 2010 and 2009 may not be indicative of future periods.

 

     Successor          Predecessor  
     Year Ended
December 31,
2011
     Period from
November 10
through
December 31,
2010
         Year Ended
December 31,
2009
 
     (In thousands)  

Oridinary income

   $ 0.303       $ -          $ 0.103   

Return of capital

     -         -            -   

Qualified dividends

     -         0.244            -   

Capital gain distributions

     0.296         0.136            0.087   
  

 

 

    

 

 

       

 

 

 

Distributions per share

   $ 0.599       $ 0.380          $ 0.190   
  

 

 

    

 

 

       

 

 

 

 

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NOTE 9 WARRANT LIABILITY

Pursuant to the terms of the Investment Agreements, the Plan Sponsors and Blackstone were issued, on the Effective Date, 120 million warrants (the “Warrants”) to purchase common stock of GGP. Below is a summary of the Warrants received by the Plan Sponsors and Blackstone.

 

Warrant Holder

   Number of
Warrants
     Exercise Price  

Brookfield Investor

     57,500,000       $         10.75   

Blackstone -B

     2,500,000         10.75   

Fairholme

     41,070,000         10.50   

Pershing Square

     16,430,000         10.50   

Blackstone -A

     2,500,000         10.50   
  

 

 

    
     120,000,000      
  

 

 

    

The Warrants were fully vested upon issuance and the exercise prices are subject to adjustment for future dividends, stock dividends, distribution of assets, stock splits or reverse splits of our common stock or certain other events. As a result of these investment provisions, as of the record date of our common stock dividends, the number of shares issuable upon exercise of the outstanding Warrants was increased as follows:

 

             Exercise Price  

Record Date

   Issuable Shares      Brookfield Investor
and Blackstone
     Fairholme, Pershing
Square and Blackstone
 

December 30, 2010

     123,144,000       $                 10.48       $                     10.23   

April 15, 2011

     123,960,000         10.41         10.16   

July 15, 2011

     124,704,000         10.34         10.10   

December 30, 2011

     131,748,000         9.79         9.56   

As a result of the RPI distribution, the exercise price of the Warrants were adjusted by $0.3943 for the Brookfield Investor and Blackstone and by $0.3852 for the Fairholme, Pershing Square and Blackstone, on the record date of December 30, 2011, and the total number of issuable shares was 131,748,000.

Each GGP Warrant has a term of seven years and expires on November 9, 2017. The Brookfield Investor Warrants and the Blackstone (A and B) Investor Warrants are immediately exercisable, while the Fairholme Warrants and the Pershing Square Warrants will be exercisable (for the initial 6.5 years from the Effective Date) only upon 90 days prior notice. No Warrants were exercised during the year ended December 31, 2011.

The estimated fair value of the Warrants was $986.0 million on December 31, 2011 and $1.04 billion on December 31, 2010 and is recorded as a liability as the holders of the Warrants could require GGP to settle such warrants in cash in the circumstance of a subsequent change of control. Subsequent to the Effective Date, changes in the fair value of the Warrants have been and will continue to be recognized in earnings. The fair value of the Warrants was estimated using the Black Scholes option pricing model using our stock price and Level 3 inputs (Note 3). The following table summarizes the estimated fair value of the Warrants and significant assumptions used in the valuation as of December 31, 2011 and December 31, 2010:

 

     December 31, 2011         December 31, 2010      
     (Dollars in thousands, except for share amounts)  

Warrant liability

   $             985,962      $         1,041,004   

GGP stock price per share

   $ 15.02      $ 15.48   

Implied volatility

     37     38

Warrant term

     5.86        6.86   

 

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The following table summarizes the change in fair value of the Warrant liability which is measured on a recurring basis:

 

     (In thousands)  

Balance at November 10, 2010

   $ 835,752   

Warrant liability adjustment

     205,252   
  

 

 

 

Balance at December 31, 2010

     1,041,004   

Warrant liability adjustment

     (55,042
  

 

 

 

Balance at December 31, 2011

   $ 985,962   
  

 

 

 

NOTE 10 RENTALS UNDER OPERATING LEASES

We receive rental income from the leasing of retail and other space under operating leases. The minimum future rentals (excluding operating leases at properties held for disposition as of December 31, 2011 and properties part of the RPI Spin-Off - (Note 19) based on operating leases of our Consolidated Properties as of December 31, 2011 are as follows:

 

Year

   Amount  
     (In thousands)  

2012

   $ 1,337,195   

2013

     1,267,646   

2014

     1,143,619   

2015

     1,003,459   

2016

     860,472   

Subsequent

     2,675,265   
  

 

 

 
   $ 8,287,656   
  

 

 

 

Minimum future rentals exclude amounts which are payable by certain tenants based upon a percentage of their gross sales or as reimbursement of operating expenses and amortization of above and below-market tenant leases. Such operating leases are with a variety of tenants, the majority of which are national and regional retail chains and local retailers, and consequently, our credit risk is concentrated in the retail industry.

NOTE 11 EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS

Noncontrolling Interests

The minority interests related to our common and preferred Operating Partnership units are presented as redeemable noncontrolling interests in our Consolidated Balance Sheets, presented at the greater of the carrying amount adjusted for the noncontrolling interest’s share of the allocation of income or loss (and its share of other comprehensive income or loss) and dividends or their fair value as of each measurement date. The redeemable noncontrolling interests have been presented at carrying value plus allocated income (loss) and other comprehensive income as of December 31, 2011 and at fair value as of December 31, 2010. The excess of the fair value over the carrying amount from period to period is recorded within additional paid-in capital in our Consolidated Balance Sheets. Allocation to noncontrolling interests is presented as an adjustment to net income to arrive at net loss attributable to common stockholders.

Generally, the holders of the Common Units share in any distributions by the Operating Partnership with our common stockholders. However, the Operating Partnership agreement permits distributions solely to GGP if such distributions were required to allow GGP to comply with the REIT distribution requirements or to avoid the imposition of excise tax. Under certain circumstances, the conversion rate for each Common Unit is required to be adjusted to give effect to stock distributions. As a result, the common stock dividends declared for 2011 and

 

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2010 modified the conversion rate to 1.0397624. The aggregate amount of cash that would have been paid to the holders of the outstanding Common Units as of December 31, 2011 if such holders had requested redemption of the Common Units as of December 31, 2011, and all such Common Units were redeemed or purchased pursuant to the rights associated with such Common Units for cash, would have been $103.0 million.

The Plan provided that holders of the Common Units could elect to redeem, reinstate or convert their units. Four holders of the Common Units elected to redeem 226,684 Common Units in the aggregate on the Effective Date. All remaining Common Units were reinstated in the Operating Partnership on the Effective Date.

The Operating Partnership issued Convertible Preferred Units, which are convertible, with certain restrictions, at any time by the holder into Common Units of the Operating Partnership at the rates below (subject to adjustment). The Common Units are convertible into common stock at a one to one ratio at the current stock price. The convertible preferred units are carried at the greater of contractual redemption value or fair value (based on current stock price).

 

     Number of Common
Units for each
Preferred Unit
     Number of Contractual
Convertible Preferred
Units Outstanding as of
December 31, 2011
     Converted Basis to
Common Units
Outstanding as of
December 31, 2011
     Contractual
Coversion Price
     Redemption Value  

Series B

     3.000         1,279,715         3,839,146       $ 16.6667       $ 63,985,887   

Series D

     1.508         532,750         803,498         33.1519         26,637,477   

Series E

     1.298         502,658         652,633         38.5100         25,132,889   

Series C

     1.000         20,000         20,000         250.0000         5,000,000   
              

 

 

 
               $ 120,756,253   
              

 

 

 

Pursuant to the Plan, holders of the Convertible Preferred Units received their previously accrued and unpaid dividends net of the applicable taxes and reinstatement of their preferred units in the Operating Partnership. Holders of the preferred units will receive shares of the common stock of RPI as a result of the spin-off that occurred on January 12, 2012.

 

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The following table reflects the activity of the redeemable noncontrolling interests for year ended December 31, 2011, the period November 10, 2010 through December 31, 2010, the period January 1, 2010 through November 9, 2010 and for the year ended December 31, 2009.

 

     (In thousands)  

Predecessor

  

Balance at January 1, 2009 (Predecessor)

   $ 499,926   

Net loss

     (21,960

Distributions

     (9,433

Conversion of operating partnership units into common shares

     (324,489

Other comprehensive income

     10,573   

Adjustment for noncontrolling interests in operating partnership

     (13,200

Adjust redeemable noncontrolling interests

     65,416   
  

 

 

 

Balance at December 31, 2009 (Predecessor)

     206,833   
  

 

 

 

Net loss

     (26,604

Distributions

     (15,608

Other comprehensive income

     683   

Adjust redeemable noncontrolling interests

     55,539   
  

 

 

 

Balance at November 9, 2010 (Predecessor)

     220,843   
  

 

 

 

Successor

  

Net loss

     (1,868

Other comprehensive income

     (8

Adjust redeemable noncontrolling interests

     11,522   

Adjustment for noncontrolling interests in operating partnership

     1,875   
  

 

 

 

Balance at December 31, 2010 (Successor)

     232,364   
  

 

 

 

Net loss

     (2,212

Distributions

     (5,879

Cash redemption of operating partnership units

     (4,615

Other comprehensive loss

     (337

Adjustment for noncontrolling interests in operating partnership

     4,474   
  

 

 

 

Balance at December 31, 2011 (Successor)

   $ 223,795   
  

 

 

 

Common Stock Dividend and Purchase of Common Stock

The following table summarizes the cash common stock dividends declared in 2011:

 

Declaration Date

   Amount
per Share
     Date Paid    Record Date

March 29, 2011

   $ 0.10       April 29, 2011    April 15, 2011

April 26, 2011

     0.10       July 29, 2011    July 15, 2011

July 29, 2011

     0.10       October 31, 2011    October 14, 2011

November 7, 2011

     0.10       January 13, 2012    December 30, 2011

In addition to the November 7, 2011 cash dividend declared, the Board of Directors approved the distribution of RPI on December 20, 2011 in the form of a special dividend for which GGP shareholders were entitled to receive approximately 0.0375 shares of RPI common stock held as of December 30, 2011. RPI’s net equity was recorded as of December 31, 2011 as a dividend payable as substantive conditions for the spin-off were met as of December 31, 2011 and it was probable that the spin-off would occur. Accordingly, as of December 31, 2011, we have recorded a distribution payable of $526.3 million and a related decrease in retained earnings (accumulated deficit), of which $426.7 million relates to the special dividend, on our Consolidated Balance Sheet. On January 12, 2012, we distributed our shares in RPI to the shareholders of record as of the close of business on December 30, 2011. This special dividend satisfied part of our 2011 and the 2012 REIT distribution requirements.

 

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On December 20, 2010, we declared a dividend of $0.38 per share, paid on January 27, 2011 in the amount of approximately $35.8 million in cash and issued approximately 22.3 million shares of common stock (with a valuation of $14.4725 calculated based on the volume weighted average trading prices of GGP’s common stock on January 19 and January 21, 2011).

On March 29, 2011, we announced the implementation of our Dividend Reinvestment Plan (“DRIP”). The DRIP provides eligible holders of GGP’s common stock with a convenient method of increasing their investment in the Company by reinvesting all or a portion of cash dividends in additional shares of common stock. Eligible stockholders who enroll in the DRIP on or before the fourth business day preceding the record date for a dividend payment will be able to have that dividend reinvested. As a result of the DRIP elections for the dividends declared during 2011, 7,225,345 shares were issued during the year ended December 31, 2011.

In May 2011, we purchased shares of our common stock on the New York Stock Exchange through a private purchase. In addition, on August 8, 2011, the Board of Directors authorized the Company to repurchase up to $250 million of our common stock on the open market. During the year ended December 31, 2011, we have purchased 5,247,580 shares at a weighted average price of $12.53 per share for a total of $65.7 million. The following table summarizes the stock buy-back activity during the year:

 

Trade Date

   Shares
Purchased
     Average Price      Total
Consideration

(In  thousands)
 

August 18 – 26, 2011

     2,046,940       $ 13.1455       $ 26,908   

September 1 – 22, 2011

     2,273,172         12.4592         28,322   

October 3 – 5, 2011

     927,468         11.3308         10,509   

There were no stock repurchases during 2009 and 2010.

NOTE 12 EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of all potentially dilutive common shares. The dilutive effect of the Warrants are computed using the “if-converted” method and the dilutive effect of options and their equivalents (including fixed awards and nonvested stock issued under stock-based compensation plans), is computed using the “treasury” method.

All options were anti-dilutive for all periods presented because of net losses, and, as such, their effect has not been included in the calculation of diluted net loss per share. In addition, potentially dilutive shares of 40,781,905 related to the Warrants for the year ended December 31, 2010, have been excluded from the denominator in the computation of diluted EPS because they are also anti-dilutive. Outstanding Common Units have also been excluded from the diluted earnings per share calculation because including such Common Units would also require that the share of GGPLP income attributable to such Common Units be added back to net income therefore resulting in no effect on EPS.

 

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Information related to our EPS calculations is summarized as follows:

 

    Successor     Predecessor  
    Year Ended
December 31, 2011
    Period from
November 10, 2010
through
December 31, 2010
    Period from
January 1, 2010
through
November 9, 2010
    Year Ended
December 31, 2009
 
    Basic and Diluted     Basic and Diluted     Basic and Diluted     Basic and Diluted  
    (In thousands)  

Numerators – Basic:

         

Loss from continuing operations

  $ (279,788   $ (249,079   $ (635,341   $ (523,441

Allocation to noncontrolling interests

    (6,331     1,843        13,572        19,911   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations – net of noncontrolling interests

    (286,119     (247,236     (621,769     (503,530

Discontinued operations

    (27,093     (7,005     (577,067     (781,275

Allocation to noncontrolling interests

    40        25        13,078        116   
 

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations – net of noncontrolling interests

    (27,053     (6,980     (563,989     (781,159

Net (loss) income

    (306,881     (256,084     (1,212,408     (1,304,716

Allocation to noncontrolling interests

    (6,291     1,868        26,650        20,027   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (313,172   $ (254,216   $ (1,185,758   $ (1,284,689
 

 

 

   

 

 

   

 

 

   

 

 

 

Numerators – Diluted:

         

Loss from continuing operations – net of noncontrolling interests

  $ (286,119   $ (247,236   $ (621,769   $ (503,530

Exclusion of warrant adjustment

    (55,042     -        -        -   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted loss from continuing operations

  $ (341,161   $ (247,236   $ (621,769   $ (503,530
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (313,172   $ (254,216   $ (1,185,758   $ (1,284,689

Exclusion of warrant adjustment

    (55,042     -        -        -   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net loss attributable to common stockholders

  $ (368,214   $ (254,216   $ (1,185,758   $ (1,284,689
 

 

 

   

 

 

   

 

 

   

 

 

 

Denominators:

         

Weighted average number of common shares outstanding – basic

    943,669        945,248        316,918        311,993   

Effect of dilutive securities

    37,467        -        -        -   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding – diluted

    981,136        945,248        316,918        311,993   
 

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 13 STOCK-BASED COMPENSATION PLANS

Incentive Stock Plans

On October 27, 2010, New GGP, Inc. adopted the General Growth Properties, Inc. 2010 Equity Plan (the “Equity Plan”) which remains in effect after the Effective Date. The number of shares of New GGP, Inc. common stock reserved for issuance under the Equity Plan is equal to 4% of New GGP, Inc.’s outstanding shares on a fully diluted basis as of the Effective Date. The Equity Plan provides for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, other stock-based awards and performance-based compensation (collectively, “the Awards”). Directors, officers and other employees of GGP’s and its subsidiaries and affiliates are eligible for Awards. The Equity Plan is not subject to the Employee Retirement

 

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Income Security Act of 1974, as amended. No participant may be granted more than 4,000,000 shares, or the equivalent dollar value of such shares, in any year. Options granted under the Equity Plan will be designated as either nonqualified stock options or incentive stock options. An option granted as an incentive stock option will, to the extent it fails to qualify as an incentive stock option, be treated as a nonqualified option. The exercise price of an option may not be less than the fair value of a share of GGP’s common stock on the date of grant. The term of each option will be determined prior to the date of grant, but may not exceed ten years.

Pursuant to the Plan, on the Effective Date, unvested options issued by the Predecessor became fully vested. Each option to acquire a share of the Predecessor common stock was replaced by two options: an option to acquire one share of New GGP, Inc. common stock and a separate option to acquire 0.098344 of a share of HHC common stock.

The exercise price under the Predecessor outstanding options was allocated to the New GGP, Inc. options and the HHC options based on the relative fair values of the two underlying stocks. For purposes of such allocation, the volume-weighted price of shares of New GGP, Inc. and HHC during the last ten-day trading period (the “Trading Period”) ending on or before the 60th day after the Effective Date was used. As the date of emergence was November 9, 2010, the Trading Period was December 27, 2010 through January 7, 2011. The volume-weighted price of one New GGP, Inc. common share was $15.29 and one HHC common share was $54.13, during the Trading Period and, therefore, the exercise prices for the Predecessor options replaced were allocated in a ratio of approximately 74.15% to GGP and 25.85% to HHC. In addition, we agreed with HHC that all exercises of replacement options, except for those of two former senior executives that they exercised in 2010 immediately upon their termination of employment, would be settled by the employer of the Predecessor employee at the time of exercise.

Stock Options

The following tables summarize stock option activity for the Equity Plan for the Successor and for the 2003 Incentive Stock Plan for the Predecessor for the periods ended December 31, 2011, November 9 through December 31, 2010, January 1, 2010 through November 9, 2010 and for 2009.

 

    Successor     Predecessor  
    2011     2010     2010     2009  
    Shares     Weighted
Average
Exercise
Price
    Shares     Weighted
Average
Exercise
Price
    Shares     Weighted
Average
Exercise
Price
    Shares     Weighted
Average
Exercise
Price
 

Stock options outstanding at January 1

    5,427,011      $ 20.21        5,413,917      $ 16.26        4,241,500      $ 31.63        4,730,000      $ 33.01   

(November 10 for Successor in 2010), Granted

    8,662,716        15.26        1,891,857        14.73        2,100,000        10.56        -        -   

Stock dividend adjustment

    -        -        -        -        58,127        30.32        -        -   

Exercised

    (51,988     11.05        (1,828,369     2.72        -        -        -        -   

Forfeited

    (1,606,792     14.96        (25,000     14.73        (55,870     64.79        (290,000     54.66   

Expired

    (927,078     39.31        (25,394     34.05        (929,840     44.28        (198,500     30.78   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stock options outstanding at December 31

    11,503,869      $ 15.65        5,427,011      $ 20.21        5,413,917      $ 20.61        4,241,500      $ 31.63   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Stock Options Outstanding     Stock Options Exercisable  

Range of Exercise
Prices

  Shares     Weighted Average
Remaining
Contractual Term
(in years)
    Weighted Average
Exercise Price
    Shares     Weighted Average
Remaining
Contractual Term
(in years)
    Weighted Average
Exercise Price
 

$9.00 – $13.00

    2,102,363        8.6      $ 10.34        602,363        6.0      $ 10.57   

$14.00 – $17.00

    8,902,418        9.3        15.15        667,440        8.9        14.73   

$34.00 – $37.00

    -        -        -        -        -        -   

$46.00 – $50.00

    499,088        0.2        46.95        499,088        0.2        46.96   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    11,503,869        8.7      $ 15.65        1,768,891        5.2      $ 22.40   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intrinsic value (in thousands)

  $ 9,839          $ 2,874       
 

 

 

       

 

 

     

Stock options under the Equity Plan generally vest in 20% increments annually from one year from the grant date. Options under the 2003 Plan were replaced under the Plan with options, fully vested, in New GGP Inc. common stock. The intrinsic value of outstanding and exercisable stock options as of December 31, 2011 represents the excess of our closing stock price on that date, $15.02, over the exercise price multiplied by the applicable number of shares that may be acquired upon exercise of stock options, and is not presented in the table above if the result is a negative value. The intrinsic value of exercised stock options represents the excess of our stock price at the time the option was exercised over the exercise price and was $0.2 million for options exercised during the year ended December 31, 2011 and $23.7 million for options exercised during the period from November 10, 2010 through December 31, 2010, No stock options were exercised during the period of January 1, 2010 through November 9, 2010, or during the year ended December 31, 2009.

The weighted-average fair value of stock options as of the grant date was $4.59 for stock options granted during the year ended December 31, 2011, $3.92 for stock options granted during the period from November 10, 2010 through December 31, 2010 and $4.99 for stock options granted during the period from January 1, 2010 through November 9, 2010. No stock options were granted during the year ended December 31, 2009.

Restricted Stock

Pursuant to the Equity Plan and the 2003 Stock Incentive Plan, GGP and the Predecessor, respectively, made restricted stock grants to certain employees and non-employee directors. The vesting terms of these grants are specific to the individual grant. The vesting terms varied in that a portion of the shares vested either immediately or on the first anniversary and the remainder vested in equal annual amounts over the next two to five years. Participating employees were required to remain employed for vesting to occur (subject to certain exceptions in the case of retirement). Shares that did not vest were forfeited. Dividends are paid on restricted stock and are not returnable, even if the underlying stock does not ultimately vest. All the Predecessor grants of restricted stock became vested at the Effective Date. Each share of the Predecessor’s previously restricted common stock was replaced on the Effective Date by one share of New GGP, Inc. common stock and 0.098344 of a share of HHC common stock (rounded down to the nearest whole share because no fractional HHC shares were issued in accordance with the Plan).

 

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The following table summarizes restricted stock activity for the respective grant year ended December 31, 2011, the periods from November 10, 2010 through December 31, 2010, the period from January 1, 2010 through November 9, 2010 and for the year ended December 31, 2009:

 

    Successor     Predecessor  
    2011     2010     2010     2009  
    Shares     Weighted
Average Grant
Date Fair Value
    Shares     Weighted
Average Grant

Date  Fair Value
    Shares     Weighted
Average Grant
Date  Fair Value
    Shares     Weighted
Average Grant
Date Fair Value
 

Nonvested restricted stock grants outstanding as of beginning of period

    2,807,682      $ 14.24        -      $ -        275,433      $ 33.04        410,767      $ 41.29   

Granted

    84,659        14.98        3,053,092        14.21        90,000        15.14        70,000        2.10   

Canceled

    (329,292     14.73        (12,500     14.73        (8,097     35.57        (69,628     46.04   

Vested

    (846,117     14.23        (232,910     13.87        (357,336     28.48        (135,706     35.38   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nonvested restricted stock grants outstanding as of end of period

    1,716,932      $ 14.19        2,807,682      $ 14.24        -      $ -        275,433      $ 33.04   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The weighted average remaining contractual term (in years) of nonvested awards as of December 31, 2011 was 2.7 years.

The total fair value of restricted stock grants which vested was $12.1 million during the year ended December 31, 2011, $3.7 million during the period from November 10, 2010 through December 31, 2010, $5.6 million during the period from January 1, 2010 through November 9, 2010 and $0.1 million during the year ended December 31, 2009.

 

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Threshold-Vesting Stock Options

Under the 1998 Incentive Stock Plan (the “1998 Incentive Plan”), stock incentive awards to employees in the form of threshold-vesting stock options (“TSOs”) have been granted. The exercise price of the TSO was the current market price (“CMP”) as defined in the 1998 Incentive Plan of the Predecessor common stock on the date the TSO was granted. In order for the TSOs to vest, common stock must achieve and sustain the applicable threshold price for at least 20 consecutive trading days at any time during the five years following the date of grant. Participating employees must remain employed until vesting occurs in order to exercise the options. The threshold price was determined by multiplying the CMP on the date of grant by an Estimated Annual Growth Rate (7%) and compounding the product over a five-year period. TSOs granted in 2004 and thereafter were required to be exercised within 30 days of the vesting date or be forfeited. TSOs granted prior to 2004, all of which have vested, have a term of up to 10 years. Under the 1998 Incentive Plan, 8,163,995 options had been granted and there were no grants in 2008. The 1998 Incentive Plan terminated December 31, 2008. All unvested TSOs vested on the Effective Date and were replaced by vested GGP options and HHC options with equivalent terms as the former TSOs. As most TSOs were granted subsequent to 2004, the majority of the options as replacements for TSOs were forfeited on December 10, 2010. The following is information for the options as replacements for TSOs as of December 31, 2010 and for the year then ended:

 

Predecessor:

  

TSOs Outstanding, January 1, 2009

     2,220,932   

Forfeited/Canceled

     (252,407

Exercised

     -   
  

 

 

 

TSOs Outstanding, December 31, 2009

     1,968,525   

Stock Dividend Adjustment

     30,917   

Forfeited/Canceled

     (305,027

Exercised

     (5,156
  

 

 

 

TSOs Outstanding, November 9, 2010

     1,689,259   

Successor:

  

Forfeited/Expired (*)

     (1,578,749

Surrendered for cash

     (1,085
  

 

 

 

Options as replacements for TSOs outstanding, December 31, 2010

     109,425   

Stock Dividend Adjustment

     2,370   

Forfeited/Expired (*)

     (8,789

Exercised

     (69,451
  

 

 

 

Options as replacements for TSOs outstanding, December 31, 2011

     33,555   

Weighted Average Exercise Price Outstanding

   $ 11.27   

Weighted Average Remaining Term Outstanding

     0.59   

Fair Value of Outstanding Options on Effective Date (in thousands)

   $ 465   

 

(*) All outstanding TSOs vested pursuant to the Plan on the Effective Date. The majority of the TSOs outstanding on the Effective Date had terms which stated that, once vested, such options would expire within 30 days if not exercised.

Holders of in-the-money options under the 1998 Incentive Stock Plan had the right to elect, within sixty days after the Effective Date, to surrender such options for a cash payment equal to the amount by which the highest reported sales price for a share of the Predecessor common stock during the sixty-day period prior to and including the Effective Date exceeded the exercise price per share under such option, multiplied by the number of shares of common stock subject to such option.

 

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Other Required Disclosures

Historical data, such as the past performance of our common stock and the length of service by employees, is used to estimate expected life of the stock options, TSOs and our restricted stock and represents the period of time the options or grants are expected to be outstanding. The weighted average estimated values of options granted were based on the following assumptions:

 

     Successor         Predecessor  
     Year Ended
December 31, 2011
    November 10, 2010
th 2/3rough
December 31, 2010
        January 1, 2010
through
November 9, 2010
    Year Ended
December 31, 2009
 

Risk-free interest rate (*)

     1.25     1.26       1.39     No options granted   

Dividend yield (*)

     2.50     2.72       2.86     No options granted   

Expected volatility

     41.16     38.00       38.00     No options granted   

Expected life (in years)

     6.5        5.0          5.0        No options granted   

 

(*) Weighted average

Compensation expense related to stock-based compensation plans is summarized in the following table:

 

     Successor      Predecessor  
     For the year ended
December 31, 2011
     For the  period
from
November 10,  2010
through

December 31, 2010
     For the  period
from
January 1, 2010
through
November 9, 2010
     For the year ended
December 31, 2009
 
     (in thousands)  

Stock options

   $ 8,245       $ 953       $ 3,914       $ 1,943   

Restricted stock

     11,292         5,010         9,385         2,710   

TSOs

     -         -         2,892         3,986   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,537       $ 5,963       $ 16,191       $ 8,639   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Successor consolidated statements of operations do not include any expense related to the conversion of the Predecessor options to acquire the Predecessor common stock into options to acquire New GGP, Inc. and HHC common stock as such options were fully vested at the Effective Date and no service period expense or compensation expense is therefore recognizable.

As of December 31, 2011, total compensation expense which had not yet been recognized related to nonvested options and restricted stock grants was $61.6 million. Of this total, $19.5 million is expected to be recognized in 2012, $18.4 million in 2013, $12.0 million in 2014, $8.3 million in 2015 and $3.4 million in 2016. These amounts may be impacted by future grants, changes in forfeiture estimates or vesting terms, actual forfeiture rates which differ from estimated forfeitures and/or timing of TSO vesting.

 

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NOTE 14 OTHER ASSETS

The following table summarizes the significant components of prepaid expenses and other assets.

 

     December 31,
2011
     December 31,
2010
 
     (In thousands)  

Above-market tenant leases, net (Note 4)

   $ 1,163,754       $ 1,518,893   

Security and escrow deposits

     247,718         259,440   

Below-market ground leases, net (Note 4)

     198,230         255,854   

Real estate tax stabilization agreement, net (Note 4)

     104,295         110,607   

Prepaid expenses

     51,928         64,230   

Other non-tenant receivables

     21,198         50,920   

Deferred tax, net of valuation allowances

     4,578         10,505   

Prepaid finance costs

     1,477         56   

Below-market office lessee leases net

     -         15,026   

Other

     12,357         14,921   
  

 

 

    

 

 

 

Total prepaid expenses and other assets

   $ 1,805,535       $ 2,300,452   
  

 

 

    

 

 

 

NOTE 15 OTHER LIABILITIES

The following table summarizes the significant components of accounts payable and accrued expenses.

 

     December 31,
2011
     December 31,
2010
 
     (In thousands)  

Below-market tenant leases, net (Note 4)

   $ 634,802       $ 932,311   

Accrued interest

     196,536         143,856   

Accounts payable and accrued expenses

     164,139         264,578   

Accrued real estate taxes

     77,722         75,137   

Accrued payroll and other employee liabilities

     77,231         176,810   

Construction payable

     69,291         85,724   

Deferred gains/income

     65,174         60,808   

Tenant and other deposits

     19,336         19,109   

Insurance reserve liability

     17,796         17,381   

Conditional asset retirement obligation liability

     16,596         16,637   

Above-market office lessee leases, net

     13,571         -   

Capital lease obligations

     12,774         12,998   

Uncertain tax position liability

     6,847         8,356   

Other

     73,923         79,866   
  

 

 

    

 

 

 

Total accounts payable and accrued expenses

   $ 1,445,738       $ 1,893,571   
  

 

 

    

 

 

 

NOTE 16 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Components of accumulated other comprehensive income (loss) as of December 31, 2011 and 2010 are as follows:

 

     December 31,
2011
    December 31,
2010
 
     (in thousands)  

Net unrealized (losses) gains on financial instruments

   $ -      $ 129   

Foreign currency translation

     (48,545     75   

Unrealized gains (losses) on available-for-sale securities

     263        (32
  

 

 

   

 

 

 
   $ (48,282   $ 172   
  

 

 

   

 

 

 

 

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NOTE 17 LITIGATION

In the normal course of business, from time to time, we are involved in legal proceedings relating to the ownership and operations of our properties. In management’s opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a material adverse effect on our consolidated financial position, results of operations or liquidity.

Default Interest

Pursuant to the Plan, the Company cured and reinstated that certain note (the “Homart Note”) in the original principal amount of $254.0 million between GGP Limited Partnership and The Comptroller of the State of New York as Trustee of the Common Retirement Fund (“CRF”) by payment in cash of accrued interest at the contractual non-default rate. CRF, however, contended that the Company’s bankruptcy caused the Company to default under the Homart Note and, therefore, post-petition interest accrued under the Homart Note at the contractual default rate was due for the period June 1, 2009 until November 9, 2010. On June 16, 2011, the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) ruled in favor of CRF, and, on June 22, 2011, the Company elected to satisfy the Homart Note in full by paying CRF the outstanding default interest and principal amount on the Homart Note totaling $246.0 million. As a result of the ruling, the Company incurred and paid $11.7 million of default interest expense during the year ended December 31, 2011. However, the Company has appealed the Bankruptcy Court’s order and has reserved its right to recover the payment of default interest.

Pursuant to the Plan, the Company agreed to pay to the holders of claims (the “2006 Lenders”) under a revolving and term loan facility (the “2006 Credit Facility”) the principal amount of their claims outstanding of approximately $2.58 billion plus post-petition interest at the contractual non-default rate. However, the 2006 Lenders asserted that they were entitled to receive interest at the contractual default rate. In July 2011, the Bankruptcy Court ruled in favor of the 2006 Lenders, and in August 2011, the Company appealed the order. As a result of the ruling, the Company recorded additional default interest of $49.5 million in the year ended December 31, 2011 and has accrued $91.5 million as of December 31, 2011. The Company accrued $42.0 million of default interest as of December 31, 2010 based upon its assessment of default interest amounts that would be paid under the 2006 Credit Facility. We will continue to evaluate the appropriateness of our accrual during the appeal process.

Tax Indemnification Liability

Pursuant to the Investment Agreements, the Successor has indemnified HHC from and against 93.75% of any and all losses, claims, damages, liabilities and reasonable expenses to which HHC and its subsidiaries become subject, in each case solely to the extent directly attributable to MPC Taxes (as defined in the Investment Agreements) in an amount up to $303.8 million. Under certain circumstances, we agreed to be responsible for interest or penalties attributable to such MPC Taxes in excess of the $303.8 million. As a result of this indemnity, The Howard Hughes Company, LLC and Howard Hughes Properties, Inc. filed petitions in the United States Tax Court on May 6, 2011, contesting this liability. We have accrued $303.8 million as of December 31, 2011 and 2010 related to the tax indemnification liability. In addition, we have accrued $21.6 million of interest related to the tax indemnification liability in accounts payable and accrued expenses on our Consolidated Balance Sheet as of December 31, 2011 and $19.7 million as of December 31, 2010. The aggregate liability of $325.4 million represents management’s best estimate of our liability as of December 31, 2011, which will be periodically evaluated in the aggregate. We do not expect to make any payments on the tax indemnification liability within the next 12 months.

NOTE 18 COMMITMENTS AND CONTINGENCIES

We lease land or buildings at certain properties from third parties. The leases generally provide us with a right of first refusal in the event of a proposed sale of the property by the landlord. Rental payments are expensed as

 

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incurred and have, to the extent applicable, been straight-lined over the term of the lease. The following is a summary of our contractual rental expense as presented in our Consolidated Statements of Operations and Comprehensive Income (Loss):

 

     Successor      Predecessor  
     Year Ended
December 31,
2011
     Period from
November 10,
2010 through
December 31,
2010
     Period from
January  1,

2010 through
November 9,
2010
     Year Ended
December 31,
2009
 
     (In thousands)  

Contractual rent expense, including participation rent

   $ 14,270       $ 1,990       $ 9,351       $ 11,683   

Contractual rent expense, including participation rent and excluding amortization of above and below-market ground leases and straight-line rent

     8,411         1,179         4,725         6,236   

See Note 8 for our obligations related to uncertain tax positions for disclosure of additional contingencies.

The following table summarizes the contractual maturities of our long-term commitments. Long-term debt, held for sale debt and ground leases include the related acquisition accounting fair value adjustments:

 

    2012     2013     2014     2015     2016     Subsequent /
Other
    Total  
    (In thousands)  

Long-term debt-principal

  $ 1,555,148      $ 1,388,883      $ 2,735,139      $ 2,038,427      $ 3,424,025      $ 6,001,392      $ 17,143,014   

Held for sale debt principal (1)

    72,453        -        -        -        -        -        72,453   

Retained debt-principal

    37,745        1,277        1,363        1,440        1,521        87,272        130,618   

Junior Subordinated Notes (2)

    206,200        -        -        -        -        -        206,200   

Ground lease payments

    6,520        6,629        6,663        6,674        6,558        223,767        256,811   

Tax indemnification liability

    -        -        -        -        -        303,750        303,750   

Uncertain tax position liability

    -        -        -        -        -        6,847        6,847   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,878,066      $ 1,396,789      $ 2,743,165      $ 2,046,541      $ 3,432,104      $ 6,623,028      $ 18,119,693   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Held for sale debt principal is included in liabilities held for disposition on the consolidated balance sheet.
(2) Although we do not expect the notes to be redeemed prior to maturity in 2041, the trust that owns the notes may exercise its right to redeem the notes prior to 2041. As a result, the notes are included as amounts due in 2012.

Contingent Stock Agreement

In conjunction with GGP’s acquisition of The Rouse Company (“TRC”) in November 2004, GGP assumed TRC’s obligations under the Contingent Stock Agreement, (“the “CSA”). Under the terms of the CSA, the Predecessor was required through August 2009 to issue shares of its common stock semi-annually (February and August) to the previous owners of certain assets within the Summerlin Master Planned Community (the “CSA Assets”) dependent on the cash flows from the development and/or sale of the CSA Assets and the Predecessor’s stock price. During 2009, the Predecessor was not obligated to deliver any shares of its common stock under the CSA as the net development and sales cash flows of the CSA assets were negative for the applicable periods. The Plan provided that the final payment and settlement of all other claims under the CSA would be a total of $230.0 million, all of which has been paid by GGP as of December 31, 2010. On the Effective Date, the CSA assets were spun-out, with the other Summerlin assets, to HHC.

 

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NOTE 19 SUBSEQUENT EVENTS

On January 12, 2012, we completed the spin-off of RPI, which now owns a 30-mall portfolio, totaling approximately 21 million square feet. The RPI Spin-Off was accomplished through a special dividend of the common stock of RPI to holders of GGP common stock as of December 30, 2011. Subsequent to the spin-off, we retained a 1% interest in RPI. The consolidated financial information presented herein includes RPI in discontinued operations for all periods presented.

On February 21, 2012, we sold Grand Traverse Mall to RPI. RPI assumed the debt on the property as consideration for the purchase.

On February 23, 2012, our board approved the purchase of 11 anchor boxes from an anchor tenant for $270 million. These anchor boxes will provide us further opportunities to expand, redevelop and enhance certain assets within our portfolio. The acquisition is expected to close in the second quarter of 2012.

On February 27, 2012, our board approved the declaration of a quarterly common stock dividend of $0.10 per share. The dividend is payable on April 30, 2012, to stockholders of record on April 16, 2012.

On March 2, 2012, we sold our interest in Village of Cross Keys for $25.0 million. We received $8.0 million in cash and entered into a secured note receivable with the buyer for $17.0 million.

NOTE 20 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

 

     2011  
     Successor  
     First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 
     (In thousands, except per share amounts)  

Total revenues

   $ 620,414      $ 603,020      $ 624,179      $ 657,985   

Operating income

     158,314        143,821        135,698        122,832   

Income (loss) from continuing operations

     9,846        (197,191     260,250        (352,693

Income (loss) from discontinued operations

     (2,910     (4,922     (3,689     (15,572

Net income (loss) attributable to common shareholders

     5,664        (203,047     252,049        (367,838

Basic earnings (loss) per share from: 1

        

Continuing operations

     0.01        (0.21     0.27        (0.37

Discontinued operations

     -        (0.01     -        (0.02

Diluted earnings (loss) per share from: 1

        

Continuing operations

     -        (0.21     (0.08     (0.37

Discontinued operations

     -        (0.01     -        (0.02

Dividends declared per share 2

     0.10        0.10        0.10        0.53   

Weighted-average shares outstanding:

        

Basic

     957,435        946,769        936,260        943,669   

Diluted

     996,936        946,769        970,691        943,669   

 

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     2010  
     Predecessor          Successor  
     First
Quarter
    Second
Quarter
    Third
Quarter
    Period from
October 1
through
November 9
         Period from
November 10
through
December 31
 
     (In thousands, except per share amounts)  

Total revenues

   $ 625,672      $ 616,642      $ 622,830      $ 276,299          $ 373,250   

Operating income

     242,641        236,348        233,818        107,492            75,804   

Income (loss) from continuing operations

     (19,560     (126,080     (226,657     (263,044         (249,079

Income (loss) from discontinuing operations

     75,334        8,508        (7,122     (653,787         (7,005

Net income (loss) attributable to common shareholders

     51,656        (117,527     (231,185     (888,702         (254,216

Basic earnings (loss) per share from: 1

              

Continuing operations

     (0.08     (0.40     (0.71     (0.78         (0.26

Discontinued operations

     0.24        0.03        (0.02     (2.02         (0.01

Diluted earnings (loss) per share from: 1

              

Continuing operations

     (0.08     (0.40     (0.71     (0.78         (0.26

Discontinued operations

     0.24        0.03        (0.02     (2.02         (0.01

Dividends declared per share

     -        -        -        -            0.38   

Weighted-average shares outstanding:

              

Basic

     315,773        317,363        317,393        317,393            945,248   

Diluted

     317,070        317,363        317,393        317,393            945,248   

 

1 

Earnings (loss) per share for the quarters do not add up to annual earnings per share due to the issuance of additional common stock during the year.

2 

Includes $0.43 non-cash distribution of Rouse Properties, Inc. (Note 11).

NOTE 21 PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

The following pro forma financial information has been presented as a result of the acquisition of the Predecessor pursuant to the Plan during 2010. The pro forma consolidated statements of operations are based upon the historical financial information of the Predecessor and the Successor as presented herein, excluding discontinued operations and the financial information of operations spun off to HHC, as if the transaction had been consummated on the first day of the earliest period presented.

The following pro forma financial information may not necessarily be indicative of what our actual results would have been if the Plan had been consummated as of the date assumed, nor does it purport to represent our results of operations for future periods.

 

     For the period from
November 10, 2010
through December 31,
2010
    For the period from
January 1, 2010
through November 9,
2010
    Pro Forma
Year Ended
December 31,
2010
 
     (In thousands)  

Total revenues

   $ 373,250      $ 2,141,443      $ 2,492,167   

Loss from continuing operations

     (249,079     (635,341     (698,515

 

     Year Ended
December 31,
2009
    Pro Forma
Year Ended
December 31,
2009
 

Total revenues

   $ 2,551,172      $ 2,521,574   

Loss from continuing operations

     (523,441     (815,025

 

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Included in the above pro forma financial information for the year ended December 31, 2010 and 2009 are the following adjustments:

Minimum rent receipts are recognized on a straight-line basis over periods that reflect the related lease terms, and include accretion and amortization related to above and below market portions of tenant leases. Acquisition accounting pro forma adjustments reflect a change in the periods over which such items are recognized. The adjustment related to straight line rent and accretion and amortization related to above and below market portions of tenant leases was a decrease in revenues of $27.4 million for the year ended December 31, 2010 and $36.0 million for the year ended December 31, 2009.

Depreciation and amortization have been adjusted to reflect adjustments of estimated useful lives and contractual terms as well as the fair valuation of the underlying assets and liabilities, resulting in changes to the rate and amount of depreciation and amortization.

Interest expense has been adjusted to reflect the reduction in interest expense due to the repayment or replacement of certain of Old GGP’s debt as provided by the Plan. In addition, the pro forma information reflects non-cash adjustments to interest expense due to the fair valuing of debt and deferred expenses and other amounts in historical interest expense as a result of the acquisition method of accounting.

Reorganization items have been reversed as the Plan is assumed to be effective and all debtors of the Predecessor are deemed to have emerged from bankruptcy as of the first day of the periods presented and, accordingly, such expenses or items would not be incurred.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

General Growth Properties, Inc.

Chicago, Illinois

We have audited the consolidated financial statements of General Growth Properties, Inc. and subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income (loss), equity, and cash flows for the year ended December 31, 2011 and the period from November 10, 2010 to December 31, 2010 (Successor Company operations), and the period from January 1, 2010 to November 9, 2010 and the year ended December 31, 2009 (Predecessor Company operations) and the Company’s internal control over financial reporting as of December 31, 2011 (such report dated February 29, 2012 and not presented herein), and have issued our report thereon dated February 29, 2012 (June 27, 2012 as to the effects of the 2012 discontinued operations described in Note 5 to the consolidated financial statements) (which report on the consolidated financial statements expresses an unqualified opinion and includes an explanatory paragraph regarding the Company’s financial statements including assets, liabilities, and a capital structure with carrying values not comparable with prior periods). Our audits also included the consolidated financial statement schedule of the Company. This consolidated financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Deloitte & Touche LLP

Chicago, Illinois

February 29, 2012 (June 27, 2012 as to the effects of the 2012 discontinued operations described in Note g)

 

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GENERAL GROWTH PROPERTIES, INC.

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2011

 

Name of Center

 

Location

  Encumbrances (a)     Acquisition
Accounting Cost (f)
    Costs Capitalized
Subsequent to
Acquisition (c)
    Gross Amounts at Which
Carried at Close of Period (d)
    Accumulated
Depreciation (e)
    Date
Acquired
    Life Upon
Which
Latest
Statement
of
Operation
is
Computed
 
      Land     Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Total        
        (In thousands)                                                        

Ala Moana Center

  Honolulu, HI   $ 1,322,146      $ 571,836        1,738,740      $ -      $ 1,892      $ 571,836      $ 1,740,632      $ 2,312,468      $ 67,252        2010        (e

Anaheim Crossing

  Anaheim, CA     -        -        4,464        -        (4,464     -        -        -        -        2010        (e

Animas Valley Mall

  Farmington, NM     43,451        6,509        32,270        -        858        6,509        33,128        39,637        2,745        2010        (e

Apache Mall

  Rochester, MN     -        17,738        116,663        -        986        17,738        117,649        135,387        5,701        2010        (e

Arizona Center

  Phoenix, AZ     -        4,095        168,099        (4,095     (168,099     -        -        -        -        2010        (e

Augusta Mall

  Augusta, GA     159,401        25,450        137,376        -        3,394        25,450        140,770        166,220        8,333        2010        (e

Austin Bluffs Plaza (g)

  Colorado Springs, CO     1,983        1,425        1,075        -        -        1,425        1,075        2,500        40        2010        (e

Bailey Hills Village

  Eugene, OR     -        422        347        (422     (347     -        -        -        -        2010        (e

Baskin Robbins

  Idaho Falls, ID     -        333        19        -        -        333        19        352        5        2010        (e

Baybrook Mall

  Friendswood, TX     179,951        76,527        288,241        -        (2,215     76,527        286,026        362,553        12,367        2010        (e

Bayshore Mall

  Eureka, CA     30,436        4,770        33,305        -        (327     4,770        32,978        37,748        2,005        2010        (e

Bayside Marketplace

  Miami, FL     83,953        -        198,396        -        1,105        -        199,501        199,501        13,491        2010        (e

Beachwood Place

  Beachwood, OH     227,749        59,156        196,205        -        1,256        59,156        197,461        256,617        7,602        2010        (e

Bellis Fair

  Bellingham, WA     93,882        14,122        102,033        -        704        14,122        102,737        116,859        4,956        2010        (e

Birchwood Mall

  Port Huron, MI     46,924        8,316        44,884        -        68        8,316        44,952        53,268        2,577        2010        (e

Boise Plaza

  Boise, ID     -        3,996        645        -        (42     3,996        603        4,599        73        2010        (e

Boise Towne Plaza

  Boise, ID     9,694        6,457        3,195        -        10        6,457        3,205        9,662        446        2010        (e

Boise Towne Square

  Boise, ID     139,650        37,724        159,923        -        213        37,724        160,136        197,860        7,055        2010        (e

Brass Mill Center

  Waterbury, CT     89,053        21,959        79,574        -        504        21,959        80,078        102,037        4,415        2010        (e

Brass Mill Commons

  Waterbury, CT     19,046        9,538        19,533        -        (133     9,538        19,400        28,938        1,100        2010        (e

Burlington Town Center

  Burlington, VT     24,066        3,703        22,576        -        (615     3,703        21,961        25,664        2,449        2010        (e

Cache Valley Mall

  Logan, UT     28,623        2,890        19,402        -        (48     2,890        19,354        22,244        1,115        2010        (e

Cache Valley Marketplace

  Logan, UT     -        1,072        7,440        -        13        1,072        7,453        8,525        503        2010        (e

Canyon Point Village Center

  Las Vegas, NV     -        11,439        9,388        (11,439     (9,388     -        -        -        -        2010        (e

Capital Mall

  Jefferson City, MO     -        1,114        7,731        -        (45     1,114        7,686        8,800        899        2010        (e

Chula Vista Center

  Chula Vista, CA     -        13,214        67,743        1,149        10,134        14,363        77,877        92,240        4,052        2010        (e

Coastland Center

  Naples, FL     120,694        24,470        166,038        -        343        24,470        166,381        190,851        7,605        2010        (e

Collin Creek

  Plano, TX     63,742        14,747        48,094        -        426        14,747        48,520        63,267        2,997        2010        (e

Colony Square Mall

  Zanesville, OH     28,212        4,253        29,573        -        546        4,253        30,119        34,372        2,150        2010        (e

Columbia Mall

  Columbia, MO     89,355        7,943        107,969        -        8        7,943        107,977        115,920        6,343        2010        (e

Columbiana Centre

  Columbia, SC     103,800        22,178        125,061        -        17        22,178        125,078        147,256        7,791        2010        (e

 

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Name of Center

 

Location

  Encumbrances (a)     Acquisition
Accounting Cost (f)
    Costs Capitalized
Subsequent to
Acquisition (c)
    Gross Amounts at Which
Carried at Close of Period (d)
    Accumulated
Depreciation (e)
    Date
Acquired
    Life Upon
Which
Latest
Statement
of
Operation
is
Computed
 
      Land     Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Total        
        (In thousands)                                                        

Coral Ridge Mall

  Coralville, IA     91,278        20,178        134,515        -        171        20,178        134,686        154,864        6,657        2010        (e

Coronado Center

  Albuquerque, NM     153,690        28,312        153,526        -        1,163        28,312        154,689        183,001        8,322        2010        (e

Crossroads Center

  St. Cloud, MN     78,493        15,499        103,077        -        1,480        15,499        104,557        120,056        5,855        2010        (e

Cumberland Mall

  Atlanta, GA     105,594        36,913        138,795        -        1,545        36,913        140,340        177,253        7,703        2010        (e

Deerbrook Mall

  Humble, TX     152,656        36,761        133,448        -        (295     36,761        133,153        169,914        6,485        2010        (e

Eastridge Mall

  Casper, WY     34,310        5,484        36,756        -        91        5,484        36,847        42,331        2,299        2010        (e

Eastridge Mall

  San Jose, CA     153,167        30,368        135,317        -        603        30,368        135,920        166,288        6,147        2010        (e

Eden Prairie Center

  Eden Prairie, MN     73,308        24,985        74,733        -        83        24,985        74,816        99,801        5,902        2010        (e

Fallbrook Center

  West Hills, CA     81,771        18,479        62,432        1,543        4,364        20,022        66,796        86,818        3,622        2010        (e

Faneuil Hall Marketplace

  Boston, MD     -        -        91,817        -        (91,817     -        -        -        -        2010        (e

Fashion Place

  Murray, UT     138,206        24,068        232,456        -        22,215        24,068        254,671        278,739        10,402        2010        (e

Fashion Show

  Las Vegas, NV     629,870        564,310        627,327        -        29,169        564,310        656,496        1,220,806        33,441        2010        (e

Foothills Mall

  Fort Collins, CO     38,682        16,137        22,259        -        1,342        16,137        23,601        39,738        2,293        2010        (e

Fort Union

  Midvale, UT     2,386        -        2,104        -        (375     -        1,729        1,729        58        2010        (e

Four Seasons Town Centre

  Greensboro, NC     93,570        17,259        126,570        -        736        17,259        127,306        144,565        5,908        2010        (e

Fox River Mall

  Appleton, WI     185,835        42,259        217,932        -        1,029        42,259        218,961        261,220        8,857        2010        (e

Fremont Plaza

  Las Vegas, NV     -        -        1,723        -        (17     -        1,706        1,706        202        2010        (e

Gateway Crossing Shopping Center

  Bountiful, UT     -        9,701        13,957        (9,701     (13,957     -        -        -        -        2010        (e

Gateway Mall

  Springfield, OR     -        7,097        36,573        -        2,574        7,097        39,147        46,244        2,457        2010        (e

Glenbrook Square

  Fort Wayne, IN     158,095        30,965        147,002        -        (447     30,965        146,555        177,520        6,880        2010        (e

Governor’s Square

  Tallahassee, FL     75,465        18,289        123,088        -        733        18,289        123,821        142,110        8,209        2010        (e

 

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GENERAL GROWTH PROPERTIES, INC.

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2011

 

Name of Center

 

Location

  Encumbrances (a)     Acquisition
Accounting Cost
    Costs Capitalized
Subsequent to
Acquisition (c)
    Gross Amounts at Which
Carried at Close of Period (d)
    Accumulated
Depreciation (e)
    Date
Acquired
    Life Upon
Which
Latest
Statement
of
Operation
is
Computed
 
      Land     Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Total        
        (In thousands)                                                        

Grand Teton Mall

  Idaho Falls, ID     50,733        7,836        52,616        -        394        7,836        53,010        60,846        2,817        2010        (e

Grand Teton Plaza

  Idaho Falls, ID     -        5,230        7,042        -        577        5,230        7,619        12,849        441        2010        (e

Greenwood Mall

  Bowling Green, KY     -        12,459        85,370        -        1,912        12,459        87,282        99,741        4,494        2010        (e

Harborplace

  Baltimore, MD     50,198        -        82,834        -        835        -        83,669        83,669        3,627        2010        (e

Hulen Mall

  Fort Worth, TX     103,599        8,665        112,252        -        9,409        8,665        121,661        130,326        5,579        2010        (e

Jordan Creek Town Center

  West Des Moines, IA     173,545        54,663        262,608        -        1,643        54,663        264,251        318,914        11,394        2010        (e

Knollwood Mall

  St. Louis Park, MN     36,132        6,127        32,905        -        119        6,127        33,024        39,151        1,987        2010        (e

Lakeland Square

  Lakeland, FL     51,357        10,938        56,867        -        614        10,938        57,481        68,419        3,226        2010        (e

Lakeside Mall

  Sterling Heights, MI     155,040        36,993        130,460        -        1,275        36,993        131,735        168,728        6,039        2010        (e

Lansing Mall

  Lansing, MI     22,129        9,615        49,220        -        279        9,615        49,499        59,114        2,980        2010        (e

Lincolnshire Commons

  Lincolnshire, IL     27,423        8,806        26,848        -        (10     8,806        26,838        35,644        1,327        2010        (e

Lynnhaven Mall

  Virginia Beach, VA     218,241        54,628        219,013        -        (1,478     54,628        217,535        272,163        10,117        2010        (e

Mall At Sierra Vista

  Sierra Vista, AZ     23,335        7,078        36,441        -        2        7,078        36,443        43,521        1,764        2010        (e

Mall of Louisiana

  Baton Rouge, LA     234,883        88,742        319,097        -        43        88,742        319,140        407,882        11,941        2010        (e

Mall of The Bluffs

  Council Bluffs, IA     25,909        3,839        12,007        -        (205     3,839        11,802        15,641        972        2010        (e

Mall St. Matthews

  Louisville, KY     135,695        42,014        155,809        19        1,389        42,033        157,198        199,231        6,829        2010        (e

Mall St. Vincent

  Shreveport, LA     -        4,604        21,927        -        (340     4,604        21,587        26,191        1,396        2010        (e

Market Place Shopping Center

  Champaign, IL     105,240        21,611        111,515        -        1,378        21,611        112,893        134,504        6,137        2010        (e

Mayfair Mall

  Wauwatosa, WI     297,066        84,473        352,140        (79     685        84,394        352,825        437,219        17,345        2010        (e

Meadows Mall

  Las Vegas, NV     97,462        30,275        136,846        -        322        30,275        137,168        167,443        6,241        2010        (e

Mondawmin Mall

  Baltimore, MD     72,556        19,707        63,348        -        4,405        19,707        67,753        87,460        4,102        2010        (e

Newgate Mall

  Ogden, UT     38,204        17,856        70,318        -        2,487        17,856        72,805        90,661        4,688        2010        (e

Newpark Mall

  Newark, CA     67,056        17,848        57,404        -        857        17,848        58,261        76,109        3,797        2010        (e

North Plains Mall

  Clovis, NM     13,160        2,218        11,768        -        379        2,218        12,147        14,365        958        2010        (e

North Point Mall

  Alpharetta, GA     207,212        57,900        228,517        -        1,930        57,900        230,447        288,347        14,810        2010        (e

North Star Mall

  San Antonio, TX     217,665        91,135        392,422        -        3,097        91,135        395,519        486,654        15,252        2010        (e

Northridge Fashion Center

  Northridge, CA     248,738        66,774        238,023        -        112        66,774        238,135        304,909        11,093        2010        (e

NorthTown Mall

  Spokane, WA     89,565        12,310        108,857        -        575        12,310        109,432        121,742        6,389        2010        (e

Oak View Mall

  Omaha, NE     84,601        20,390        107,216        -        1,673        20,390        108,889        129,279        6,406        2010        (e

Oakwood Center

  Gretna, LA     90,249        21,105        74,228        -        149        21,105        74,377        95,482        3,278        2010        (e

Oakwood Mall

  Eau Claire, WI     81,592        13,786        92,114        -        532        13,786        92,646        106,432        4,995        2010        (e

Oglethorpe Mall

  Savannah, GA     130,229        27,075        157,100        -        1,700        27,075        158,800        185,875        8,370        2010        (e

 

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Table of Contents

Name of Center

 

Location

  Encumbrances (a)     Acquisition
Accounting Cost
    Costs Capitalized
Subsequent to
Acquisition (c)
    Gross Amounts at Which
Carried at Close of Period (d)
    Accumulated
Depreciation (e)
    Date
Acquired
    Life Upon
Which
Latest
Statement
of
Operation
is
Computed
 
      Land     Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Total        
        (In thousands)                                                        

Orem Plaza Center
Street (g)

  Orem, UT     2,133        1,935        2,180        -        6        1,935        2,186        4,121        71        2010        (e

Orem Plaza State
Street (g)

  Orem, UT     1,320        1,264        611        -        52        1,264        663        1,927        29        2010        (e

Owings Mills Mall

  Owing Mills, MD     -        24,921        31,746        (22,519     (6,202     2,402        25,544        27,946        1,414        2010        (e

Oxmoor Center

  Louisville, KY     94,396        -        117,814        -        874        -        118,688        118,688        5,133        2010        (e

Paramus Park

  Paramus, NJ     96,729        31,320        102,054        -        2,026        31,320        104,080        135,400        5,956        2010        (e

Park City Center

  Lancaster, PA     195,740        42,451        195,409        -        660        42,451        196,069        238,520        5,094        2010        (e

Park Place

  Tucson, AZ     198,468        61,907        236,019        -        577        61,907        236,596        298,503        9,352        2010        (e

Peachtree Mall

  Columbus, GA     82,983        13,855        92,143        -        2,187        13,855        94,330        108,185        5,843        2010        (e

Pecanland Mall

  Monroe, LA     51,551        12,943        73,231        -        1,672        12,943        74,903        87,846        4,894        2010        (e

Pembroke Lakes Mall

  Pembroke Pines, FL     122,111        64,883        254,910        -        322        64,883        255,232        320,115        17,140        2010        (e

Pierre Bossier Mall

  Bossier City, LA     41,440        7,522        38,247        -        (291     7,522        37,956        45,478        1,828        2010        (e

Pine Ridge Mall

  Pocatello, ID     23,133        7,534        5,013        -        49        7,534        5,062        12,596        726        2010        (e

Pioneer Place

  Portland, OR     112,329        -        97,096        -        962        -        98,058        98,058        3,712        2010        (e

Plaza 800

  Sparks, NV     -        -        61        -        336        -        397        397        14        2010        (e

Prince Kuhio Plaza

  Hilo, HI     33,814        -        52,373        -        (100     -        52,273        52,273        3,078        2010        (e

Providence Place

  Providence, RI     421,371        -        400,893        -        1,345        -        402,238        402,238        16,169        2010        (e

Provo Towne Centre

  Provo, UT     55,422        17,027        75,871        -        (12,949     17,027        62,922        79,949        3,559        2010        (e

Red Cliffs Mall

  St. George, UT     21,986        4,739        33,357        -        (135     4,739        33,222        37,961        1,798        2010        (e

Red Cliffs Plaza

  St. George, UT     -        2,073        573        -        5        2,073        578        2,651        104        2010        (e

Regency Square Mall

  Jacksonville, FL     74,467        14,979        56,082        -        (660     14,979        55,422        70,401        6,066        2010        (e

Ridgedale Center

  Minnetonka, MN     161,139        39,495        151,090        -        1,460        39,495        152,550        192,045        6,863        2010        (e

River Falls Mall

  Clarksville, IN     -        4,464        12,824        (4,464     (12,824     -        -        -        -        2010        (e

River Hills Mall

  Mankato, MN     76,961        16,207        85,608        -        1,352        16,207        86,960        103,167        4,577        2010        (e

 

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Table of Contents

GENERAL GROWTH PROPERTIES, INC.

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2011

 

Name of Center

 

Location

  Encumbrances (a)     Acquisition
Accounting Cost
    Costs Capitalized
Subsequent to
Acquisition (c)
    Gross Amounts at Which
Carried at Close of Period (d)
    Accumulated
Depreciation (e)
    Date
Acquired
    Life Upon
Which
Latest
Statement
of
Operation
is
Computed
 
      Land     Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Total        
        (In thousands)                                                        

River Pointe Plaza (g)

  West Jordan, UT     3,303        3,128        3,509        -        6        3,128        3,515        6,643        156        2010        (e

Riverlands Shopping Center

  LaPlace, LA     -        2,017        4,676        (2,017     (4,676     -        -        -        -        2010        (e

Riverside Plaza

  Provo, UT     -        8,128        9,489        (8,128     (9,489     -        -        -        -        2010        (e

Rivertown Crossings

  Grandville, MI     167,829        47,790        181,770        -        1,507        47,790        183,277        231,067        7,992        2010        (e

Rogue Valley Mall

  Medford, OR     26,575        9,042        61,558        -        1,438        9,042        62,996        72,038        3,248        2010        (e

Saint Louis Galleria

  St. Louis, MO     -        21,425        263,596        (21,425     (263,596     -        -        -        -        2010        (e

Salem Center

  Salem, OR     37,416        5,925        33,620        -        (84     5,925        33,536        39,461        1,742        2010        (e

Sikes Senter

  Wichita Falls, TX     49,891        5,915        34,075        -        1,467        5,915        35,542        41,457        3,097        2010        (e

Silver Lake Mall

  Coeur d’Alene, ID     13,078        3,237        12,914        -        33        3,237        12,947        16,184        730        2010        (e

Sooner Mall

  Norman, OK     57,721        9,902        69,570        -        2,744        9,902        72,314        82,216        3,599        2010        (e

Southlake Mall

  Morrow, GA     91,708        19,263        68,607        -        166        19,263        68,773        88,036        5,439        2010        (e

Southland Center

  Taylor, MI     -        13,698        51,861        -        (666     13,698        51,195        64,893        2,234        2010        (e

Southland Mall

  Hayward, CA     72,908        23,407        81,474        -        6,386        23,407        87,860        111,267        4,889        2010        (e

Southshore Mall

  Aberdeen, WA     -        460        316        -        71        460        387        847        147        2010        (e

Southwest Plaza

  Littleton, CO     106,375        19,024        76,453        -        95        19,024        76,548        95,572        5,188        2010        (e

Spokane Valley Mall

  Spokane, WA     52,431        14,328        83,706        -        (9,930     14,328        73,776        88,104        3,514        2010        (e

Spokane Valley Plaza

  Spokane, WA     -        2,488        16,503        -        (2,122     2,488        14,381        16,869        697        2010        (e

Spring Hill Mall

  West Dundee, IL     52,611        8,219        23,679        -        (53     8,219        23,626        31,845        1,803        2010        (e

Staten Island Mall

  Staten Island, NY     282,198        102,227        375,612        -        2,496        102,227        378,108        480,335        20,017        2010        (e

Steeplegate Mall

  Concord, NH     66,434        11,438        42,032        -        264        11,438        42,296        53,734        2,481        2010        (e

Stonestown Galleria

  San Francisco, CA     216,093        65,962        203,043        -        (705     65,962        202,338        268,300        8,425        2010        (e

The Boulevard Mall

  Las Vegas, NV     81,895        34,523        46,428        -        851        34,523        47,279        81,802        4,340        2010        (e

The Crossroads

  Portage, MI     -        20,261        95,463        -        (40     20,261        95,423        115,684        7,296        2010        (e

The Gallery At Harborplace

  Baltimore, MD     77,778        15,930        112,117        -        1,076        15,930        113,193        129,123        5,328        2010        (e

The Grand Canal Shoppes

  Las Vegas, NV     370,823        49,785        716,625        -        (715     49,785        715,910        765,695        25,307        2010        (e

The Maine Mall

  South Portland, ME     200,706        36,205        238,067        -        1,464        36,205        239,531        275,736        11,253        2010        (e

The Mall In Columbia

  Columbia, MD     402,438        124,540        479,171        -        839        124,540        480,010        604,550        18,353        2010        (e

The Parks at Arlington

  Arlington, TX     183,116        19,807        299,708        -        1,315        19,807        301,023        320,830        12,018        2010        (e

The Pines

  Pine Bluff, AR     -        331        1,631        (331     (1,631     -        -        -        -        2010        (e

The Shoppes at Buckland

  Manchester, CT     155,358        35,180        146,474        -        (218     35,180        146,256        181,436        8,241        2010        (e

The Shoppes at the Palazzo

  Las Vegas, NV     241,282        -        290,826        -        (1,028     -        289,798        289,798        9,555        2010        (e

The Shops At Fallen Timbers

  Maumee, OH     46,969        3,785        31,771        (23     1,249        3,762        33,020        36,782        1,806        2010        (e

 

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Table of Contents

Name of Center

 

Location

  Encumbrances (a)     Acquisition
Accounting Cost
    Costs Capitalized
Subsequent to
Acquisition (c)
    Gross Amounts at Which
Carried at Close of Period (d)
    Accumulated
Depreciation (e)
    Date
Acquired
    Life Upon
Which
Latest
Statement
of
Operation
is
Computed
 
      Land     Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Total        
              (In thousands)                                                  

The Shops At La Cantera

  San Antonio, TX     170,436        80,016        350,737        -        16,699        80,016        367,436        447,452        13,492        2010        (e

The Streets At SouthPoint

  Durham, NC     228,970        66,045        242,189        -        12,183        66,045        254,372        320,417        22,869        2010        (e

The Village Of Cross Keys

  Baltimore, MD     -        8,425        26,651        -        922        8,425        27,573        35,998        2,753        2010        (e

The Woodlands Mall

  The Woodlands, TX     268,047        84,889        349,315        -        479        84,889        349,794        434,683        13,614        2010        (e

Three Rivers Mall

  Kelso, WA     18,834        2,080        11,142        -        593        2,080        11,735        13,815        1,057        2010        (e

Town East Mall

  Mesquite, TX     94,703        9,928        168,555        -        4,309        9,928        172,864        182,792        7,257        2010        (e

Tucson Mall

  Tucson, AZ     112,014        2,071        193,815        -        91,381        2,071        285,196        287,267        18,054        2010        (e

Twin Falls Crossing

  Twin Falls, ID     -        1,680        2,770        (1,680     (2,770     -        -        -        -        2010        (e

Tysons Galleria

  McLean, VA     260,459        90,317        351,005        -        2,208        90,317        353,213        443,530        12,502        2010        (e

University Crossing (g)

  Orem, UT     4,769        8,170        16,886        -        (84     8,170        16,802        24,972        862        2010        (e

Valley Hills Mall

  Hickory, NC     52,110        10,047        61,817        -        422        10,047        62,239        72,286        3,438        2010        (e

Valley Plaza Mall

  Bakersfield, CA     84,899        38,964        211,930        -        (878     38,964        211,052        250,016        9,945        2010        (e

Visalia Mall

  Visalia, CA     36,402        11,912        80,185        -        (58     11,912        80,127        92,039        3,396        2010        (e

Vista Commons

  Las Vegas, NV     -        6,348        13,110        (6,348     (13,110     -        -        -        -        2010        (e

Vista Ridge Mall

  Lewisville, TX     74,066        15,965        34,105        -        12,387        15,965        46,492        62,457        3,253        2010        (e

Washington Park Mall

  Bartlesville, OK     10,451        1,388        8,213        -        73        1,388        8,286        9,674        730        2010        (e

West Oaks Mall

  Ocoee, FL     64,757        20,278        55,607        (12,692     (36,175     7,586        19,432        27,018        1        2010        (e

West Valley Mall

  Tracy, CA     48,437        31,340        38,316        -        3,612        31,340        41,928        73,268        3,080        2010        (e

Westlake Center

  Seattle, WA     4,487        19,055        129,295        (14,819     (98,703     4,236        30,592        34,828        1,418        2010        (e

Westwood Mall

  Jackson, MI     27,019        5,708        28,006        -        171        5,708        28,177        33,885        1,675        2010        (e

White Marsh Mall

  Baltimore, MD     178,935        43,880        177,194        4,125        3,989        48,005        181,183        229,188        10,151        2010        (e

White Mountain Mall

  Rock Springs, WY     10,596        3,010        11,311        -        466        3,010        11,777        14,787        1,274        2010        (e

Willowbrook

  Wayne, NJ     162,852        110,660        419,822        -        3,175        110,660        422,997        533,657        20,093        2010        (e

 

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Table of Contents

GENERAL GROWTH PROPERTIES, INC.

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2011

 

Name of Center

 

Location

  Encumbrances (a)     Acquisition Accounting
Cost
    Costs Capitalized
Subsequent to
Acquisition (c)
    Gross Amounts at Which
Carried at Close of Period (d)
    Accumulated
Depreciation (e)
    Date
Acquired
    Life Upon
Which
Latest
Statement
of
Operation
is
Computed
 
      Land     Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Total        
(In thousands)  

Woodbridge Center

  Woodbridge, NJ     191,054        67,825        242,744        -        8,830        67,825        251,574        319,399        10,913        2010        (e

Woodlands Village

  Flagstaff, AZ     6,040        3,624        12,960        -        (55     3,624        12,905        16,529        869        2010        (e

Yellowstone Square

  Idaho Falls, ID     -        2,625        1,163        (2,625     (1,163     -        -        -        -        2010        (e

Office, other and development in progress

      2,013,447        165,478        542,790        (46,364     (71,688     119,114        471,102        590,216        30,617       
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total

    $ 17,349,214      $ 4,809,777      $ 20,469,723      $ (162,335   $ (519,664   $ 4,647,442      $ 19,950,059      $ 24,597,501      $ 974,185       
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Properties Held For Disposition:

                       

Grand Traverse Mall

  Traverse City, MI     72,453        9,269        59,307        -        -        9,269        59,307        68,576        414        2010        (e
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     
    $ 72,453      $ 9,269      $ 59,307      $ -      $ -      $ 9,269      $ 59,307      $ 68,576      $ 414       
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

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GENERAL GROWTH PROPERTIES, INC.

NOTES TO SCHEDULE III

 

(a) See description of mortgages, notes and other debt payable in Note 7 of Notes to Consolidated Financial Statements.
(b) Initial cost is the carrying value at the Effective Date due to the application of the acquisition method of accounting (Note 4).
(c) Due to the application of the acquisition method of accounting, all dates are November 9, 2010, the Effective Date.
(d) The aggregate cost of land, buildings and improvements for federal income tax purposes is approximately $18.2 billion.
(e) Depreciation is computed based upon the following estimated useful lives:

 

     Years

Buildings and improvements

   45

Equipment and fixtures

   5-10

Tenant improvements

   Shorter of useful life or applicable lease term

 

(f) During 2011, the initial cost for certain assets was adjusted; the total acquisition accounting cost was not impacted.
(g) Property previously classified as held for sale, and was reclassified as held for use in the first quarter of 2012.

Reconciliation of Real Estate

 

     Successor           Predeccessor  
     2011     2010           2009  
(In thousands)                         

Balance at beginning of period

   $ 25,140,166      $ 28,350,102           $ 29,863,649   

Acquisition accounting adjustments and HHC distribution

     -        (3,104,518          -   

Change in Master Planned Communities land

     -        -             (70,156

Additions

     383,001        12,518             263,418   

Impairments

     (63,910     -             (1,079,473

Dispositions and write-offs

     (861,756     (117,936          (627,336
  

 

 

   

 

 

        

 

 

 

Balance at end of period

   $ 24,597,501      $ 25,140,166           $ 28,350,102   
  

 

 

   

 

 

        

 

 

 

Reconciliation of Accumulated Depreciation

 

     Successor           Predeccessor  
     2011     2010           2009  
(In thousands)                         

Balance at beginning of period

   $ 129,794      $ 4,494,297           $ 4,240,222   

Depreciation expense

     943,627        135,003             707,183   

Dispositions and write-offs

     (99,236     (4,499,506          (453,108
  

 

 

   

 

 

        

 

 

 

Balance at end of period

   $ 974,185      $ 129,794           $ 4,494,297   
  

 

 

   

 

 

        

 

 

 

 

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TRZ HOLDINGS LLC AND SUBSIDIARIES

Consolidated financial statements as at December 31, 2011 and 2010 and for each of the years

in the three-year period ended December 31, 2011

 

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TRZ HOLDINGS LLC AND SUBSIDIARIES

 

      Page

Independent Auditor’s Report

   F-136
  
Consolidated financial statements of TRZ Holdings LLC and Subsidiaries as of December 31, 2011 and December 31, 2010 and for each of the years in the three-year period ended December 31, 2011   
  

Balance Sheets

   F-137
  

Statements of Operations

   F-138
  

Statements of Comprehensive Income

   F-139
  

Statements of Changes in Members’ Equity

   F-140
  

Statements of Cash Flows

   F-141
  

Notes to Consolidated Financial Statements

   F-142–157

 

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Table of Contents

Independent Auditor’s Report

To the Members of

TRZ Holdings LLC:

We have audited the accompanying consolidated statements of operations, comprehensive income and cash flows of TRZ Holdings LLC and Subsidiaries (the “Company”) for the year ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated statements of operations, comprehensive income and cash flows present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Chartered Accountants

Licensed Public Accountants

Toronto, Canada

April 9, 2010, except as to Note 8 for the year ended December 31, 2009

for which the date is March 29, 2012

 

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TRZ HOLDINGS LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2011 AND 2010

(U.S. dollars in thousands)

 

 

 

      Unaudited  
     2011     2010  

ASSETS

    

REAL ESTATE

   $ 3,998,464      $ 5,941,743   

CASH

     261,231        166,678   

ESCROWS AND RESTRICTED CASH

     42,082        24,011   

INVESTMENT IN UNCONSOLIDATED REAL ESTATE VENTURES

     588,418        786,512   

RECEIVABLES AND OTHER

     211,633        176,943   

DEFERRED CHARGES — Net

     143,403        167,847   

INTANGIBLE ASSETS — Net

     154,385        284,598   

PREPAID EXPENSE AND OTHER ASSETS

     17,735        11,902   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 5,417,351      $ 7,560,234   
  

 

 

   

 

 

 

LIABILITIES

    

MORTGAGE DEBT AND OTHER LOANS

   $ 2,638,007      $ 5,151,165   

ACCOUNTS PAYABLE AND OTHER LIABILITIES

     157,811        208,224   

INTANGIBLE LIABILITIES — Net

     181,330        268,557   

TAXES PAYABLE

     3,713        20,500   
  

 

 

   

 

 

 

Total liabilities

     2,980,861        5,648,446   
  

 

 

   

 

 

 

CONTINGENCIES (Note 14)

    

MEMBERS’ EQUITY:

    

Members’ equity

     2,440,363        1,888,451   

Accumulated other comprehensive loss

     (6,887     (31
  

 

 

   

 

 

 

Total members’ equity of TRZ Holdings LLC

     2,433,476        1,888,420   
  

 

 

   

 

 

 

NONCONTROLLING INTEREST:

    

Noncontrolling interest — real estate ventures

     1,014        3,814   

8% Series G cumulative redeemable subordinated preferred units

     2,000        2,000   

Redeemable preferred units

     -            17,554   
  

 

 

   

 

 

 

Total noncontrolling interest

     3,014        23,368   
  

 

 

   

 

 

 

Total members’ equity

     2,436,490        1,911,788   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND MEMBERS’ EQUITY

   $ 5,417,351      $ 7,560,234   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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TRZ HOLDINGS LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

(U.S. dollars in thousands)

 

 

 

     Unaudited     Unaudited     Audited  
     2011     2010     2009 (1)  

REVENUES:

      

Rentals

   $ 398,256      $ 458,630      $ 450,193   

Recoveries from tenants

     130,467        148,385        153,367   

Parking and other

     59,020        54,542        49,446   

Fee income

     866        885        885   
  

 

 

   

 

 

   

 

 

 

Total revenues

     588,609        662,442        653,891   
  

 

 

   

 

 

   

 

 

 

EXPENSES:

      

Operating

     248,187        266,292        273,887   

General and administrative

     78        -            73   

Depreciation and amortization

     158,733        165,883        180,031   
  

 

 

   

 

 

   

 

 

 

Total expenses

     406,998        432,175        453,991   
  

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     181,611        230,267        199,900   
  

 

 

   

 

 

   

 

 

 

OTHER EXPENSE:

      

Interest and other expense

     (7,536     (3,605     (2,793

Interest expense

     (178,006     (190,804     (180,619
  

 

 

   

 

 

   

 

 

 

Total other expense

     (185,542     (194,409     (183,412
  

 

 

   

 

 

   

 

 

 

INCOME BEFORE GAIN ON SOLD PROPERTY, INCOME TAXES, INCOME FROM DISCONTINUED OPERATIONS, AND INCOME FROM UNCONSOLIDATED REAL ESTATE VENTURES

     (3,931     35,858        16,488   

GAIN ON SOLD PROPERTY

     265,545        35,084        -       

PROVISION FOR INCOME AND OTHER CORPORATE TAXES — Net

     (1,980     (18,510     (882

INCOME FROM UNCONSOLIDATED REAL ESTATE VENTURES

     21,835        19,052        23,406   
  

 

 

   

 

 

   

 

 

 

NET INCOME FROM CONTINUING OPERATIONS

     281,469        71,484        39,012   

NET INCOME FROM DISCONTINUED OPERATIONS

     125,950        37,132        34,964   
  

 

 

   

 

 

   

 

 

 

NET INCOME

     407,419        108,616        73,976   

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

     985        1,112        15,222   
  

 

 

   

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO TRZ HOLDINGS LLC

   $ 406,434      $ 107,504      $ 58,754   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

(1) Restated for discontinued operations

 

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TRZ HOLDINGS LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

(U.S. dollars in thousands)

 

 

     Unaudited        Unaudited         Audited   
     2011     2010      2009  

NET INCOME

   $ 407,419      $ 108,616       $ 73,976   
  

 

 

   

 

 

    

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS):

       

Unrealized derivative gains (losses):

     (6,856     678         (252
  

 

 

   

 

 

    

 

 

 

Total other comprehensive income (loss)

     (6,856     678         (252
  

 

 

   

 

 

    

 

 

 

NET COMPREHENSIVE INCOME

     400,563        109,294         73,724   

NET COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

     985        1,112         15,222   
  

 

 

   

 

 

    

 

 

 

NET COMPREHENSIVE INCOME ATTRIBUTABLE TO TRZ HOLDINGS LLC

   $ 399,578      $ 108,182       $ 58,502   
  

 

 

   

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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TRZ HOLDINGS LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010

(U.S. dollars in thousands)

Unaudited

 

 

 

     Members’
Equity
   

Accumulated

Other

Comprehensive
Income (Loss)

    Noncontrolling
Interest
     Total
Equity
 

BALANCE — December 31, 2009

   $ 1,780,947      $ (709   $ 23,309       $ 1,803,547   

Contributions

     -        -        -         -   

Net income for the year

     107,504        -        1,112         108,616   

Distributions

     -        -        (1,053      (1,053

Other comprehensive income

     -        678        -         678   
  

 

 

   

 

 

   

 

 

    

 

 

 

BALANCE — December 31, 2010

     1,888,451        (31     23,368         1,911,788   

Contributions

     2,054,200        -        -         2,054,200   

Net income for the year

     406,434        -        985         407,419   

Transfer of redeemable preferred units (Note 1)

     -        -        (17,554      (17,554

Distributions

     (1,908,722     -        (3,785      (1,912,507

Other comprehensive income

     -        (6,856     -         (6,856
  

 

 

   

 

 

   

 

 

    

 

 

 

BALANCE — December 31, 2011

   $ 2,440,363      $ (6,887   $ 3,014       $ 2,436,490   
  

 

 

   

 

 

   

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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TRZ HOLDINGS LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

(U.S. dollars in thousands)

 

 

     Unaudited        Unaudited        Audited   
     2011        2010        2009   

OPERATING ACTIVITIES:

      

Net income

   $ 407,419      $ 108,616      $ 73,976   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Income from unconsolidated real estate ventures

     (25,989     (22,621     (26,860

Operating distributions from unconsolidated real estate ventures

     3,076        5,081        15,124   

Depreciation and amortization expense

     191,915        226,425        244,034   

Amortization of acquired operating leases to rental revenue — net

     (50,061     (63,360     (78,981

Gain on sold property

     (265,545     (35,084     -       

Gain on sale of discontinued operations

     (101,032     -            -       

Tenant leasing costs

     (22,738     (33,145     (17,620

Recognition to earnings of deferred hedge loss and other

     31        678        (252

Changes in operating assets and liabilities:

      

Receivables and other

     (29,751     (31,521     (21,136

Prepaid expense and other assets

     (9,208     6,305        (4,871

Accounts payable and other liabilities

     (25,777     (25,460     (19,164

Taxes payable

     (16,787     16,767        (6,627
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     55,553        152,681        157,623   
  

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES:

      

Real estate:

      

Tenant improvements and capital expenditures

     (85,455     (102,610     (68,701

Development expenditures

     -            -            (33,794

Proceeds from sold property

     717,500        257,250        -       

Distribution from investments

     -            -            1,848   

Escrows and restricted cash

     (21,260     (4,920     4,778   

Increase in advances to affiliates

     (59,166     -            -       

Decrease in advances from affiliates

     (36,307     -            -       

Unconsolidated real estate ventures:

      

Investments

     (31,064     (18,575     (1,040

Capital distributions

     11,267        7,406        1,268   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     495,515        138,551        (95,641
  

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES:

      

Mortgage debt and other loans:

      

Increase in mortgage debt and other loans

     1,963,000        128,000        56,100   

Principal repayments

     (4,420,915     (314,497     (70,060

Financing expenditures

     (28,957     -            (4,619

Contributions of members’ capital

     2,054,200        -            6,226   

Redemption of redeemable preferred units

     -            (1,330     (27,350

Contribution by noncontrolling interest

     -            -            15,299   

Distributions

     (23,843     -            -       

Distribution to noncontrolling interest

     -            -            (10,745
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (456,515     (187,827     (35,149
  

 

 

   

 

 

   

 

 

 

NET INCREASE IN CASH

     94,553        103,405        26,833   

CASH — Beginning of year

     166,678        63,273        36,440   
  

 

 

   

 

 

   

 

 

 

CASH — End of year

   $ 261,231      $ 166,678      $ 63,273   
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW DISCLOSURES — Cash paid during the year for: Interest, inclusive of amounts capitalized

   $ 173,480      $ 187,425      $ 187,779   
  

 

 

   

 

 

   

 

 

 

Taxes paid — net

   $ 18,335      $ 4,768      $ 3,819   
  

 

 

   

 

 

   

 

 

 

 

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TRZ HOLDINGS LLC AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2011 AND 2010 AND FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2010

(U.S. dollars in thousands except share and per share amounts)

 

 

1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS

Organization — TRZ Holdings LLC (“TRZ Holdings” or the “Company”) is a Delaware limited liability company that was formed on June 5, 2006. The Company, directly or indirectly through one or more subsidiaries, is principally engaged in owning, managing, leasing and developing office properties. Through April 9, 2009, the Company was approximately 35% directly owned by Brookfield Properties Office Partners, Inc. (“BPO REIT”) and approximately 65% directly owned by BREP/TZ Holdco L.L.C. (“BREP”). BPO REIT, a Maryland corporation, is an affiliate of Brookfield Office Properties Inc. (formerly, Brookfield Properties Corporation), a publicly traded real estate company (“Brookfield Properties” or “Brookfield”). BREP, a Delaware limited liability company, is an affiliate of The Blackstone Group (“Blackstone”). The Company was formed as a result of the Agreement and Plan of Merger and Arrangement Agreement, (the “Merger Agreement” or the “Merger”) announced on June 5, 2006, between Trizec Properties, Inc. (“Trizec Properties”), Trizec Holdings Operating LLC (the “Operating Company”), Trizec Canada Inc. and affiliates of Brookfield Properties.

On April 9, 2009, BPO REIT exercised its Brookfield acquisition option that resulted in a reorganization of ownership interests in the Company. As a result, TRZ Holdings acquired all of the shares of TRZ Holdings II, Inc. (“TRZ Holdings II”), a consolidated subsidiary, and its subsidiary, TRZ Holdings III LLC (“Holdings III”), not previously owned by the Company. Upon BPO REIT exercising the option, Emerald Blue KFT (“Emerald”), a wholly owned subsidiary of Brookfield, through a series of transactions, transferred its interest in TRZ Holdings II to BPOP Investor, Inc. (“FREIT”), a Maryland corporation and affiliate of Brookfield. FREIT then exchanged all its ownership interest in TRZ Holdings II and Holdings III for units of the Company. Further, the Company issued notes with a face value of $765,000 to a wholly owned subsidiary of Brookfield. The Brookfield subsidiary subsequently assigned these notes to third party lenders in exchange for notes previously issued to the lenders by the Brookfield subsidiary. The face value of the notes assigned were of equal value. After reorganization, the Company was approximately 14% directly owned by BPO REIT, approximately 60% directly owned by FREIT and approximately 26% directly owned by BREP (collectively, the “Members”).

During the period commencing on January 1, 2011 and ending on September 30, 2011, BREP had an option (the “Call Option”) to cause the Company and its subsidiaries, through a series of transactions, to transfer indirect ownership of all of the BREP Properties (as designated under Exhibit B of the amended and Restated Limited Liability Company Agreement of TRZ Holdings LLC) to BREP in consideration for the exchange of 100% of the Class A Units (the “Units”) held by BREP. On August 9, 2011, BREP partially exercised its Call Option and all BREP Properties were transferred by the Company with the exception of 5670 Wilshire. On September 29, 2011, BREP fully exercised its Call Option causing the Company to transfer the Operating Company and its sole remaining investment 5670 Wilshire to BREP. BREP did not retain any ownership interest in the Company following the exercise of its Call Option. At the date of transfer, the Operating Company had redeemable preferred units valued at $17,554 outstanding. The holders of the redeemable preferred units are entitled, when, as and if authorized, to cumulative preferred distributions at a 6% fixed rate per annum. The redeemable preferred units are redeemable at the option of the unitholder at any time or from time to time for cash. The Company retained an interest in the Operating Company after transfer, requiring it to fund all preferred distributions to the redeemable preferred unitholders but does not expose the Company to any subsequent risk and rewards of ownership. Additionally, the Company has an obligation to fund a portion of future redemptions of the redeemable preferred units in relation to the non-economic interest. The Company’s liability related to the non-economic interest at December 31, 2011 is $12,859, which is included within accounts payable and other liabilities.

 

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On August 4, 2011 and September 9, 2011, Brookfield, through its subsidiaries, initiated a series of transactions to reorganize the ownership of the Units held indirectly by Brookfield. After this reorganization and Blackstone fully exercising its Call Option, the Company is approximately 60% directly owned by BPOP Holdco LLC (“Holdco”) and approximately 40% directly owned by BPOP Investor Subsidiary, Inc. (“SubFREIT”). Holdco, a Delaware limited liability company, and SubFREIT, a Maryland corporation, are affiliates of Brookfield.

At December 31, 2011, the Company, through its subsidiaries, had ownership interests in a portfolio of 23 consolidated office properties concentrated in the metropolitan areas of four major U.S. cities which include New York, NY, Washington, D.C., Los Angeles, CA, and Houston, TX.

At December 31, 2011, the Company also had ownership interests in five unconsolidated real estate venture properties comprising approximately 3.3 million square feet (unaudited) of total area.

 

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — The accompanying consolidated financial statements include the accounts and operating results of the Company and its subsidiaries. All intercompany transactions have been eliminated.

The Company consolidates entities in which it has a direct or indirect controlling voting interest. The equity method of accounting is followed for ownership interests in entities which the Company does not have a direct or indirect controlling voting interest, but over which it can exercise significant influence with respect to operations and major decisions. The cost method of accounting is followed for ownership interests in entities when the Company’s ownership percentage is minimal and the Company does not have significant influence.

Accounting Estimates — The preparation of financial statements in accordance with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Significant estimates and assumptions have been made with respect to useful lives of assets, determination of future cash flows and probabilities in assessing net recoverable amounts and net realizable value of assets, capitalization of development costs, provision for income taxes, recoverable amounts of receivables and deferred taxes, and initial valuations and related depreciation or amortization periods of real estate assets, deferred costs and intangibles, particularly with respect to acquisitions. Actual results could differ from these and other estimates.

Real Estate — Rental properties are recorded at cost, less accumulated depreciation. Depreciation of rental properties is calculated using the straight-line method over periods not exceeding a 60-year estimated life with an estimated salvage value of 5%, subject to the terms of any respective ground leases. Depreciation is determined with reference to each rental property’s carried value, remaining estimated useful life and residual value. Tenant improvements are deferred and amortized on a straight-line basis over the shorter of the economic life of the improvement or the term of the respective lease.

Maintenance and repair costs are expensed against operations as incurred. Planned major maintenance activities (for example: roof replacement and the replacement of heating, ventilation, air conditioning and other building systems), significant building improvements, replacements and major renovations, all of which improve or extend the useful life of the properties, are capitalized to rental properties and amortized over their estimated useful lives.

Furniture, equipment and certain improvements are depreciated on a straight-line basis over periods of up to 10 years.

 

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Above and below market leases are amortized and recorded as either an increase (in the case of below market leases) or a decrease (in the case of above market leases) to rental income over the remaining term of the associated lease and any contractual bargain renewal options to the tenant and in place at the time of purchase. The value associated with tenant relationships is amortized into depreciation and amortization expense over the expected term of the relationship, which includes an estimate of probability of the lease renewal, and its estimated term. If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are to be made on the lease, any unamortized balance of the related intangible will be written off to amortization expense. Tenant improvements, in-place lease value and lease origination costs are amortized as an expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date).

Properties under development consist of rental properties under construction and are recorded at cost, reduced for impairment losses where appropriate. Properties are classified as under development until the property is substantially completed and available for occupancy, at which time such properties are classified as rental properties and depreciation commences. The cost of properties under development includes costs incurred in connection with their acquisition, development and construction. Such costs consist of all direct costs including capitalized interest on general and specific debt and other direct expenses. Ancillary income relating specifically to such properties during the development period is treated as a reduction of costs.

If events or circumstances indicate that the carrying value of a rental property, a rental property under development, or a property held for development may be impaired, a recoverability analysis is performed based on estimated undiscounted future cash flows to be generated from property operations and its projected disposition. If the analysis indicates that the carrying value is not recoverable from such future cash flows, the property is written down to estimated fair value and an impairment loss is recognized.

In accordance with Accounting Standards Codification (“ASC”) Subtopic 360-10-15, Property, Plant and Equipment, properties formerly held for disposition are carried at the lower of their carrying values (i.e., cost less accumulated depreciation and any impairment loss recognized, where applicable) or estimated fair values less costs to sell. Estimated fair value is determined based on management’s estimate of amounts that would be realized if the property were offered for sale in the ordinary course of business assuming a reasonable sales period and under normal market conditions. Carrying values are reassessed at each balance sheet date. Implicit in management’s assessment of fair values are estimates of future rental and other income levels for the properties and their estimated disposal dates. Due to the significant uncertainty in determining fair value, actual proceeds realized on the ultimate sale of these properties will differ from estimates and such differences could be material. Depreciation ceases once a property is classified as held for disposition.

Revenue Recognition — The Company has retained substantially all of the benefits and risks of ownership of its rental properties and, therefore, accounts for leases with its tenants as operating leases. Revenues include minimum rents and recoveries of operating expenses and property taxes. Recoveries of operating expenses and property taxes are recognized in the period the expenses are incurred.

The Company reports minimum rental revenue on a straight-line basis, whereby the known amount of cash to be received under a lease is recognized in income evenly over the term of the respective lease. Differences between rental revenue and minimum rents collected in accordance with the lease agreements are recorded as deferred rent receivables. The impact of the straight-line adjustment increased rental revenue by approximately $19,711, $24,450, and $27,819 for the years ended December 31, 2011, 2010, and 2009 respectively.

Certain tenants are required to pay overage rents based on sales over a stated base amount during the lease year. The Company recognizes overage rents only when each tenant’s actual sales exceed the stated base amount.

 

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Parking and other revenue includes income from public parking spaces, parking spaces leased to tenants, income from tenants for additional services provided by the Company and income from tenants for early lease termination.

Revenue is recognized on payments received from tenants for early lease terminations on a straight line basis over the remaining term the tenant occupies the space.

The Company provides an allowance for doubtful accounts on a specific identification basis representing that portion of tenant, other and deferred rent receivables which are estimated to be uncollectible. Such allowances are reviewed periodically based upon the recovery experience of the Company.

The Company recognizes property sales in accordance with ASC Subtopic 360-20, Property, Plant and Equipment — Real Estate Sales. The Company generally records the sales of operating properties using the full accrual method at closing when the earnings process is deemed to be complete. Sales not qualifying for full recognition at the time of sale are accounted for under other appropriate deferral methods.

Investments — Investments in ventures in which the Company does not have a controlling direct or indirect voting interest, but over which it can exercise significant influence with respect to its operations and major decisions, are accounted for using the equity method of accounting whereby the cost of an investment is adjusted for the Company’s share of equity in net income or loss from the date of acquisition and reduced by distributions received and increased for contributions made. The income or loss of each entity is allocated in accordance with the provision of the applicable operating agreements. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences between the carrying amount of the Company’s investment in the respective entities and the Company’s share of the underlying equity of such unconsolidated entities are amortized over the respective lives of the underlying assets, as applicable.

Investments which do not provide the Company with the ability to exert significant influence are accounted for using the cost method of accounting. Income is recognized only to the extent of dividends or cash received.

The carrying value of investments which the Company determines to have an impairment considered to be other than temporary is written down to their fair value.

Marketable equity securities are accounted for in accordance with ASC Subtopic 320-10-15, Debt and Equity Securities. Unrealized gains and losses on marketable equity securities that are designated as available-for-sale are included in accumulated other comprehensive income (loss).

Income Taxes — The Company is a partnership for U.S. tax purposes and therefore is generally not subject to federal and state income taxes.

As a result, no provision has been made in the consolidated financial statements for federal income taxes for the year, except as noted below in respect of TRZ Holdings’ taxable Corporate Subsidiaries.

Taxable income from Corporate Subsidiaries is subject to federal, state and local income taxes. During the year, the Corporate Subsidiaries recorded a tax recovery of $207 ($48 recovery in 2010, $1,017 expense in 2009). The Corporate Subsidiaries deferred income taxes, where applicable, are accounted for using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax

 

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planning strategies and other factors. In addition, for the years ended December 31, 2011 and 2010, these Corporate Subsidiaries had net operating loss carryforward balances of $7,663 and $6,175, respectively.

A portion of the Corporate Subsidiaries’ net operating loss carryforwards may be subject to limitation under the Internal Revenue Code Section 382. A valuation allowance fully offsets the net operating loss carryforward and, as a result, no deferred tax assets have been established.

Accounting for Uncertain Tax Positions — In accordance with ASC Subtopic 740-10-15, Income Taxes (“ASC 740-10-15”), ASC 740-10-15 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10-15, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the maximum benefits that have a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740-10-15 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in the interim periods and requires increased disclosures.

The Company adopted the provisions of ASC 740-10-15 on January 1, 2007. There was no cumulative effect adjustment to retained earnings related to adoption.

Cash — Cash consists of currency on hand.

Escrows and Restricted Cash — Escrows consist primarily of amounts held by lenders to provide for future property tax expenditures and tenant improvements. Restricted cash represents amounts committed for various utility deposits, security deposits and insurance reserves. Certain of these amounts may be reduced upon the fulfillment of specific obligations.

Deferred Charges — Deferred charges include deferred finance and leasing costs. Costs incurred to obtain financing are capitalized and amortized into interest expense using the effective interest method over the term of the related debt.

All direct and indirect leasing costs are capitalized and amortized on a straight-line basis over the term of the related lease. Unamortized costs are charged to amortization expense upon the early termination of the related lease.

Derivative Instruments — The Company uses interest rate swap contracts, forward-starting swap contracts and interest rate cap contracts to manage risk from fluctuations in interest rates as well as to hedge anticipated future financing transactions. Interest rate swaps involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Forward-starting swap contracts lock in a maximum interest rate on anticipated future financing transactions. Interest rate caps involve the receipt of variable-rate amounts beyond a specified strike price over the life of the agreements without exchange of the underlying principal amount. The Company believes these agreements are with counter-parties who are creditworthy financial institutions.

The Company adheres to the provisions of ASC Subtopic 815-10-15, Derivatives and Hedging (“ASC 815-10-15”). ASC 815-10-15 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires the recognition of all derivative instruments as assets or liabilities in the Company’s consolidated balance sheets at fair value. Changes in the fair values of derivative instruments that are not designated as hedges, or that do not meet the hedge accounting criteria in ASC 815-10-15, are required to be reported through the statements of operations.

 

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For derivatives designated as qualifying cash flow hedges, the effective portion of changes in fair value of the derivatives is initially recognized in other comprehensive income and, subsequently, reclassified to earnings when the forecasted transactions occur, and the ineffective portions are recognized directly in the statements of operations. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings. The Company does not use derivatives for trading or speculative purposes.

Fair Value of Financial Instruments — The estimated fair value of mortgage debt and other loans disclosed in the accompanying notes is based on the values derived using market interest rates of similar instruments. In determining estimates of the fair value of financial instruments, the Company must make assumptions regarding current market interest rates, considering the term of the instrument and its risk. Current market interest rates are generally selected from a range of potentially acceptable rates and, accordingly, other effective rates and/or fair values are possible.

The carrying amounts of cash, escrows and restricted cash, receivables and other assets, accounts payable and other liabilities approximate their fair value due to the short maturities of these financial instruments.

New Accounting Pronouncements — Changes to accounting principles generally accepted in the United States of America (“U.S. GAAP”) are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification.

In May 2011, the FASB issued ASU No. 2011-04, which updated the guidance in ASC Topic 820, Fair Value Measurement. The amendments in this Update generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This Update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments in this Update are to be applied prospectively. The amendments are effective for the Company beginning January 1, 2012. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements and notes.

In June 2011, the FASB issued ASU No. 2011-05, which updated the guidance in ASC Topic 220, Comprehensive Income. Under the amendments in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments required by this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments required by this Update will be applied retrospectively. The amendments are effective for the Company beginning January 1, 2012.

In December, 2011, the FASB issued ASU No. 2011-12, which defers only those provisions within ASU 2011-05 pertaining to reclassification adjustments out of accumulated other comprehensive income. This guidance, except for those provisions deferred by ASU 2011-12, will become effective for fiscal years ending December 15, 2012. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements and notes.

 

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3. REAL ESTATE

The Company’s investment in real estate is comprised of:

 

     2011     2010  

Properties:

    

Income producing properties — net

   $ 3,941,064      $ 5,886,028   

Development properties

     57,400        55,715   
  

 

 

   

 

 

 
   $ 3,998,464      $ 5,941,743   
  

 

 

   

 

 

 
     2011        2010   

Properties — income producing properties:

    

Land

   $ 1,057,213      $ 1,380,919   

Buildings and improvements

     3,451,721        5,014,505   
  

 

 

   

 

 

 
     4,508,934        6,395,424   

Less accumulated depreciation

     (567,870     (509,396
  

 

 

   

 

 

 

Income producing properties — net

   $ 3,941,064      $ 5,886,028   
  

 

 

   

 

 

 
     2011        2010   

Properties — development properties

    

Land

   $ 47,224      $ 47,224   

Buildings and improvements

     10,176        8,491   
  

 

 

   

 

 

 

Properties under development

   $ 57,400      $ 55,715   
  

 

 

   

 

 

 

Ground Lease Obligations — Properties carried at a net book value of approximately $nil and $336,140 at December 31, 2011 and 2010, respectively, are situated on land subject to lease agreements expiring in the years 2069 to 2089. Ground lease expense was recorded on a straight-line basis over the non-cancelable lease period. All ground lease obligations of the Company were related to the BREP Properties and were assumed by BREP upon exercise of its Call Option.

Future Minimum Rents — Future minimum rentals, excluding operating expense recoveries, to be received under noncancelable tenant leases in effect at December 31, 2011, for each of the next five years, are as follows:

 

Years Ending

December 31

      

2012

   $ 305,100   

2013

     622,016   

2014

     584,286   

2015

     519,573   

2016

     444,484   
  

 

 

 
   $ 2,475,459   
  

 

 

 

 

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4. UNCONSOLIDATED REAL ESTATE VENTURES

The Company participates in unconsolidated real estate ventures in various operating properties which are accounted for using the equity method.

The following is a summary of the Company’s ownership in unconsolidated real estate ventures at December 31, 2011 and 2010:

 

Entity   Property and Location   Legal
Interest(1)

Marina Airport Building, Ltd.

 

Marina Towers, Los Angeles, CA

  50%    

Dresser Cullen Venture

 

Kellogg, Brown & Root Tower, Houston, TX

  50    

1114 TrizecHahn-Swig, L.L.C.

 

The Grace Building, New York, NY

  50

1411 TrizecHahn-Swig, L.L.C. (2)

 

1411 Broadway, New York, NY

  50

1460 Leasehold TrizecHahn Swig L.L.C./
1460 Fee TrizecHahn Swig L.L.C.
(2)

 

1460 Broadway, New York, NY

  50

Waterview Investor, L.P.

 

Waterview Development, Arlington, VA

  25

750 Ninth Street Parent, L.L.C.

 

Victor Building, Washington, D.C.

  50

 

  (1) 

The amounts shown approximate the Company’s economic ownership interest as of December 31, 2011 and 2010. Cash flows from operations, capital transactions and net income are allocated to the venture partners in accordance with their respective operating agreements. The Company’s share of these items is subject to change based on, among other things, the operations of the property and the timing and amount of capital transactions.

 

  (2) 

This entity was transferred to BREP on August 9,2011, following the exercise by BREP of its Call Option. At December 31, 2010, the Company’s interest in the entity was 50%.

Unconsolidated Real Estate Venture Financial Information — The following represents combined summarized financial information of the Company’s unconsolidated real estate ventures.

 

Balance Sheet Information    2011     2010  

Assets:

    

Real estate — net

   $ 317,535      $ 370,795   

Other assets

     180,800        192,205   
  

 

 

   

 

 

 

Total assets

   $ 498,335      $ 563,000   
  

 

 

   

 

 

 

Liabilities:

    

Mortgage debt and other loans

   $ 512,791      $ 751,603   

Other liabilities

     19,595        53,948   

Partners’ deficit

     (34,051     (242,551
  

 

 

   

 

 

 

Total liabilities and deficit

   $ 498,335      $ 563,000   
  

 

 

   

 

 

 

Company’s share of deficit

   $ (30,291   $ (135,637

Net excess of cost of investments over the net book value of underlying net assets

     618,709        922,149   
  

 

 

   

 

 

 

Carrying value of Company’s investment in unconsolidated real estate ventures

   $ 588,418      $ 786,512   
  

 

 

   

 

 

 

 

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Statement of Operations Information   

Unaudited

2011

   

Unaudited

2010

   

Audited

2009

 

Total revenues

   $ 141,310      $ 139,339      $ 136,653   
  

 

 

   

 

 

   

 

 

 

Expenses:

      

Operating and other

     59,433        60,743        58,120   

Depreciation and amortization

     16,920        17,531        16,340   
  

 

 

   

 

 

   

 

 

 

Total expenses

     76,353        78,274        74,460   
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest and other income

     2,361        632        5,601   

Interest expense

     (30,878     (30,878     (31,240
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (28,517     (30,246     (25,639
  

 

 

   

 

 

   

 

 

 

Net income

   $ 36,440      $ 30,819      $ 36,554   
  

 

 

   

 

 

   

 

 

 

Company’s share of net income

   $ 18,085      $ 15,807      $ 16,725   

Amortization of net excess of cost of investments over book value of underlying assets

     3,750        3,245        6,681   
  

 

 

   

 

 

   

 

 

 

Income from unconsolidated real estate ventures

   $ 21,835      $ 19,052      $ 23,406   
  

 

 

   

 

 

   

 

 

 

Contributions, Advances and Distributions — During the years ended December 31, 2011, 2010 and 2009, the Company made cash contributions to its unconsolidated real estate ventures of $31,064, $18,575 and $1,040, respectively. The Company received distributions from its unconsolidated real estate ventures in the aggregate amount of approximately $14,343, $12,487 and $16,392 as of December 31, 2011, 2010 and 2009, respectively.

Certain of the Company’s real estate venture agreements include provisions whereby, at certain specified times, each party has the right to initiate a purchase or sale of its interest in the ventures at an agreed upon fair value. Under these provisions, the Company is not obligated to purchase the interest of its outside venture partners.

 

5. CONSOLIDATED REAL ESTATE VENTURES

Although the financial condition and results of operations of the following real estate ventures are consolidated, there are unaffiliated parties that own an interest in these real estate ventures. The Company consolidates these real estate ventures because it owns at least 50% of the respective ownership entities and controls major decisions. The following is a summary of the Company’s ownership in consolidated real estate ventures at December 31, 2011 and 2010:

 

Entity

   Property and Location    Economic
Interest(1)

TrizecHahn 1065 Avenue of the Americas L.L.C.(2)

   1065 Avenue of the Americas, New York, NY    99%    

Trizec 2001 M Street Holdings L.L.C.

   2001 M Street, Washington, D.C.    98      

 

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  (1) 

The amounts shown above approximate the Company’s economic ownership interest as of December 31, 2011 and 2010. Cash flows from operations, capital transactions and net income are allocated to the venture partners in accordance with their respective operating agreements. The Company’s share of these items is subject to change based on, among other things, the operations of the property and the timing and amount of capital transactions.

 

  (2) 

This entity was transferred to BREP on August 9, 2011 following the exercise by BREP of its Call Option. At December 31, 2010, the Company’s interest in the entity was 99%.

 

6. DEFERRED CHARGES

Deferred charges consist of the following:

 

     2011      2010  

Leasing costs

   $ 216,214       $ 241,259   

Financing costs

     23,830         6,109   
  

 

 

    

 

 

 
     240,044         247,368   

Less accumulated amortization

     (96,641      (79,521
  

 

 

    

 

 

 
   $ 143,403       $ 167,847   
  

 

 

    

 

 

 

 

7.   INTANGIBLE ASSETS AND LIABILITIES

The following table summarizes the intangible assets and liabilities at December 31, 2011 and 2010:

 

     2011     2010  

Intangible assets:

    

In-place lease value

   $ 106,714      $ 130,534   

Above market lease value

     18,822        18,048   

Tenant relationship value

     246,487        318,192   

Below market ground lease

     152        23,084   
  

 

 

   

 

 

 
     372,175        489,858   

Accumulated amortization — in-place lease value

     (82,454     (88,640

Accumulated amortization — above market lease value

     (15,310     (12,978

Accumulated amortization — tenant relationship value

     (119,874     (101,850

Accumulated amortization — below market ground lease

     (152     (1,792
  

 

 

   

 

 

 
   $ 154,385      $ 284,598   
  

 

 

   

 

 

 

Intangible liabilities — below market lease value

   $ 414,044      $ 565,536   

Accumulated amortization — below market lease value

     (232,714     (296,979
  

 

 

   

 

 

 
   $ 181,330      $ 268,557   
  

 

 

   

 

 

 

 

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Future amortization of these intangible assets and liabilities is anticipated to increase (decrease) net income for each of the next five years and thereafter, by the following:

 

Years Ending

December 31

      

2012

   $ 9,934   

2013

     9,492   

2014

     8,927   

2015

     (9,719

2016

     10,050   

Thereafter

     (1,739
  

 

 

 
   $ 26,945   
  

 

 

 

 

8. DISCONTINUED OPERATIONS

The transfer of the BREP Properties in redemption of the BREP Units was accounted for at fair value as a non-pro-rata distribution in accordance with ASC Sub-Topic 845-30-12, Nonmonetary Transactions, resulting in an adjustment to record the transferred properties at fair value of $101,032. The operating results of the BREP Properties are presented separately in discontinued operations in the consolidated statements of operations.

 

Statement of Operations Information   

Unaudited

2011

   

Unaudited

2010

   

Audited

2009

 

Total revenues

   $ 97,792      $ 170,031      $ 174,221   
  

 

 

   

 

 

   

 

 

 

Expenses:

      

Operating and other

     42,704        74,234        75,959   

Depreciation and amortization

     33,182        60,499        64,003   
  

 

 

   

 

 

   

 

 

 

Total expenses

     75,886        134,733        139,962   
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest expense

     (1,141     (1,735     (2,749

Fair value adjustment

     101,032        -            -       
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

     99,891        (1,735     (2,749
  

 

 

   

 

 

   

 

 

 

Income from unconsolidated real estate ventures

     4,153        3,569        3,454   
  

 

 

   

 

 

   

 

 

 

Net income from discontinued operations

   $ 125,950      $ 37,132      $ 34,964   
  

 

 

   

 

 

   

 

 

 

 

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9. MORTGAGE DEBT AND OTHER LOANS

The following table sets forth information concerning mortgage debt and other loans as of December 31, 2011 and 2010. The economic interest of the Company is 100% unless otherwise noted.

 

Property (Ownership)    F/V(1)   

Maturity

Date

  December 31, 2011
Rate
   

Principal

Balance

2011

    

Principal

Balance

2010

 

CMBS Transaction(2):

            

Class A-4

   F    May 2011     $ -               $ 131,605   

Class B-4

   F    May 2011       -                 47,000   

Class C-4

   F    May 2011       -                 45,600   

Class D-4

   F    May 2011       -                 40,700   

Class E-4

   F    May 2011       -                 32,300   
         

 

 

    

 

 

 
            -                 297,205   

Ernst & Young Plaza

   F    February 2014     5.07%        104,197         106,797   

One New York Plaza

   F    March 2016     5.50%        378,782         386,931   

2000 L Street, N.W.

   V    April 2014       -                 53,100   

2001 M Street (98%)(4)

   F    December 2014     5.25%        43,278         43,905   

Bethesda Crescent

   F    April 2011       -                 31,519   

Two Ballston Plaza

   F    April 2011       -                 24,213   

Bank of America Plaza (Los Angeles)

   F    September 2014     5.31%        223,175         227,187   

Four Allen Center

   F    October 2013       -                 240,000   

5670 Wilshire(5)

   V    May 2013       -                 58,480   

Reston Crescent

   V    December 2015     1.99%        75,000         75,000   

1250 Connecticut

   F    January 2016     5.86%        52,424         52,945   

1200 K Street

   F    February 2021     5.88%        136,630         -         

1400 K Street

   F    February 2018     5.30%        53,398         -         

Bethesda Crescent

   F    February 2021     5.58%        61,285         -         

1550 & 1560 Wilson Blvd

   V    January 2014     2.27%        70,000         -         

2401 Pennsylvania Avenue

   V    May 2014     4.39%        30,000         -         

Two Ballston Plaza

   F    May 2014     4.39%        45,198         -         

Sunrise Tech Park I-IV

   F    May 2014     4.39%        29,708         -         

2000 L Street

   F    August 2014     2.14%        100,000         -         

Silver SM Co. LLC

   F    September 2014     2.34%        104,000         -         

601 Figueroa

   F    May 2014     4.39%        197,627         -         

Landmark Square

   F    May 2014     4.39%        65,026         -         

500 Jefferson

   F    May 2014     4.39%        20,400         -         

Continental Center I

   F    May 2014     4.39%        143,439         -         

Continental Center II

   F    May 2014     4.39%        27,476         -         

1 Allen Center

   F    May 2014     4.39%        121,126         -         

2 Allen Center

   F    May 2018     6.45%        198,847         -         

3 Allen Center

   F    May 2016     6.12%        163,972         -         

RBC Mezz

   V    January 2015     5.80%        200,000         -         

TRZ Holdings JV CMBS Loan

   V    October 2011       -                 559,217   

DB term loan

   V    September 2011       -                 78,700   

Mezzanine loan

   V    October 2011       -                 2,919,518   
         

 

 

    

 

 

 

Subtotal consolidated debt

          4.82% (3)      2,644,988         5,154,717   

Premium — net

            (6,981      (3,552
         

 

 

    

 

 

 

Total consolidated debt

          $   2,638,007       $   5,151,165   
         

 

 

    

 

 

 

 

  (1) 

“F” refers to fixed rate debt, “V” refers to variable rate debt. References to “V” represent the underlying loan, some of which have been fixed through hedging instruments.

 

  (2) 

The Company’s Commercial Mortgage Backed Securities (CMBS) loan was cross-collateralized and subject to cross-default with the properties included in the loan.

 

  (3) 

Represents weighted average at December 31, 2011.

 

  (4) 

Represents a consolidated entity.

 

  (5) 

This floating rate debt has been capped at a 9.15% fixed rate.

 

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Collateralized Property Loans — Property loans are collateralized by deeds of trust or mortgages on properties and mature at various dates between May 2014 and February 2021.

Principal repayments of debt outstanding at December 31, 2011, for each of the next five years, and thereafter, are due as follows:

 

Years Ending

December 31

  Collateralized
Property
Loans
     Other
Loans
     Total  

2012

  $ 20,733       $ -             $ 20,733   

2013

    22,316         -               22,316   

2014

    1,327,045         -               1,327,045   

2015

    94,011         200,000         294,011   

2016

    564,917         -               564,917   

Thereafter

    408,985         -               408,985   
 

 

 

    

 

 

    

 

 

 
  $ 2,438,007       $ 200,000       $ 2,638,007   
 

 

 

    

 

 

    

 

 

 

The fair value of commercial property debt is determined by discounting contractual principal and interest payments at estimated current market interest rates for the instrument. Current market interest rates are determined with reference to current benchmark rates for a similar term and current credit spreads for debt with similar terms and risk. As of December 31, 2011 and 2010, the book value of commercial property debt exceeds the fair value of these obligations by $50.0 million and $59.4 million, respectively.

As of December 31, 2011, the Company believes that it is in compliance with all financial covenants on its mortgage debt and other loans.

 

10. INCOME AND OTHER CORPORATE TAXES

The Company is a partnership for U.S. tax purposes and therefore is generally not subject to federal and state income taxes. The following state provision reflects various state minimum taxes, the DC unincorporated business tax, and the prior year state tax true ups. The prior year state tax true ups reflects the state liabilities of the predecessor company TRZ Holdings II, LLC.

Provision for Income and Other Corporate Taxes — The provision for income and other corporate taxes is as follows:

 

     2011     2010     2009  

Provision computed at combined federal and state statutory rates

   $ -          $ -            $ -     

Franchise, state income, alternative minimum and foreign taxes provision

     (1,980     (18,510     (679

Provision from operations

     -            -              (203

Provisions on gains and losses

     -            -              -     
  

 

 

   

 

 

   

 

 

 

Total provisions

   $ (1,980   $ (18,510   $ (882
  

 

 

   

 

 

   

 

 

 

As of December 31, 2011, there are no pending state tax audits.

 

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11. NONCONTROLLING INTEREST

Redeemable Preferred Units — On October 5, 2006, the Company, through TRZ Holdings II, authorized and issued 200 shares of 8% Series G Subordinated Preferred Units (“Series G”) with a par value of $0.001 per unit. These units are held by an affiliate of Brookfield Properties. The Series G units are nonvoting and entitled to cumulative dividends at a fixed rate of 8% per annum, redeemable at TRZ Holdings II’s option at any time or from time to time, for cash at a redemption price of $10,000 per unit plus an amount equal to all accrued and unpaid dividends plus a redemption premium based on a defined redemption period (the “Series G Redemption Price”). During the years ended December 31, 2011 and 2010, the Company paid dividends of $160 and $228 on the Series G units, respectively.

 

12. MEMBERS’ EQUITY

At December 31, 2010 and 2009, the direct ownership interests in the Company held by BPO REIT, FREIT and BREP were approximately 14%, 60% and 26%, respectively. The Company did not receive any capital contributions or distribute any funds to its members during the year ended December 31, 2010. On August 9, 2011, BREP contributed $1,396,513 to the Company. In connection with the Call Option exercise, a non-monetary distribution with a value of $1,885,690 was made to BREP in the form of indirect ownership interests in the BREP Properties in exchange for 100% of the Units held by BREP. Brookfield, through its subsidiaries, initiated a series of transactions on August 4, 2011 and September 9, 2011 to reorganize the ownership of the Units in the Company held by BPO REIT and FREIT. Holdco and SubFREIT received approximately 60% and 40%, respectively, of the total Units held by BPO REIT and FREIT as result of these transactions. On September 9, 2011, Holdco and SubFREIT contributed capital to the Company of $396,322 and $261,365, respectively. On October 25, 2011, the Company distributed $23,032. The Company is approximately 60% directly owned by Holdco and approximately 40% directly owned by SubFREIT as of December 31, 2011.

 

13. RELATED-PARTY INFORMATION

Prior to the exercise of the Call Option, the Company paid affiliates of Blackstone a property management fee for management services provided to the BREP Properties. For the years ended December 31, 2011, 2010 and 2009, the Company recognized $2,930, $5,011 and $5,126 in management fee expense payable to Blackstone, respectively. The Blackstone managed properties paid all leasing commissions to independent third-party brokers.

The Company also pays affiliates of Brookfield a property management fee for management services provided to the Brookfield properties. For the years ended December 31, 2011, 2010 and 2009, the Company recognized $20,047, $18,326 and $19,242 in management fee expense payable to Brookfield, respectively. In addition, the Company pays affiliates of Brookfield a leasing fee for leasing services of the Brookfield managed properties. For the years ended December 31, 2011, 2010 and 2009, the Company incurred $9,363, $11,339 and $13,401 in leasing fees, respectively. At December 31, 2011 and 2010, the Company had a payable balance of $36,453 and $35,280, respectively, owed to Brookfield related to management fees, leasing fees and various other related reimbursements.

In connection with debt issued by subsidiaries of the Company and BPOP Canada Inc., both shareholders of TRZ Holdings II (collectively, the “Mezzanine Borrowers”) through to April 9, 2009, totaling $3,100,707 a subsidiary of the Company, TRZ Holdings II, had guaranteed the obligation of the Mezzanine Borrowers. In consideration for its guarantee, the Company paid TRZ Holdings II an annual fee equal to 0.10% of the outstanding principal for the first year with a 0.25% and 0.30% fee for the second and following years thereafter, respectively.

Subsequent to April 9, 2009, in connection with debt issued totaling $3,100,707, a subsidiary of the Company, TRZ Holdings II, had guaranteed the $3,100,707 obligation of the Company. In consideration for

 

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its guarantee, the Company will pay TRZ Holdings II an annual fee equal to 0.30% of the outstanding principal balance. These fees are fully eliminated in the accompanying consolidated financial statements. The guaranteed debt was repaid during 2011.

Insurance premiums are paid by Brookfield Properties Holding Inc. (“BPHI”), an affiliate of the Company. BPHI then allocates the cost to the properties which is then fully reimbursed through an intercompany transaction.

 

14. CONTINGENCIES

Litigation — The Company is contingently liable under guarantees that are issued in the normal course of business and with respect to litigation and claims arising from time to time. While the final outcome with respect to claims and litigation pending at December 31, 2011 cannot be predicted with certainty, in the opinion of management, any liability which may arise from such contingencies would not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company.

Concentration of Credit Risk — The Company maintains its cash at financial institutions. The combined account balances at each institution typically exceed Federal Deposit Insurance Company (“FDIC”) insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. Management believes that this risk is not significant.

The Company performs ongoing credit evaluations of tenants and may require tenants to provide some form of credit support, such as corporate guarantees and/or other financial guarantees. Although the Company’s properties are geographically diverse and tenants operate in a variety of industries, to the extent the Company has a significant concentration of rental revenue from any single tenant, the inability of that tenant to make its lease payments could have an adverse effect on the Company.

Environmental — The Company, as an owner of real estate, is subject to various federal, state and local laws and regulations relating to environmental matters. Under these laws, the Company is exposed to liability primarily as an owner or operator of real property and, as such, may be responsible for the cleanup or other remediation of contaminated property.

Contamination for which the Company may be liable could include historic contamination, spills of hazardous materials in the course of its tenants’ regular business operations and spills or releases of petroleum or other hazardous substances. An owner or operator can be liable for contamination in some circumstances whether or not the owner or operator knew of, or was responsible for, the presence of such contamination. In addition, the presence of contamination on property, or the failure to properly clean up or remediate such contamination when present, may materially and adversely affect the ability to sell or lease such contaminated property or to borrow using such property as collateral.

As an owner and operator of real property, the Company is also subject to various environmental laws that regulate the use, generation, storage, handling, and disposal of any hazardous substances used in the ordinary course of its business, including those relating to the storage of petroleum in aboveground or underground storage tanks, and the use of any ozone-depleting substances in cooling systems. The Company believes that it is in substantial compliance with applicable environmental laws.

Asbestos-containing material is present in some of the Company’s properties. Federal regulations require building owners and operators to identify and warn, via signs and labels, of potential hazards posed by workplace exposure to installed asbestos-containing materials in their building. The regulations also set forth employee training and record keeping requirements pertaining to asbestos-containing materials and potentially asbestos-containing materials. Significant fines can be assessed for violation of these regulations. Building owners and operators may be subject to an increased risk of personal injury lawsuits by workers

 

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and others exposed to asbestos-containing materials. The regulations may affect the value of a building containing asbestos-containing materials. Federal, state and local laws and regulations also govern the removal, release, encapsulation, disturbance, handling and/or disposal of asbestos-containing materials. Such laws may impose liability for improper handling or a release to the environment of asbestos-containing materials, including the imposition of substantial fines.

The cost of compliance with existing environmental laws has not had a material adverse effect on the Company’s financial condition and results of operations, and the Company does not believe it will have such an impact in the future. In addition, the Company has not incurred, and does not expect to incur, any material costs or liabilities due to environmental contamination at properties it currently owns or has owned in the past. However, the Company cannot predict the impact of new or changed laws or regulations on its properties or on properties that it may acquire in the future. The Company has no current plans for substantial capital expenditures with respect to compliance with environmental laws.

Insurance — The Company carries insurance on its properties of types and in amounts that it believes adequately insure all of its properties and are in line with coverage obtained by owners of similar properties. The Company had two wholly owned captive insurance companies, Concordia Insurance L.L.C. (“Concordia”) and Chapman Insurance L.L.C. (“Chapman”) which were dissolved during 2008. Liberty IC Casualty, LLC was created to replace coverage provided previously by Chapman and Concordia.

 

15. SUBSEQUENT EVENTS

In accordance with ASC Topic 855, Subsequent Events, the Company has evaluated subsequent events and transactions up to and including March 29, 2012, which represents the date that the consolidated financial statements were available to be issued and where necessary has made the appropriate disclosure.

*  *  *  *  *  *

 

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INDEX TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF BROOKFIELD

PROPERTY PARTNERS L.P.

 

    

                Page                 

 

Unaudited Pro Forma Balance Sheet as at March 31, 2012

 

  PF-4

 

Unaudited Pro Forma Statement of Income for the three months ended March 31, 2012 and the year ended December 31, 2011

 

  PF-5

 

Notes to the Unaudited Pro Forma Financial Statements

 

  PF-6

 

 

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Unaudited Pro Forma Financial Statements

BROOKFIELD PROPERTY PARTNERS L.P.

 

 

 

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BROOKFIELD PROPERTY PARTNERS L.P.

Unaudited Pro forma Financial Statements

 

 

The following unaudited pro forma financial statements of Brookfield Property Partners L.P. (the “company”) adjust the company’s balance sheet as at March 31, 2012 and statements of income for the three months ended March 31, 2012 and the year ended December 31, 2011 to give effect to the acquisition of the Business (as defined below) by the company from Brookfield Asset Management Inc. (“Brookfield” or the “parent company”), the spin-off (as defined below) and related transactions as if such transactions occurred as of March 31, 2012, in the case of the unaudited pro forma balance sheet, or as January 1, 2011, in the case of the unaudited pro forma statements of income. Prior to the acquisition, Brookfield intends to effect a reorganization (the “reorganization”) so that an interest in its commercial property operations (the “Business”), including its office, retail, multi-family and industrial, and opportunistic assets, is acquired by holding entities that will be owned by Brookfield Property L.P. (the “property partnership”).

Brookfield intends to transfer a portion of the limited partnership interests it holds in the company to holders of its Class A limited voting shares and Class B limited voting shares through a special dividend (the “spin-off”). Immediately following the reorganization and spin-off, the company’s sole direct investment will be an interest in the Business through the company’s ownership of limited partnership interests in the property partnership. The company will control the strategic, financial and operating policy decisions of the property partnership pursuant to a voting agreement to be entered into between the company and Brookfield and, through its ownership of the limited partnership units of the property partnership, benefit from the property partnership’s activities. Wholly-owned subsidiaries of Brookfield will serve as the general partners for both the company and the property partnership.

The unaudited pro forma financial statements reflect adjustments for the reorganization, the spin-off, the following related transactions and resulting tax effects:

 

   

Acquisition of interests in Brookfield’s Australian properties through participating loan notes

   

Exclusion of certain assets within Brookfield’s Australian operations which are not being transferred to the company as part of the reorganization

   

Issuance of $750 million of Capital Securities to Brookfield as partial consideration for the Business acquired by the company

   

Issuance of $15 million of Preferred Shares by certain holding entities

   

Issuance of partnership units by the company as partial consideration for the business acquired by the company

   

Reorganization of the legal structure through which the Business is held, including the issuance of certain inter-company debt between the property partnership and the Holding Entities, resulting in changes in the effective tax rate and the tax basis of certain investments

   

Annual Management Fees of $50 million paid by the company to Brookfield pursuant to a Master Services Agreement

   

Exclusion of Brookfield’s 2% investment in Howard Hughes Corporation

The unaudited pro forma financial statements have been prepared based upon currently available information and assumptions deemed appropriate by management. The unaudited pro forma financial statements are provided for information purposes only and are not intended to represent, or be indicative of, the results that would have occurred had the transactions reflected in the pro forma adjustments been effected on the dates indicated.

The accounting for certain of the above transactions will require the determination of pro forma adjustments to give effect to the transactions on the dates indicated. The pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma financial information. Differences between these preliminary estimates and the final accounting for these transactions may occur and these differences could have a material impact on the accompanying unaudited pro forma financial statements. Further, integration costs, in any, that may be incurred upon consummation of the aforementioned transactions have been excluded from the unaudited pro forma statements of income.

All financial data in these unaudited pro forma financial statements is presented in U.S. dollars and has been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

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BROOKFIELD PROPERTY PARTNERS L.P.

Unaudited Pro forma Balance Sheet

 

As at March 31, 2012  

Brookfield
Property
Partners
L.P. (1)

    Brookfield
Carve-out
    Pro Forma Adjustments     Pro Forma
Brookfield
Property
Partners L.P.
 
(US$ Millions)       Australian
Investments
4 (a)
    Australian
Exclusions
4 (b)
    Capital
Securities
4 (c)
   

Preferred
Shares

4 (d)

   

Partnership
Units

4 (e)

    Tax Impact of
Reorganization
4 (f)
   

HHC

4 (h)

    Total Pro
Forma
Adjustments
   
 

Assets

                       

Non-current assets

                       

Investment properties

  $         -      $     28,138      $ (924)      $ (451)      $ -      $         -      $         -      $         -      $ -      $     (1,375)      $     26,763   

Equity accounted investments

    -        7,466        (553)        (5)        -        -        -        -        -        (558)        6,908   

Participating loan notes

    -        -                854                    -        -        -        -        -        -        854        854   

Other non-current assets

    -        2,331        -        -        -        -        -        -          (102)        (102)        2,229   

Loans and notes receivable

    -        1,096        -        (186)        -        -        -        -        -        (186)        910   
      -        39,031        (623)        (642)        -        -        -        -        (102)        (1,367)        37,664   

Current assets

                       

Loans and notes receivable

    -        548        -        -        -        -        -        -        -        -        548   

Accounts receivable and other

    -        773        (18)        (10)        -        -        -        -        -        (28)        745   

Cash and cash equivalents

    -        697        (9)        (35)        -        -        -        -        -        (44)        653   
      -        2,018        (27)        (45)        -        -        -        -        -        (72)        1,946   

Total assets

  $ -      $ 41,049      $ (650)      $ (687)      $ -      $ -      $ -      $ -      $ (102)      $ (1,439)      $ 39,610   

Liabilities and equity in net assets

                       

Non-current liabilities

                       

Property debt

  $ -      $ 14,006      $ (639)      $ (162)      $ -      $ -      $ -      $ -      $ -      $ (801)      $ 13,205   

Capital securities

    -        862        -        -        750        -        -        -        -        750        1,612   

Other non-current liabilities

    -        288        -        (2)        -        -        -        -        -        (2)        286   

Deferred tax liability

    -        805        (23)        -        -        -        -        150        -        127        932   
      -        15,961        (662)        (164)        750        -        -        150        -        74        16,035   

Current liabilities

                       

Property debt

    -        1,260        -        (41)        -        -        -        -        -        (41)        1,219   

Accounts payable and other liabilities

    -        1,229        (28)        (31)        -        -        -        -        -        (59)        1,170   
      -        2,489        (28)        (72)        -        -        -        -        -        (100)        2,389   

Equity in net assets

                       

Equity in net assets attributable to parent company

    -        12,575        -        -        -        -        (12,575)        -        -        (12,575)        -   

Partnership equity

    -        -        40        (353)                (750)        (15)        12,575        (150)        (85)        11,262        11,262   

Non-controlling interests

    -        10,024        -        (98)        -        15        -        -        (17)        (100)        9,924   

Total equity in net assets

    -        22,599        40        (451)        (750)        -        -        (150)        (102)        (1,413)        21,186   

Total liabilities and equity in net assets

  $ -      $ 41,049      $ (650)      $ (687)      $ -      $ -      $ -      $ -      $ (102)      $ (1,439)      $ 39,610   
(1) 

Includes Brookfield Property Partners L.P. balance sheet as at May 31, 2012 which includes partnership equity of $0.001 which is not presented due to rounding.

See accompanying notes to the unaudited pro forma financial statements

 

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BROOKFIELD PROPERTY PARTNERS L.P.

Unaudited Pro forma Statement of Income

 

For the three months ended
March 31, 2012
  Brookfield
Property
Partners
L.P.
    Brookfield
Carve-out
    Pro Forma Adjustments     Pro Forma
Brookfield
Property
Partners L.P.
 
(US$ Millions)       Australian
Investments
4 (a)
    Australian
Exclusions
4 (b)
    Capital
Securities
4 (c)
    Preferred
Shares
4 (d)
   

Partnership
Units

4 (e)

    Tax Impact of
Reorganization
4 (f)
   

Management
Fee

4 (g)

    HHC
4 (h)
         Total Pro
Forma
Adjustments
   

Revenue

  $         -      $         775        $        (25     $        (11   $         -      $         -      $         -      $         -      $         -      $         -            $        (36   $         739   

Property net operating income

      409        (20     (7     -        -        -        -        -        -            (27     382   

Investment and other income

    -        39        14        (1     -        -        -        -        -        -            13        52   

Expenses:

                           

Interest expense

    -        246        (16     (4     11        -        -        -        -        -            (9     237   

General and administrative expense

    -        21        -        -        -        -        -        -        13        -            13        34   

Depreciation and amortization

    -        39        -        -        -        -        -        -        -        -            -        39   

Income before fair value gains, realized gains, share of net earnings from equity accounted investments and income taxes

    -        142        10        (4     (11     -        -        -        (13     -            (18     124   

Fair value gains

    -        287        -        (14     -        -        -        -        -        (13         (27     260   

Realized gains

    -        78        -        -        -        -        -        -        -        -            -        78   

Share of net earnings from equity accounted investments

    -        442        (10     -        -        -        -        -        -        -            (10     432   

Income before income taxes

    -        949        -        (18     (11     -        -        -        (13     (13         (55     894   

Income tax (expense) benefit

    -        (239     -        1        -        -        -        22        3        -            26        (213

Net income

  $ -      $ 710      $ -      $ (17   $ (11   $ -      $ -      $ 22      $ (10   $ (13       $ (29   $ 681   

Net income attributable to:

                           

Parent company

  $ -      $ 383      $ -      $ -      $ -      $ -      $ (383   $ -      $ -      $ -          $ (383   $ -   

Partners

    -        -        -        (6     (11     -        383        22        (10     (13         365        365   

Non-controlling interests

    -        327        -        (11     -        -        -        -        -        -            (11     316   
    $ -      $ 710      $ -      $ (17   $ (11   $ -      $ -      $ 22      $ (10   $ (13       $ (29   $ 681   

See accompanying notes to the unaudited pro forma financial statements

 

 

For the year ended December 31, 2011   Brookfield
Property
Partners
L.P.
    Brookfield
Carve-out
    Pro Forma Adjustments     Pro Forma
Brookfield
Property
Partners L.P.
 
(US$ Millions)       Australian
Investments
4 (a)
    Australian
Exclusions
4 (b)
    Capital
Securities
4 (c)
   

Preferred
Shares

4 (d)

   

Partnership
Units

4 (e)

    Tax Impact of
Reorganization
4 (f)
    Management
Fee 4 (g)
         Total Pro
Forma
Adjustments
   

Revenue

  $         -      $         2,820        $        (143     $        (45   $         -      $         -      $         -      $         -      $         -            $    (188   $         2,632   

Property net operating income

      1,507        (76     (26     -        -        -        -        -            (102     1,405   

Investment and other income

    -        177        43        (1     -        -        -        -        -            42        219   

Expenses:

                         

Interest expense

    -        977        (69     (11     43        -        -        -        -            (37     940   

General and administrative expense

    -        84        -        -        -        -        -        -        50            50        134   

Depreciation and amortization

    -        20        -        (1     -        -        -        -        -            (1     19   

Income before fair value gains, realized gains, share of net earnings from equity accounted investments and income taxes

    -        603        36        (15     (43     -        -        -        (50         (72     531   

Fair value gains

    -        1,112        9        32        -        -        -        -        -            41        1,153   

Realized gains

    -        365        -        -        -        -        -        -        -            -        365   

Share of net earnings from equity accounted investments

    -        2,104        (45     -        -        -        -        -        -            (45     2,059   

Income before income taxes

    -        4,184        -        17        (43     -        -        -        (50         (76     4,108   

Income tax (expense) benefit

    -        (439     -        4        -        -        -        (403     14            (385     (824

Net income

  $ -      $ 3,745      $ -      $ 21      $ (43   $ -      $ -      $ (403   $ (36       $ (461   $ 3,284   

Net income attributable to:

                         

Parent company

  $ -      $ 2,323      $ -      $ -      $ -      $ -      $ (2,323   $ -      $ -          $ (2,323   $ -   

Partners

    -        -        -        21        (43     (1     2,323        (403     (36       $ 1,861      $ 1,861   

Non-controlling interests

    -        1,422        -        -        -        1        -        -        -            1        1,423   
    $ -      $ 3,745      $ -      $ 21      $ (43   $ -      $ -      $ (403   $ (36       $ (461   $ 3,284   

See accompanying notes to the unaudited pro forma financial statements

 

PF-5


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NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS

1. NATURE AND DESCRIPTION OF THE LIMITED PARTNERSHIP

Brookfield Property Partners L.P. (the “company”) was established by Brookfield Asset Management Inc. (“Brookfield” or the “parent company”) as the primary entity through which it and its affiliates will own and operate commercial property on a global basis. The registered head office of the company is 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda.

The company’s sole direct investment is a limited partnership interest in Brookfield Property L.P. (the “property partnership”). In addition to the Redemption-Exchange units described below, Brookfield, through Property GP L.P. (the “Property GP”), its indirect wholly-owned subsidiary, will hold a 1% general partnership interest in the property partnership. The property partnership holds all of the common shares or equity interests, as applicable, of the Holding Entities, which are newly formed entities under the laws of the Province of Ontario, the State of Delaware and Bermuda established to hold the company’s interest in the Business described below.

Brookfield will effect a reorganization (the “reorganization”) so that an interest in its commercial property operations, including its office, retail, multi-family and industrial and opportunistic assets, located in the United States, Canada, Australia, Brazil and Europe, that have historically been owned and operated, both directly and through its operating entities, by Brookfield, is acquired by the Holding Entities. The commercial property operations transferred to the company through the reorganization (the “Business”) includes all of the commercial property operations of Brookfield included in the carve-out financial statements except for its 2% equity interest in the Howard Hughes Corporation (“HHC”), a publicly listed real estate entity, (refer to Note 4(g) to the unaudited pro forma financial statements). Also, as described in Note 4(a) to the unaudited pro forma financial statements, a subsidiary of Brookfield will continue to hold title to the commercial and other real property in Australia. The company will hold an economic interest in such property in the form of participating loan notes receivable from Brookfield.

In consideration for the Business, the company and its subsidiaries will issue to Brookfield:

 

   

$750 million of redeemable preferred shares of one of the Holding Entities formed under the laws of Ontario;

   

Redemption-Exchange units in the property partnership and

   

The general and limited partnership interests in the company.

Also, in connection with the reorganization, Brookfield will provide a total of $15 million of working capital to the Holding Entities by subscribing for preferred shares of such entities (refer to Note 4(c)).

Subsequent to the reorganization, Brookfield intends to transfer a portion of its non-voting limited partnership units in the company to holders of its Class A limited voting shares and Class B limited voting shares, through a special dividend (the “spin-off”). Immediately following the reorganization and spin-off, the holders of Brookfield’s Class A and Class B limited voting shares public holders of the company’s units will own approximately 10% of the issued and outstanding units of the company on a fully-exchanged basis and Brookfield will hold units of the company and Redemption-Exchange units that, taken together, on a fully exchanged basis represent approximately 90% of the units of the company.

Pursuant to its accounting policy for common control transactions described further in Note 3 to the unaudited pro forma financial statements, the company will recognize the Business acquired from Brookfield at the carrying amount in Brookfield’s financial statements immediately prior to the reorganization and spin-off. As discussed further in Note 4(b) to the unaudited pro forma financial statements, the capital securities issued by one of the Holdings Entities will be accounted for as a liability by the company and will be initially recognized at their fair value. The Redemption-Exchange units in the property partnership and the general and limited partnership interests in the company are recognized as equity of the company as discussed in Notes 4(c) and 4(d), respectively.

 

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The company and Brookfield intend for the company to have control over the property partnership and Property GP following the spin-off. Accordingly, the company will enter into a voting agreement with Brookfield (the “Voting Agreement”) pursuant to which any voting rights Brookfield holds with respect to the election of directors of the property partnership or the Property GP will be voted in favor of directors approved by the company. Also under the Voting Agreement, the company will have the right to approve or reject major strategic decisions relating to the property partnership, including the liquidation of its assets, business combinations or other material corporate transactions involving the property partnership, any proposed dissolution of the property partnership, amendments to the limited partnership agreements of the property partnership or the Property GP and the removal of the Property GP.

Prior to the spin-off, the company is expected to enter into a three-year unsecured credit facility with Brookfield that will provide borrowings on a revolving basis of up to $500 million, which will be used for working capital purposes. The credit facility will be guaranteed by the company, the property partnership and each of the Holding Entities. It is expected that no amounts will be drawn on the facility as of the date of the spin-off.

2. BASIS OF PRESENTATION

The company’s unaudited pro forma balance sheet as March 31, 2012 and unaudited pro forma statements of income for the three months ended March 31, 2012 and year ended December 31, 2011 have been prepared assuming the transactions described herein had each occurred as of March 31, 2012, in the case of the unaudited pro forma balance sheet, and as of January 1, 2011 in the case of the unaudited pro forma statements of income.

The company’s unaudited pro forma financial statements have been prepared using the carve-out financial statements of the Business (the “Brookfield Carve-out financial statements”) for the three months ended March 31, 2012 and the year ended December 31, 2011 included elsewhere in this Form 20-F/A.

The unaudited pro forma financial statements have been prepared for informational purposes only and should be read in conjunction with the Brookfield Carve-out financial statements and related disclosures. The preparation of these unaudited pro forma financial statements requires management to make estimates and assumptions deemed appropriate. The unaudited pro forma financial statements are not intended to represent, or be indicative of, the actual financial position and results of operations that would have occurred if the transactions described below had been effected on the dates indicated, nor are they indicative of the company’s future results.

3. SIGNIFICANT ACCOUNTING POLICIES

The company presents its financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). The accounting policies used in the preparation of the company’s unaudited pro forma financial statements are those that are set out in the Brookfield Carve-out financial statements for the year ended December 31, 2011. Accounting policies applied in accounting for the impacts of the reorganization and spin-out transactions in the unaudited pro forma financial statements are summarized herein.

 

(a) Basis of Consolidation

The unaudited pro forma financial statements include the accounts of the company and its subsidiaries, which are the entities over which the company has control. Control exists when the company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

The company will control the strategic financial and operating policy decisions of the property partnership pursuant to the Voting Agreement described in Note 1 to these unaudited pro forma financial statements and, through its ownership of the limited partnership units of the property partnership, benefit from the property partnerships activities. Accordingly, the company has consolidated the property partnership in the unaudited pro forma financial statements.

 

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(b) Common control transactions

IFRS does not include specific measurement guidance for transfers of businesses or subsidiaries between entities under common control. The company has developed a policy to account for such transactions for the purposes of preparing the unaudited pro forma financial statements taking into consideration other guidance in the IFRS framework and pronouncements of other standard-setting bodies. Consistent with the policy applied in the Brookfield Carve-out financial statements, the company’s policy is to record assets and liabilities recognized as a result of transfers of businesses or subsidiaries between entities under common control at the carrying value in the transferor’s financial statements immediately prior to such transfer.

4. PRO FORMA ADJUSTMENTS

This note should be read in conjunction with Note 2 to the unaudited pro forma financial statements, Basis of Presentation. The unaudited pro forma financial statements adjust the Brookfield Carve-out financial statements to give effect to the reorganization and the spin-off, the transactions set out below and the resulting tax effects:

 

   

Acquisition of interests in Brookfield’s Australian assets through participating loan notes

   

Exclusion of certain assets within Brookfield’s Australian operations which are not being transferred to the company as part of the reorganization

   

Issuance of $750 million of Capital Securities to Brookfield as partial consideration for the Business acquired by the company

   

Issuance of $15 million of Preferred Shares by certain holding entities

   

Issuance of partnership units by the company as partial consideration for the business acquired by the company

   

Reorganization of the legal structure through which the Business is held, including the issuance of certain inter-company debt between the property partnership and the Holding Entities, resulting in changes in the effective tax rate and the tax basis of certain investments

   

Annual Management Fees of $50 million paid by the company to Brookfield pursuant to a Master Services Agreement

   

Exclusion of Brookfield’s 2% investment in HHC

Integration costs, if any, that may be incurred upon consummation of the acquisition and other transactions have been excluded from the unaudited pro forma statements of income. As the principal operating entities comprising the Business generally maintain their own independent management and infrastructure which are expected to be retained following the reorganization and spin-off, the integration costs are not expected to be significant.

 

(a) Acquisition of interests in Brookfield’s Australian assets through participating loan interests

The Holding Entities will hold economic interests in Brookfield’s commercial and other real property in Australia (the “referenced properties”) in the form of participating loan agreements with Brookfield, which are hybrid instruments comprising an interest bearing note, a total return swap and an option to acquire direct or indirect legal ownership to the referenced properties. The initial principal amount of the participating loan interests will be the fair value of Brookfield’s net interest in the referenced properties. The participating loan interests will provide the Holding Entities with an interest in the results of operations and changes in fair value of the referenced properties. At the date of the spin-off, Brookfield will continue to hold legal title to the referenced properties through a wholly-owned subsidiary that is not part of the Business in order to preserve existing financing arrangements. These participating loan notes will be convertible by the Holding Entities, at any time, into direct ownership interests in the referenced properties or the entities that have direct ownership of such properties (the “Australian property subsidiaries”). Certain of these participating loan notes will provide the Holding Entities with control over the Australian property subsidiaries and, accordingly, the assets, liabilities and results of those property subsidiaries will be consolidated by the Holding Entities. Where the participating loan interest does not provide the Holding Entities with control over an Australian property subsidiary, it will be accounted for as a loan receivable with related interest income reflecting the operating cash flows of the underlying property. Included in the participating loan notes that are accounted for as loans receivable is an embedded derivative representing the Holding Entities’ right to participate in the changes in value of the

 

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referenced properties, such embedded derivative will be measured at fair value with changes in value reflected in earnings in the period when they occur.

The unaudited pro forma balance sheet reflects the reclassification of certain investment properties, equity accounted investments, property debt and related balances to participating loan notes for those participating loan notes that do not provide the Holding Entities with control over the Australian property subsidiary that owns the referenced properties. Also, the property net operating income, interest expense and share of earnings from equity accounted investments associated with the referenced properties are reclassified to investment and other income in the unaudited pro forma statements of income. The fair value gains associated with those participating loan notes when the referenced properties are accounted for as equity accounted investments in the Brookfield Carve-out financial statements have been reclassified to fair value gains from share of net earnings from equity accounted investments.

In addition, the unaudited pro forma balance sheet reflects an adjustment to derecognize certain derivatives with a carrying value of $17 million, which are designated as hedges of property debt associated with the Australian operations and are included in accounts payable and other liabilities in the Brookfield Carve-out financial statements, as these instruments are in entities that will not be transferred to the Holding Entities.

The initial tax basis of the participating loan notes through which the economic interests in the referenced properties are held by the Holding Entities will initially be equal to their carrying amounts. Accordingly, the net deferred tax liability of $23 million relating to these properties reflected in deferred tax liability in the Brookfield Carve-out financial statements has been derecognized in the unaudited pro forma financial statements.

 

(b) Exclusion of certain interests in Brookfield’s Australian assets

The Brookfield Carve-out financial statements include certain investment properties and loans and notes receivable within Brookfield’s Australian operations that will not be included in the Business pursuant to the reorganization.

The unaudited pro forma balance sheet reflects the derecognition of these assets as well as associated debt and working capital balances with a corresponding reduction in the equity in net assets attributable to the parent. The unaudited pro forma statements of income for the three months ended March 31, 2012 and the year ended December 31, 2011 reflect a reversal of the related results of operations that were reflected in the Brookfield Carve-out financial statements for those periods.

 

(c) Issuance of Capital Securities

Brookfield will hold $750 million of redeemable and retractable preferred shares in one of the Holding Entities formed under the laws of Ontario, which it will receive as partial consideration for causing the property partnership to acquire substantially all of Brookfield’s commercial property operations. The preferred shares are entitled to receive a cumulative preferential dividend equal to 5.75% of their redemption value as and when declared by the board of directors of the Holding Entity until the fifth anniversary of their issuance, after which the redeemable preferred shares will be entitled to receive a cumulative preferential dividend equal to 5.0% plus the prevailing yield for 5-year U.S. Treasury Notes.

As the company will be required to redeem the shares for cash or other consideration, they have been accounted for as liabilities within capital securities in the pro forma balance sheet. As they are a financial liability, the capital securities are initially measured at their fair value which is presumed to be the redemption amount in the unaudited pro forma financial statements as the redeemable preferred shares are at market terms. The related dividends have been presented as interest expense in the unaudited pro forma statements of income for the three months ended March 31, 2012 and the year ended December 31, 2011 in the amount of $11 million and $43 million, respectively.

 

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(d) Issuance of Preferred Shares

In connection with the reorganization, Brookfield will provide a total of $15 million of working capital to the Holding Entities by subscribing for $5 million of preferred shares in each of three Holding Entities. The preferred shares are entitled to receive a cumulative preferential cash dividend equal to $0.75 million per year as and when declared by the board of the directors of the applicable Holding Entity and are redeemable at the option of the applicable Holding Entity at any time after the twentieth anniversary of their issuance.

As the company and its subsidiaries are not obligated to redeem the preferred shares, they have been determined to be equity of the Holding Entities and are reflected as a $15 million increase in non-controlling interest in the unaudited pro forma balance sheet. The unaudited pro forma statement of income for the three months ended March 31, 2012, and the year ended December 31, 2011 adjusts net income attributable to non-controlling interest by $0.19 million and $0.75 million, respectively, for the dividends on the preferred shares.

 

(e) Partnership Equity

On completion of the reorganization and spin-off, partnership equity will include the general and limited partnership units in the company and the Redeemption-Exchange units of the property partnership.

In connection with the reorganization, the property partnership will issue Redemption-Exchange units to Brookfield that may, at the request of the holder beginning two years from the date of closing of the spin-off, require the property partnership to redeem all or a portion of the holder’s units of the property partnership for cash in an amount equal to the market value of one of the company’s units multiplied by the number of units to be redeemed (subject to certain adjustments). This right is subject to the company’s right, at its sole discretion, to elect to acquire any unit so presented to the property partnership in exchange for one of the company’s units (subject to certain customary adjustments). The Redemption-Exchange units have been presented as partnership equity in the unaudited pro forma balance sheet as they do not entail a contractual obligation on the part of the company to deliver cash and can be settled by the company, at its sole discretion, by issuing a fixed number of its own equity instruments.

Equity in net assets attributable to parent company in the Brookfield Carve-out financial statements has been presented as partnership equity in the unaudited pro forma financial statements to reflect the impact of the reorganization and spin-off. Income attributable to parent company in the Brookfield Carve-out financial statements has been presented as net income attributable to partners in the pro forma statement of income and adjusted for the impact of the dividends on preferred shares issued by the Holding Entities.

 

(f) Tax Impacts of Reorganization

The reorganization will impact the effective tax rate of the Business as the Holding Entities through which the company will hold the Business are different from those through which it was historically held by Brookfield, and result in the issuance of certain inter-company debt between the property partnership and the Holding Entities.

The aggregate impact of the reorganization on income tax expense in the pro forma statements of income, giving effect to certain elements of the reorganization that were completed in the first quarter of 2012 as though they occurred on January 1, 2011, is a decrease of $22 million and an increase of $403 million for the three months ended March 31, 2012 and the year ended December 31, 2011, respectively. The aggregate impact of the reorganization on the deferred tax liability in the pro forma balance sheet is an increase of $150 million as at March 31, 2012.

 

(g) Management Fees

The pro forma statements of income reflect a charge of $12.5 million for the three months ended March 31, 2012 and $50 million for the year ended December 31, 2011, respectively, together with the associated tax effects of $3.4 million and $13.6 million, respectively, representing an estimate of the annual management fee that would be paid by the company to a subsidiary of Brookfield for services rendered in connection with a Master Services

 

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Agreement to be entered into in connection with the reorganization and spin-off. The estimated Management Fees are based on an annual base management fee of $50 million (subject to an annual escalation by a specified inflation factor beginning on January 1, 2014).

The property partnership will also pay a quarterly equity enhancement distribution to the Property GP of 0.3125% of the amount by which the company’s total capitalization value at the end of each quarter exceeds its total capitalization value determined immediately following the spin-off. As this is based on the future capitalization value of the company, which cannot be reliably estimated, the expense associated with the equity enhancement distribution has not been included in the pro forma statements of income.

This adjustment does not reflect general and administrative costs which management expects will be approximately $5 million per year.

 

(h) Exclusion of Brookfield’s 2% investment in HHC

The Brookfield Carve-out financial statements include Brookfield’s 2% common equity interest in HHC which is classified as securities designated as available-for-sale that is not included in the Business pursuant to the reorganization.

The unaudited pro forma balance sheet reflects the derecognition of this investment with a corresponding reduction in the equity in net assets attributable to the parent. The unaudited pro forma statements of income for the three months ended March 31, 2012 and the year ended December 31, 2011 reflect a reversal of fair value gains of $13 and nil, respectively, that were reflected in the Brookfield Carve-out financial statements for those periods.

 

PF-11

EX-1.3 2 d384817dex13.htm EX-1.3 EX-1.3

Exhibit 1.3

1648285 ALBERTA ULC

- and -

BROOKFIELD ASSET MANAGEMENT INC.

- and -

BREF HOLDINGS LLC

EACH PERSON WHO IS ADMITTED TO THE PARTNERSHIP AS A LIMITED

PARTNER FROM TIME TO TIME

 

 

FORM OF AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT

OF BROOKFIELD PROPERTY PARTNERS L.P.

 

 

n, 2012


TABLE OF CONTENTS

 

ARTICLE 1

  

INTERPRETATION

     2   

1.1

   Definitions      2   

1.2

   Headings and Table of Contents      9   

1.3

   Interpretation      9   

1.4

   Invalidity of Provisions      10   

1.5

   Entire Agreement      10   

1.6

   Waiver, Amendment      11   

1.7

   Governing Law; Submission to Jurisdiction      11   

ARTICLE 2

  

ORGANIZATIONAL MATTERS

     11   

2.1

   Formation      11   

2.2

   Purpose      11   

2.3

   Powers      12   

2.4

   Name      12   

2.5

   Registered Office; Principal Office      12   

2.6

   Power of Attorney      12   

2.7

   Term      14   

ARTICLE 3

  

CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS

     14   

3.1

   Formation of the Partnership      14   

3.2

   Initial Capital Contributions by the General Partner and the Initial Limited Partner/Adjustments to General Partner Capital Contributions      14   

3.3

   The Reorganization and Spin-Off      15   

3.4

   Interest and Withdrawal      15   

3.5

   Issuances of Additional Partnership Interests      15   

3.6

   Pre-emptive Rights      16   

3.7

   Splits and Combinations      16   

3.8

   Fully Paid and Non-Assessable Nature of Units      17   

3.9

   Take-Over Bid      17   

ARTICLE 4

  

ALLOCATIONS AND DISTRIBUTIONS

     18   

4.1

   Determination of Net Income or Loss      18   

4.2

   General Allocations      18   

4.3

   No Right to Withdraw Accounts      19   

4.4

   Allocations for Tax Purposes      19   

4.5

   Currency Translation      20   

4.6

   Distributions      20   

4.7

   Prohibition on Distributions      20   


 

- ii -

 

ARTICLE 5

  

MANAGEMENT AND OPERATION OF PARTNERSHIP

     21   

5.1

   Management      21   

5.2

   Restrictions on General Partner’s Authority      22   

5.3

   Reimbursement of Partnership Expenses      22   

5.4

   Outside Activities      23   

5.5

   Disclosure of Interests      24   

5.6

   Indemnification      25   

5.7

   Resolution of Conflicts of Interest      27   

5.8

   Other Matters Concerning the General Partner      27   

5.9

   Title to Partnership Assets      28   

5.10

   Purchase or Sale of Units      28   

5.11

   Reliance by Third Parties      28   

5.12

   Services      29   

ARTICLE 6

  

INVESTMENTS IN THE PROPERTY PARTNERSHIP

     29   

ARTICLE 7

  

RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS

     29   

7.1

   Limitation of Liability      29   

7.2

   Management of Partnership Affairs      29   

7.3

   Outside Activities      30   

ARTICLE 8

  

BOOKS, RECORDS, ACCOUNTING AND REPORTS

     30   

8.1

   Books, Records and Accounting      30   

8.2

   Fiscal Year      30   

8.3

   Reports      31   

ARTICLE 9

  

TAX MATTERS

     31   

9.1

   Tax Information      31   

9.2

   Preparation of Tax Returns      31   

9.3

   Tax Elections      32   

9.4

   Tax Controversies      32   

9.5

   Withholding      32   

9.6

   Election to be Treated as a Corporation      32   

ARTICLE 10

  

CERTIFICATES; RECORD HOLDERS; TRANSFERS OF PARTNERSHIP INTERESTS

     33   

10.1

   Certificates      33   

10.2

   Mutilated, Destroyed, Lost or Stolen Certificates      33   

10.3

   Record Holder      34   

10.4

   Transfer Generally      34   

10.5

   Registration and Transfer of Units      35   


 

- iii -

 

10.6

   Transfer of General Partner Units      36   

10.7

   Restrictions on Transfers      36   

ARTICLE 11

  

ADMISSION OF ADDITIONAL OR SUCCESSOR PARTNERS

     37   

11.1

   Admission of Additional Limited Partners      37   

11.2

   Admission of Successor General Partner      38   

ARTICLE 12

  

WITHDRAWAL OF PARTNERS

     38   

12.1

   Withdrawal of the General Partner      38   

12.2

   Interest of Departing General Partner and Successor General Partner      39   

12.3

   Withdrawal of Limited Partners      40   

ARTICLE 13

  

TERMINATION OF THE PARTNERSHIP

     40   

13.1

   General      40   

13.2

   Incapacity      41   

13.3

   Liquidation      41   

13.4

   Distributions in Kind      42   

13.5

   Cancellation of Certificate of Limited Partnership      43   

13.6

   Reasonable Time for Winding Up      43   

13.7

   Return of Capital      43   

13.8

   Waiver of Partition      43   

ARTICLE 14

  

AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE

     43   

14.1

   Amendment to be Adopted Solely by General Partner      43   

14.2

   Amendment Procedures      45   

14.3

   Amendment Requirements      45   

14.4

   Meetings      46   

14.5

   Notice of Meeting      47   

14.6

   Record Date      47   

14.7

   Adjournment      47   

14.8

   Quorum      47   

14.9

   Conduct of Meeting      48   

14.10

   Action Without a Meeting      48   

14.11

   Voting and Other Rights      49   

ARTICLE 15

  

GENERAL PROVISIONS

     49   

15.1

   Enurement      49   

15.2

   Notices      49   

15.3

   Further Assurances      51   

15.4

   Counterparts      51   


 

- iv -

 

Schedule A – Capital Contributions


AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT

OF BROOKFIELD PROPERTY PARTNERS L.P.

THIS AGREEMENT is made as of the nth day of n, 2012 among 1648285 ALBERTA ULC (the “General Partner”), an unlimited liability company existing under the laws of the Province of Alberta, as the General Partner, BROOKFIELD ASSET MANAGEMENT INC., a corporation existing under the laws of the Province of Ontario (the “Initial Limited Partner”), BREF Holdings LLC, a limited liability company existing under the laws of Delaware, as Limited Partner, and each person who is admitted to the Partnership (as hereinafter defined) as a limited partner in accordance with the provisions of this Agreement.

WHEREAS the General Partner and the Initial Limited Partner formed a limited partnership under the laws of Bermuda upon the entering into of a limited partnership agreement between the General Partner and the Initial Limited Partner dated as of January 3, 2012 (the “Initial Limited Partnership Agreement”). A Certificate of Registration for the Partnership (as hereinafter defined) confirming the registration of the Partnership as an “Exempted Partnership” pursuant to a Certificate of Exempted Partnership under the Exempted Partnerships Act 1992 (Bermuda) (as supplemented, the “Certificate of Exempted Partnership”) and as a “Limited Partnership” pursuant to a Certificate of Limited Partnership under the Limited Partnership Act 1883 (Bermuda) (as supplemented, the “Certificate of Limited Partnership”) was issued by the Bermuda Registrar of Companies on January 3, 2012;

AND WHEREAS the General Partner and the Initial Limited Partner wish to amend the Initial Limited Partnership Agreement by making the modifications reflected herein, to restate the Initial Limited Partnership Agreement as so amended and to admit BREF Holdings LLC as a limited partner;

AND WHEREAS this Amended and Restated Limited Partnership Agreement shall replace the Initial Limited Partnership Agreement in its entirety;

AND WHEREAS immediately following the Reorganization (as hereinafter defined) n Units (as hereinafter defined) will be held by the Initial Limited Partner and n Units will be held by BREF Holdings LLC;

AND WHEREAS the Initial Limited Partner intends to distribute n Units to the holders (the “Brookfield Shareholders”) of its Class A limited voting shares and Class B limited voting shares (the “Brookfield Shares”) as a special dividend (the “Spin-Off”) following the execution of this Agreement, at which point those Brookfield Shareholders will become limited partners of the Partnership and parties to this Amended and Restated Limited Partnership Agreement;

AND WHEREAS the Partners (as hereinafter defined) desire to set forth the rights, powers and duties of the Partners, the affairs of the Partnership and the conduct of the Partnership’s activities, all upon the terms and conditions provided for in this Amended and Restated Limited Partnership Agreement.


 

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NOW THEREFORE in consideration of the premises, mutual covenants and agreements contained in this Agreement and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties covenant and agree, each with the others, as follows:

ARTICLE 1

INTERPRETATION

 

1.1 Definitions

The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.

 

  1.1.1. Affiliate” means, with respect to a Person, any other Person that, directly or indirectly, through one or more intermediaries, Controls or is Controlled by such Person, or is under common Control of a third Person;

 

  1.1.2. Agreement” means this Amended and Restated Limited Partnership Agreement of Brookfield Property Partners L.P.;

 

  1.1.3. Assets” means all assets, whether tangible or intangible and whether real, personal or mixed, at any time owned by the Partnership (or by the General Partner, one or more of its Affiliates or one or more nominees for the benefit of the Partnership, in each case in accordance with Section 5.9) or acquired by the General Partner for the account of the Partnership in the course of carrying on the activities of the Partnership;

 

  1.1.4. BPY Group” means the Partnership, the Property Partnership, the Holding Entities, the Operating Entities and any other direct or indirect Subsidiary of a Holding Entity;

 

  1.1.5. Brookfield” means Brookfield Asset Management Inc.;

 

  1.1.6. Brookfield Group” means Brookfield and any Affiliates of Brookfield, other than any member of the BPY Group;

 

  1.1.7. Brookfield Shareholders” has the meaning assigned to such term in the recitals;

 

  1.1.8. Brookfield Shares” has the meaning assigned to such term in the recitals;

 

  1.1.9. Business” means the business to be acquired by the BPY Group, as described in the Registration Statement;

 

  1.1.10. Business Day” means every day except a Saturday or Sunday, or a day which is a statutory or civic holiday in Bermuda, the Province of Ontario, or the State of New York;


 

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  1.1.11. Canadian Tax Purposes” means for the purposes of determining liability for Tax pursuant to Canadian federal and provincial Tax Laws;

 

  1.1.12. Capital Contribution” means the amount of capital contributed to the Partnership by each Record Holder (or a Person from which the Record Holder purchased or acquired its Partnership Interests) in respect of the Partnership Interests purchased or acquired by or issued to that Record Holder;

 

  1.1.13. Certificate” means a certificate issued by the Partnership evidencing ownership of one or more Units or any other Partnership Interests, or of options, rights, warrants or appreciation rights relating to Partnership Interests, in such form as may be adopted by the General Partner from time to time;

 

  1.1.14. Certificate of Exempted Partnership” has the meaning assigned to such term in the recitals;

 

  1.1.15. Certificate of Limited Partnership” has the meaning assigned to such term in the recitals;

 

  1.1.16. Closing Date” means the date of the Spin-Off;

 

  1.1.17. Code” means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder, and any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provisions of future law;

 

  1.1.18. Conflicts Guidelines” has the meaning assigned to such term in Section 5.7.2;

 

  1.1.19. Control” means the control by one Person of another Person in accordance with the following: a Person (“A”) controls another Person (“B”) where A has the power to determine the management and policies of B by contract or status (for example, the status of A being the general partner of B) or by virtue of the beneficial ownership of or control over a majority of the voting interests in B; and, for certainty and without limitation, if A owns or has control over shares or other securities to which are attached more than 50% of the votes permitted to be cast in the election of directors to the Governing Body of B, or A is the general partner of B, a limited partnership, then in each case A Controls B for this purpose; and the term “Controlled” has the corresponding meaning;

 

  1.1.20. Departing General Partner” means a former General Partner, from and after the effective date of any withdrawal of such former General Partner pursuant to Section 12.1;

 

  1.1.21. Event of Withdrawal” has the meaning assigned to such term in Section 12.1.1;

 

  1.1.22. Exempted Partnerships Act” means the Exempted Partnerships Act 1992 (Bermuda);


 

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  1.1.23. fiscal year” as such term relates to the Partnership shall be the fiscal year of the Partnership as determined in accordance with Section 8.2;

 

  1.1.24. General Partner” means 1648285 Alberta ULC, a corporation existing under the laws of the Province of Ontario, and includes any person who becomes a successor or replacement general partner of the Partnership pursuant to the terms of this Agreement after the date hereof;

 

  1.1.25. General Partner Units” means the interests in the Partnership owned by the General Partner, having the rights and obligations specified in this Agreement, and which are designated as General Partner Units;

 

  1.1.26. Governing Body” means (i) with respect to a corporation or limited company, the board of directors of such corporation or limited company, (ii) with respect to a limited liability company, the manager(s) or managing partner(s) of such limited liability company, (iii) with respect to a partnership, the board, committee or other body of each general partner or managing partner of such partnership, respectively, that serves a similar function (or if any such general partner is itself a partnership, the board, committee or other body of such general or managing partner’s general or managing partner that serves a similar function), and (iv) with respect to any other Person, the body of such Person that serves a similar function, and in the case of each of (i) through (iv) includes any committee or other subdivision of such body and any Person to whom such body has delegated any power or authority, including any officer or managing director;

 

  1.1.27. Governing Instruments” means (i) the Memorandum of Association and Bye-laws in the case of any exempted company existing under the Laws of Bermuda, (ii) the certificate of incorporation, amalgamation or continuance, as applicable, and bylaws in the case of a corporation, (iii) the memorandum and articles of association and by-laws, as applicable, in the case of a limited company, (iv) the partnership agreement in the case of a partnership, (v) the articles of formation and operating agreement in the case of a limited liability company, (vi) the trust instrument in the case of a trust, and (vii) any other similar governing document under which an entity was organized, formed or created and operates, in each case as amended, supplemented or otherwise modified from time to time;

 

  1.1.28. Governmental Authority” means any (i) international, multinational, national, federal, provincial, state, regional, municipal, local or other government, governmental or public department, central bank, court, tribunal, arbitral body, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) self-regulatory organization or stock exchange, (iii) subdivision, agent, commission, board, or authority of any of the foregoing, or (iv) quasi-governmental or private body exercising any regulatory, expropriation or taxing authority under or for the account of any of the foregoing;

 

  1.1.29.

Holding Entities” means BPY Bermuda Holdings Limited, Brookfield BPY Holdings (US) Inc., Brookfield BPY Property Holdings I Inc. and Brookfield


 

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  BPY Retail Holdings I Inc. and any direct wholly-owned Subsidiary of the Property Partnership created or acquired after the date of this Agreement;

 

  1.1.30. IFRS-IASB” means International Financial Reporting Standards as issued by the International Accounting Standards Board consistently applied or such other applicable accounting principles;

 

  1.1.31. “Income for Canadian Tax Purposes” means, in respect of any fiscal year of the Partnership, the income of the Partnership for that fiscal year, determined in accordance with the Income Tax Act;

 

  1.1.32. Income Tax Act” means the Income Tax Act (Canada), and includes the regulations promulgated thereunder;

 

  1.1.33. Indemnified Party” has the meaning assigned to such term in Section 5.6.1;

 

  1.1.34. Independent Committee” means a committee of the board of directors of the General Partner made up of directors that are “independent” of Brookfield and its Affiliates, as contemplated by applicable securities Laws;

 

  1.1.35. Initial GP Capital Contribution” has the meaning assigned to such term in Section 3.2;

 

  1.1.36. Initial Limited Partner” has the meaning assigned to such term in the recitals;

 

  1.1.37. Initial Limited Partnership Agreement” has the meaning assigned to such term in the recitals;

 

  1.1.38. Initial LP Capital Contribution” has the meaning assigned to such term in Section 3.2;

 

  1.1.39. Interested Party” has the meaning assigned to such term in Section 5.5.1;

 

  1.1.40. Laws” means any and all applicable (i) laws, constitutions, treaties, statutes, codes, ordinances, principles of common and civil law and equity, rules, regulations and municipal by-laws, whether domestic, foreign or international, (ii) judicial, arbitral, administrative, ministerial, departmental and regulatory judgments, orders, writs, injunctions, decisions, and awards of any Governmental Authority, and (iii) policies, practices and guidelines of any Governmental Authority which, although not actually having the force of law, are considered by such Governmental Authority as requiring compliance as if having the force of law; and the term “applicable”, with respect to such Laws and in the context that refers to one or more Persons, means such Laws that apply to such Person or Persons or its or their business, undertaking, property or securities at the relevant time and that emanate from a Governmental Authority having jurisdiction over the Person or Persons or its or their business, undertaking, property or securities;

 

  1.1.41. Liabilities” has the meaning assigned to such term in Section 5.6.1;


 

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  1.1.42. Limited Partner” means a Person who is the direct beneficial owner of a Unit, without regard to the Record Holder (unless the Record Holder is such Person);

 

  1.1.43. Limited Partnership Act” means the Limited Partnership Act 1883 (Bermuda);

 

  1.1.44. Liquidator” means the General Partner or other Person approved pursuant to Section 13.3 who performs the functions described therein;

 

  1.1.45. Loss for Canadian Tax Purposes” means, in respect of any fiscal year of the Partnership, the loss of the Partnership for that fiscal year, determined in accordance with the Income Tax Act;

 

  1.1.46. Managers” means Brookfield Asset Management (Barbados) Inc., BGRE Partners LP, Brookfield Developments Europe Ltd. and Brookfield Global Real Estate LLC and any other Affiliate of Brookfield that is appointed from time to time to act as a manager pursuant to the Master Services Agreement;

 

  1.1.47. Master Services Agreement” means the master services agreement dated the date hereof among, inter alia, the Managers, the Partnership, the Property Partnership, the Holding Entities and others;

 

  1.1.48. Non-Tendering Offeree” means, where a Take-Over Bid is made for all of the Units other than those held by the offeror, a holder of Units who does not accept the take-over bid and includes a subsequent holder of that Unit who acquires it from the first mentioned holder;

 

  1.1.49. Notice” has the meaning assigned to such term in Section 15.2;

 

  1.1.50. Offeree” means a Person to whom a take-over bid is made;

 

  1.1.51. Offeror” means a Person, other than an agent, who makes a Take-Over Bid, and includes two or more Persons who, directly or indirectly:

 

  1.1.51.1 make a Take-Over Bid jointly or in concert; or

 

  1.1.51.2 intend to exercise jointly or in concert voting rights attached to the Units for which a Take-Over Bid is made;

 

  1.1.52. Operating Entities” means, from time to time, the Persons in which the Holding Entities, directly or indirectly, hold interests and that (i) directly hold real estate assets, or (ii) indirectly hold real estate assets but all of the interests of which are not held, directly or indirectly, by the Holding Entities, other than, in the case of each of (i) and (ii), any Person in which the Holding Entities, directly or indirectly, hold interests for investment purposes only of less than 5% of the outstanding equity securities of that Person;

 

  1.1.53. Opinion of Counsel” means a written opinion of counsel acceptable to the General Partner;


 

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  1.1.54. Outstanding” means, with respect to Units or Partnership Interests, all Units or Partnership Interests that are issued by the Partnership and reflected as outstanding on the Partnership’s books and records as of the date of determination;

 

  1.1.55. Partner” means the General Partner or a Limited Partner;

 

  1.1.56. Partnership” means Brookfield Property Partners L.P., the limited partnership heretofore formed and continued pursuant to this Agreement;

 

  1.1.57. Partnership Interest” means any partnership interest, including any General Partner Unit or Unit;

 

  1.1.58. Percentage Interest” means, as of the date of such determination:

 

  1.1.58.1 as to the General Partner, 0.2%;

 

  1.1.58.2 as to all Limited Partners, 99.8%; and

 

  1.1.58.3 as to any Limited Partner holding Units, a percentage equal to the number of Units held by such Limited Partner divided by the total number of all Units then Outstanding, expressed as a percentage;

 

  1.1.59. Person” means any natural person, partnership, limited partnership, limited liability partnership, joint venture, syndicate, sole proprietorship, company or corporation (with or without share capital), limited liability corporation, unlimited liability company, joint stock company, unincorporated association, trust, trustee, executor, administrator or other legal personal representative, Governmental Authority or other entity however designated or constituted and pronouns have a similarly extended meaning;

 

  1.1.60. Property Partnership” means Brookfield Property L.P.;

 

  1.1.61. Property Partnership Agreement” means the limited partnership agreement of the Property Partnership;

 

  1.1.62. Quarter” means a calendar quarter ending on the last day of March, June, September or December;

 

  1.1.63. Record Date” means the date established by the General Partner for determining (i) the identity of Record Holders entitled to notice of any meeting of Limited Partners or entitled to consent to a Partnership action in writing without a meeting or entitled to exercise rights in respect of any lawful action of Limited Partners, or (ii) the identity of Record Holders entitled to receive any report or distribution;

 

  1.1.64.

Record Holder” means, as of any particular Business Day, the Person in whose name a Unit is registered on the books of the Transfer Agent as of the opening of


 

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  business on such Business Day, or with respect to other Partnership Interests, the Person in whose name any such other Partnership Interest is registered on the books which the General Partner has caused to be kept as of the opening of business on such Business Day;

 

  1.1.65. Redemption-Exchange Mechanism” means the “Redemption Right” and the “Exchange Right” as such terms are defined in the Property Partnership Agreement;

 

  1.1.66. Registration Statement” means the final registration statement and prospectus of the Partnership filed with securities regulators in connection with the Spin-Off;

 

  1.1.67. Relationship Agreement” means the relationship agreement between certain members of the Brookfield Group, the Partnership, the Property Partnership, the Holding Entities and others dated as of the date hereof;

 

  1.1.68. Reorganization” means the transactions relating to the indirect acquisition of the Business by the Holding Entities;

 

  1.1.69. Securities Exchange” means any stock exchange on which Units or other Partnership Interests are or will be listed for trading;

 

  1.1.70. Securities Exchange Act” means the United States Securities Exchange Act of 1934, as amended;

 

  1.1.71. Spin-Off” has the meaning assigned to such term in the recitals;

 

  1.1.72. Subsidiary” means, with respect to any Person, (i) any other Person that is directly or indirectly Controlled by such Person, (ii) any trust in which such Person holds all of the beneficial interests, or (iii) any partnership, limited liability company or similar entity in which such Person holds all of the interests other than the interests of any general partner, managing member or similar Person;

 

  1.1.73. Take-Over Bid” has the meaning given to it in the Securities Act (Ontario);

 

  1.1.74. Tax” means all forms of taxation, whether direct or indirect and whether levied by reference to income, profits, gains, net wealth, asset values, turnover, added value or other reference and statutory, governmental, national, federal, state, provincial, local governmental or municipal impositions, duties, contributions and levies (including social security contributions, national insurance contributions and any other payroll taxes), whenever and wherever imposed (whether imposed by way of a withholding or deduction for or on account of tax or otherwise) and in respect of any Person, and all penalties, charges, costs and interest relating thereto;

 

  1.1.75. transfer” has the meaning assigned to such term in Section 10.4;


 

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  1.1.76. Transfer Agent” means the transfer agent duly appointed by the Partnership to act as registrar and transfer agent for the Units, from time to time;

 

  1.1.77. Treasury Regulations” means the Income Tax Regulations promulgated under the Code, as amended from time to time;

 

  1.1.78. Uncertificated” means, in respect of any Partnership Interest, a unit of a Partnership Interest, title to which is recorded on the relevant register of interests as being held in uncertificated form, and title to which may be transferred by means of any clearing system established for the Partnership or by any means accepted or approved by the General Partner;

 

  1.1.79. Unit” means a limited partnership interest in the Partnership representing a fractional part of all the limited partner interests in the Partnership, which is designated as a “Unit”; and

 

  1.1.80. Withdrawal Opinion of Counsel” an Opinion of Counsel that withdrawal of the General Partner (following the selection of the successor general partner) will not (i) result in the loss of the limited liability of any Limited Partner, (ii) cause the Partnership or any BPY Group member to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for tax purposes (to the extent not previously treated as such), or (iii) cause the Partnership or the Property Partnership to become an “investment company” under the U.S. Investment Company Act of 1940, as amended, or similar legislation in other jurisdictions.

 

1.2 Headings and Table of Contents

The inclusion of headings and a table of contents in this Agreement are for convenience of reference only and will not affect the construction or interpretation hereof.

 

1.3 Interpretation

In this Agreement, unless the context otherwise requires:

 

  1.3.1. words importing the singular shall include the plural and vice versa, words importing gender shall include all genders or the neuter, and words importing the neuter shall include all genders;

 

  1.3.2. the words “include”, “includes”, “including”, or any variations thereof, when following any general term or statement, are not to be construed as limiting the general term or statement to the specific items or matters set forth or to similar items or matters, but rather as referring to all other items or matters that could reasonably fall within the broadest possible scope of the general term or statement;

 

  1.3.3. references to any Person include such Person’s successors and permitted assigns;


 

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  1.3.4. except as otherwise provided in this Agreement, any reference in this Agreement to a statute, regulation, policy, rule or instrument shall include, and shall be deemed to be a reference also to, all rules and regulations made under such statute, in the case of a statute, to all amendments made to such statute, regulation, policy, rule or instrument, and to any statute, regulation, policy, rule or instrument that may be passed which has the effect of supplementing or superseding the statute, regulation, policy, rule or instrument so referred to;

 

  1.3.5. any reference to this Agreement or any other agreement, document or instrument shall be construed as a reference to this Agreement or, as the case may be, such other agreement, document or instrument as the same may have been, or may from time to time be, amended, varied, replaced, amended and restated, supplemented or otherwise modified;

 

  1.3.6. in the event that any day on which any amount is to be determined or any action is required to be taken hereunder is not a Business Day, then such amount shall be determined or such action shall be required to be taken at or before the requisite time on the next succeeding day that is a Business Day; and

 

  1.3.7. except where otherwise expressly provided, all amounts in this Agreement are stated and shall be paid in U.S. currency.

 

1.4 Invalidity of Provisions

Each of the provisions contained in this Agreement is distinct and severable and a declaration of invalidity or unenforceability of any such provision or part thereof by a court of competent jurisdiction will not affect the validity or enforceability of any other provision hereof. To the extent permitted by applicable Law, the parties waive any provision of Law which renders any provision of this Agreement invalid or unenforceable in any respect. The parties will engage in good faith negotiations to replace any provision which is declared invalid or unenforceable with a valid and enforceable provision, the economic effect of which comes as close as possible to that of the invalid or unenforceable provision which it replaces.

 

1.5 Entire Agreement

This Agreement constitutes the entire agreement between the parties pertaining to the subject matter of this Agreement. There are no warranties, conditions, or representations (including any that may be implied by statute) and there are no agreements in connection with such subject matter except as specifically set forth or referred to in this Agreement. No reliance is placed on any warranty, representation, opinion, advice or assertion of fact made either prior to, contemporaneous with, or after entering into this Agreement, or any amendment or supplement hereto, by any party to this Agreement or its directors, officers, employees or agents, to any other party to this Agreement or its directors, officers, employees or agents, except to the extent that the same has been reduced to writing and included as a term of this Agreement, and none of the parties to this Agreement has been induced to enter into this Agreement or any amendment or supplement by reason of any such warranty, representation, opinion, advice or assertion of fact. Accordingly, there will be no liability, either in tort or in contract, assessed in


 

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relation to any such warranty, representation, opinion, advice or assertion of fact, except to the extent contemplated above.

 

1.6 Waiver, Amendment

Except as expressly provided in this Agreement, no amendment or waiver of this Agreement will be binding unless executed in writing by the party to be bound thereby. No waiver of any provision of this Agreement will constitute a waiver of any other provision nor will any waiver of any provision of this Agreement constitute a continuing waiver unless otherwise expressly provided. A party’s failure or delay in exercising any right under this Agreement will not operate as a waiver of that right. A single or partial exercise of any right will not preclude a party from any other or further exercise of that right or the exercise of any other right.

 

1.7 Governing Law; Submission to Jurisdiction

This Agreement will be governed by and construed in accordance with the laws of Bermuda. Each of the Partners (other than governmental entities prohibited from submitting to the jurisdiction of a particular jurisdiction) will submit to the non-exclusive jurisdiction of any court in Bermuda in any dispute, suit, action or proceeding arising out of or relating to this Agreement. Each Partner waives, to the fullest extent permitted by Law, any immunity from jurisdiction of any such court or from any legal process therein and further waives, to the fullest extent permitted by Law, any claim of inconvenient forum, improper venue or that any such court does not have jurisdiction over the Partner. Any final judgment against a Partner in any proceedings brought in any court in Bermuda will be conclusive and binding upon the Partner and may be enforced in the courts of any other jurisdiction of which the Partner is or may be subject, by suit upon such judgment. The foregoing submission to jurisdiction and waivers will survive the dissolution, liquidation, winding up and termination of the Partnership.

ARTICLE 2

ORGANIZATIONAL MATTERS

 

2.1 Formation

The Partnership has been formed as an exempted limited partnership on January 3, 2012, pursuant to the provisions of the Limited Partnership Act and the Exempted Partnerships Act. Except as expressly provided to the contrary in this Agreement, the rights, duties (including fiduciary duties), liabilities and obligations of the Partners and the administration, dissolution and termination of the Partnership shall be governed by the Limited Partnership Act and the Exempted Partnerships Act. All Partnership Interests shall constitute personal property of the owner thereof for all purposes and a Partner has no interest in any specific Partnership property.

 

2.2 Purpose

The purpose of the Partnership shall be to: (i) acquire and hold interests in the Property Partnership and, subject to the approval of the General Partner, interests in any other entity; (ii) engage in any activity related to the capitalization and financing of the Partnership’s interests in the Property Partnership and such other Persons; and (iii) engage in any activity that is


 

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incidental to or in furtherance of the foregoing and that is approved by the General Partner and that lawfully may be conducted by a limited partnership organized under the Limited Partnership Act and the Exempted Partnerships Act and this Agreement. To the fullest extent permitted by Law, the General Partner shall have no duty or obligation to propose or approve, and may decline to propose or approve, the conduct by the Partnership of any activity free of any duty (including any fiduciary duty) or obligation whatsoever to the Partnership or any Limited Partner or Record Holder and, in declining to so propose or approve, shall not be deemed to have breached this Agreement, any other agreement contemplated hereby, the Limited Partnership Act, the Exempted Partnerships Act or any other provision of Law.

 

2.3 Powers

The Partnership shall be empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and activities described in Section 2.2 and for the protection and benefit of the Partnership.

 

2.4 Name

The name of the Partnership shall be “Brookfield Property Partners L.P.” The Partnership’s activities and affairs may be conducted under any other name or names deemed necessary or appropriate by the General Partner, including the name of the General Partner or any Affiliate thereof. The words “Limited Partnership”, “L.P.” or similar words or letters shall be included in the Partnership’s name where necessary for the purposes of complying with the Laws of any jurisdiction that so requires. Subject to compliance with the requirements of the Limited Partnership Act and the Exempted Partnerships Act, the General Partner in its sole discretion may change the name of the Partnership at any time and from time to time and shall notify the Record Holders of such change in the next regular communication to Record Holders.

If the General Partner ceases to be the general partner of the Partnership and the new general partner is not an Affiliate of Brookfield, the Partnership shall change its name so that it does not include “Brookfield” and could not be capable of confusion in any way with such name. This obligation shall be enforceable and waivable by the General Partner notwithstanding that it may have ceased to be the general partner of the Partnership.

 

2.5 Registered Office; Principal Office

Unless and until changed by the General Partner, the registered office of the Partnership shall be located at 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda. The head office of the Partnership and the General Partner shall be 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda, or such other place as the General Partner may from time to time designate by notice to the Record Holders. The Partnership may maintain offices at such other place or places within Bermuda as the General Partner deems necessary or appropriate.

 

2.6 Power of Attorney

 

  2.6.1.

Each Limited Partner hereby constitutes and appoints each of the General Partner and, if a Liquidator shall have been selected pursuant to Section 13.3, the


 

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  Liquidator severally (and any successor to either thereof by merger, transfer, assignment, election or otherwise) and each of their authorized officers and attorneys-in-fact, with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead, to:

 

  2.6.1.1 execute, swear to, acknowledge, deliver, file and record in the appropriate public offices: (i) all certificates, documents and other instruments (including this Agreement, the Certificate of Limited Partnership and the Certificate of Exempted Partnership and all amendments or restatements thereof) that the General Partner or the Liquidator deems necessary or appropriate to form, qualify or continue the existence or qualification of the Partnership as an exempted limited partnership (or a partnership in which the limited partners have limited liability) in Bermuda and in all other jurisdictions in which the Partnership may conduct activities and affairs or own property; (ii) all certificates, documents and other instruments that the General Partner or the Liquidator deems necessary or appropriate to reflect, in accordance with its terms, any amendment, change, modification or restatement of this Agreement; (iii) all certificates, documents and other instruments (including conveyances and a certificate of cancellation) that the General Partner or the Liquidator deems necessary or appropriate to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement; (iv) all certificates, documents and other instruments relating to the admission or withdrawal of any Partner pursuant to, or other events described in, Article 11 or Article 12 or to the Capital Contribution of any Partner; (v all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of any class or series of Units or other Partnership Interests issued pursuant to Section 3.5; and (vi) any tax election with any Limited Partner or General Partner on behalf of the Partnership and/or all Partners; and

 

  2.6.1.2

execute, swear to, acknowledge, deliver, file and record all ballots, consents, approvals, waivers, certificates, documents and other instruments necessary or appropriate, in the sole discretion of the General Partner or the Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action that is made or given by the Partners hereunder or is consistent with the terms of this Agreement or is necessary or appropriate, in the sole discretion of the General Partner or the Liquidator, to effectuate the terms or intent of this Agreement; provided, that when required by any other provision of this Agreement that establishes a percentage of the Limited Partners or of the Limited Partners of any class or series required to take any action, the General Partner or the Liquidator may exercise the power of attorney made in this Section 2.6.1.2 only after


 

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  the necessary vote, consent or approval of the Limited Partners or of the Limited Partners of such class or series, as applicable.

Nothing contained in this Section 2.6.1 shall be construed as authorizing the General Partner to amend this Agreement except in accordance with Article 14 or as may be otherwise expressly provided for in this Agreement.

 

  2.6.2. The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, and it shall survive and not be affected by the subsequent death, incompetency, disability, incapacity, dissolution, bankruptcy or termination of any Limited Partner or the transfer of all or any portion of such Limited Partner’s Partnership Interest and shall extend to such Limited Partner’s heirs, successors, assigns and personal representatives. Each Limited Partner hereby agrees to be bound by any representation made by the General Partner or the Liquidator acting in good faith pursuant to such power of attorney; and each Limited Partner hereby waives any and all defenses that may be available to it to contest, negate or disaffirm the action of the General Partner or the Liquidator taken in good faith under such power of attorney. Each Limited Partner shall execute and deliver to the General Partner or the Liquidator, within 15 days after receipt of the General Partner’s or the Liquidator’s request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator deems necessary to effectuate this Agreement and the purposes of the Partnership.

 

2.7 Term

The Partnership commenced upon the formation of the Partnership on January 3, 2012, pursuant to the Initial Limited Partnership Agreement, the Certificate of Limited Partnership and the Certificate of Exempted Partnership and shall continue in perpetual existence until the termination of the Partnership in accordance with the provisions of Section 13.1.

ARTICLE 3

CAPITAL CONTRIBUTIONS AND

ISSUANCE OF PARTNERSHIP INTERESTS

 

3.1 Formation of the Partnership

In connection with the formation of the Partnership, the General Partner has been admitted as the General Partner of the Partnership and the Initial Limited Partner has been admitted as a Limited Partner as of the date of the Initial Limited Partnership Agreement.

 

3.2 Initial Capital Contributions by the General Partner and the Initial Limited Partner/Adjustments to General Partner Capital Contributions

 

  3.2.1.

The General Partner has made a Capital Contribution of $100.00 to the Partnership (“Initial GP Capital Contribution”) in exchange for 100 General Partner Units. The Initial Limited Partner has made a Capital Contribution of


 

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  $900.00 to the Partnership (“Initial LP Capital Contribution”) in exchange for 900 Units.

 

  3.2.2. Notwithstanding any provision herein to the contrary, the General Partner shall be required to maintain its Partnership Interest as specified in Section 1.1.57 by making additional Capital Contributions or effecting withdrawals of its Capital Contributions, as shall be necessary.

 

3.3 The Reorganization and Spin-Off

 

  3.3.1. In connection with the transactions involved in the Reorganization, the Capital Contributions outlined in Schedule A will be made.

 

  3.3.2. Immediately prior to the Reorganization, 96 General Partner Units will be cancelled and 864 Units held by the Initial Limited Partner will be cancelled.

 

  3.3.3. In connection with the Spin-Off and following the execution of this Agreement, each Brookfield Shareholder shall receive and accept a portion of the Units held by the Initial Limited Partner on the Closing Date in proportion to its holding of Brookfield Shares whereupon such Brookfield Shareholder shall be admitted as a Limited Partner of the Partnership subject to and in accordance with Section 11.1.

 

3.4 Interest and Withdrawal

No interest on Capital Contributions shall be paid by the Partnership. No Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent, if any, that distributions made pursuant to this Agreement or upon dissolution of the Partnership may be considered as such by Law and then only to the extent provided for in this Agreement. Except to the extent expressly provided in this Agreement, no Partner shall have priority over any other Partner either as to the return of Capital Contributions or as to profits, losses or distributions.

 

3.5 Issuances of Additional Partnership Interests

 

  3.5.1. The Partnership may issue additional Partnership Interests (including new classes of Partnership Interests) and options, rights, warrants and appreciation rights relating to such Partnership Interests or class of Partnership Interests for any Partnership purpose (including in connection with any distribution reinvestment plan or the Redemption-Exchange Mechanism) at any time and on such terms and conditions as the General Partner shall determine in its sole discretion, all without the approval of any Limited Partners.

 

  3.5.2.

Each additional Partnership Interest authorized to be issued by the Partnership pursuant to Section 3.5.1 may be issued in one or more classes, or one or more series of any such classes, with such designations, preferences, rights, powers and duties (which may be senior to existing classes and series of Partnership Interests), as shall be fixed by the General Partner in its sole discretion, including: (i) the right to share in Partnership profits and losses or items thereof; (ii) the right to share in Partnership distributions; (iii) the rights upon dissolution and


 

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  liquidation of the Partnership; (iv) whether, and the terms and conditions upon which, the Partnership may or shall be required to redeem the Partnership Interest (including sinking fund provisions); (v) whether such Partnership Interest is issued with the privilege of conversion or exchange and, if so, the terms and conditions of such conversion or exchange; (vi) the terms and conditions upon which each Partnership Interest will be issued, evidenced by certificates and assigned or transferred; and (viii) the requirement, if any, of each such Partnership Interest to consent to certain partnership matters.

 

  3.5.3. The General Partner is hereby authorized to take all actions that it determines to be necessary or appropriate in connection with each issuance of Partnership Interests and options, rights, warrants and appreciation rights relating to Partnership Interests pursuant to this Section 3.5, including the admission of additional Limited Partners in connection therewith and any related amendment of this Agreement, and all additional issuances of Partnership Interests and options, rights, warrants and appreciation rights relating to Partnership Interests. The General Partner is authorized to do all things that it determines to be necessary or appropriate in connection with any future issuance of Partnership Interests or options, rights, warrants or appreciation rights relating to Partnership Interests, including compliance with any Laws or guideline of any Governmental Authority or any Securities Exchange on which the Units or other Partnership Interests or options, rights, warrants or appreciation rights relating to Partnership Interests are listed for trading.

 

3.6 Pre-emptive Rights

Unless otherwise determined by the General Partner, in its sole discretion, no Person shall have any pre-emptive, preferential or other similar right with respect to the issuance of any Partnership Interest, whether unissued, held in the treasury or hereafter created.

 

3.7 Splits and Combinations

 

  3.7.1. Subject to Section 3.7.4, the Partnership may make a distribution of Partnership Interests to all Record Holders pro rata to their Percentage Interests or may effect a subdivision or combination of Partnership Interests so long as, after any such event, each Partner shall have the same Percentage Interest in the Partnership as before such event.

 

  3.7.2.

Whenever such a distribution, subdivision or combination of Partnership Interests or options, rights, warrants or appreciation rights relating to Partnership Interests is declared, the General Partner shall select a Record Date as of which the distribution, subdivision or combination shall be effective and shall send notice thereof at least 20 days prior to such Record Date to each Record Holder as of a date not less than 10 days prior to the date of such notice. The General Partner also may cause independent public accountants of international standing selected by it to calculate the number of Partnership Interests to be held by each Record Holder after giving effect to such distribution, subdivision or combination. The


 

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  General Partner shall be entitled to rely on any certificate provided by such firm as conclusive evidence of the accuracy of such calculation.

 

  3.7.3. Promptly following any such distribution, subdivision or combination, the Partnership may issue Certificates to the Record Holders of Partnership Interests or options, rights, warrants or appreciation rights relating to Partnership Interests as of the applicable Record Date representing the new number of Partnership Interests or options, rights, warrants or appreciation rights relating to Partnership Interests held by such Record Holders, or the General Partner may adopt such other procedures that it determines to be necessary or appropriate to reflect such changes. If any such combination results in a smaller total number of Partnership Interests Outstanding or outstanding options, rights, warrants or appreciation rights relating to Partnership Interests, the Partnership shall require, as a condition to the delivery to a Record Holder of any such new Certificate, the surrender of any Certificate held by such Record Holder immediately prior to such Record Date.

 

  3.7.4. The Partnership shall not be required to issue fractional Units upon any distribution, subdivision or combination of Units. If a distribution, subdivision or combination of Units would result in the issuance of fractional Units but for the provisions of this Section 3.7.4, each fractional Unit shall be rounded to the nearest whole Unit, with each half Unit being rounded to the next higher Unit.

 

3.8 Fully Paid and Non-Assessable Nature of Units

All Units issued pursuant to, and in accordance with, the requirements of this Article 3 shall be fully paid and non-assessable Units in the Partnership.

 

3.9 Take-Over Bid

 

  3.9.1. If, within 120 days after a Take-Over Bid, the Take-Over Bid is accepted by the holders of not less than 90% of the Outstanding Units, other than Units held at the date of the Take-Over Bid by or on behalf of the Offeror or an Affiliate or associate (as such term is defined in the Business Corporations Act (Ontario)) of the Offeror, the Offeror is entitled, on complying with this Section 3.9, to acquire the Units held by the Non-Tendering Offerees.

 

  3.9.2. An Offeror may acquire Outstanding Units held by a Non-Tendering Offeree by sending by registered mail within 60 days after the date of termination of the Take-Over Bid and in any event within 180 days after the date of the Take-Over Bid, an Offeror’s notice to each Non-Tendering Offeree stating that:

 

  3.9.2.1 the Offerees holding not less than 90% of the Units to which the Take-Over Bid relates accepted the Take-Over Bid;

 

  3.9.2.2 the Offeror is bound to take up and pay for or has taken up and paid for the Units of the Offerees who accepted the Take-Over Bid;


 

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  3.9.2.3 a Non-Tendering Offeree is required to transfer its Units to the Offeror on the terms on which the Offeror acquired the Units of the Offerees who accepted the Take-Over Bid; and

 

  3.9.2.4 a Non-Tendering Offeree who does not transfer its Units in accordance with Section 3.9.2.3 within 20 days after it receives the Offeror’s notice is deemed to have elected to transfer, and to have transferred, its Units to the Offeror on the same terms that the Offeror acquired the Units from the Offerees who accepted the Take-Over Bid.

 

  3.9.3. Concurrently with sending the Offeror’s notice under Section 3.9.2, the Offeror shall send to the General Partner a notice of adverse claim disclosing the name and address of the Offeror and the name of the Non-Tendering Offeree with respect to each Unit held by a Non-Tendering Offeree.

 

  3.9.4. A Non-Tendering Offeree to whom an Offeror’s notice is sent under Section 3.9.2 shall, within 20 days after it receives that notice, send its Units and all Certificates representing its Units or cause its Units to be sent to the General Partner.

 

  3.9.5. Within 20 days after the Offeror sends an Offeror’s notice under Section 3.9.2, the Offeror shall pay or transfer to the General Partner the amount of money or other consideration that the Offeror would have had to pay or transfer to a Non-Tendering Offeree if the Non-Tendering Offeree had tendered under the Take-Over Bid.

 

  3.9.6. The General Partner is deemed to hold on behalf of the Non-Tendering Offeree the money or other consideration it receives under Section 3.9.5, and the General Partner shall deposit the money in a separate account in a bank or other depositary of national standing in Canada or the United States, as applicable, and shall place the other consideration in the custody of a bank or such other body corporate.

ARTICLE 4

ALLOCATIONS AND DISTRIBUTIONS

 

4.1 Determination of Net Income or Loss

Subject to Section 4.4, the net income or loss of the Partnership for each fiscal year shall be determined by the General Partner in accordance with IFRS-IASB.

 

4.2 General Allocations

Limited Partners shall share in the net profits and net losses of the Partnership, generally in accordance with their respective Percentage Interests.


 

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4.3 No Right to Withdraw Accounts

No Partner shall have the right to withdraw any of its Capital Contribution or to receive any distribution from the Partnership except as expressly provided in this Agreement and permitted by the Limited Partnership Act.

 

4.4 Allocations for Tax Purposes

 

  4.4.1. For United States federal income tax purposes, allocations of items of income, gain, loss, deduction, and credit for each taxable year or other relevant period of the Partnership shall be allocated among the Partners pro rata to their respective Percentage Interests, except to the extent (i) that any such allocations would not have substantial economic effect or are not in accordance with the Partners’ interests in the Partnership (in each case, as determined pursuant to Section 704(b) of the Code) or (ii) otherwise required by applicable Law or by reason of tax elections made by the General Partner on behalf of the Partnership, and, in the case of either clause (i) or (ii), the General Partner shall adjust allocations as necessary so as to comply with the requirements of Sections 704(b) and 704(c) of the Code and the Treasury Regulations promulgated thereunder, relevant provisions of Law, or elections made by the General Partner on behalf of the Partnership (as applicable); provided, however, that any such adjustments shall be made in the sole discretion of the General Partner. In furtherance of the foregoing, and for purposes of the proper administration of the Partnership and in order to preserve the uniformity of the Units, the General Partner, in its sole discretion, may (i) make such changes to the allocations as the General Partner deems necessary to (x) reflect the proposal, amendment or promulgation of Treasury Regulations under Section 704 of the Code or (y) otherwise preserve the uniformity of the Units, and (ii) adopt, employ or otherwise modify such conventions and methods as the General Partner determines to be appropriate for (a) the determination of the identities and tax classification of the Partners, (b) the valuation of Assets and the determination of the tax bases thereof, (c) the allocation of asset values and tax bases, (d) the adoption and maintenance of tax accounting methods and tax elections, and (e) the determination of allocations of items between transferors and transferees of Units, including the adoption of monthly, quarterly or other conventions that are consistent with Section 706 of the Code. The source and character of items of income, gain, loss and deduction allocated to a Partner will be the same source and character as the income or gain earned or the loss or deduction incurred by the Partnership.

 

  4.4.2.

The Income for Canadian Tax Purposes for a given fiscal year of the Partnership will be allocated to each Partner in an amount calculated by multiplying the Income for Canadian Tax Purposes by a fraction, the numerator of which is the sum of the distributions received by such Partner with respect to such fiscal year and the denominator of which is the aggregate amount of the distributions made by the Partnership to Partners with respect to such fiscal year. Generally, the source and character of items of income so allocated to a Partner with respect to a fiscal year of the Partnership will be the same source and character as the


 

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  distributions received by such Partner with respect to such fiscal year. If, with respect to a given fiscal year, no distribution is made by the Partnership or the Partnership has a Loss for Canadian Tax Purposes, one quarter of the Income for Canadian Tax Purposes or the Loss for Canadian Tax Purposes, as the case may be, for such fiscal year, will be allocated to the Partners of record at the end of each Quarter ending in such fiscal year pro rata to their respective Percentage Interests at each such date. To such end, any Person who was a Partner at any time during such fiscal year but who has disposed of all of such Person’s Units before the last day of that fiscal year may be deemed to be a Partner on the last day of such fiscal year for the purposes of subsection 96(1) of the Income Tax Act. Generally, the source and character of such income or losses so allocated to a Partner at the end of each Quarter will be the same source and character as the income or loss earned or incurred by the Partnership in such Quarter.

 

4.5 Currency Translation

Allocations of amounts other than in U.S. Dollars shall be converted into U.S. Dollars by the General Partner on such date as the General Partner deems appropriate, using rates quoted by appropriate financial institutions of repute or by internationally recognized financial publications or news services to fix the rate of translation.

 

4.6 Distributions

Subject to this Article 4, the General Partner may in its sole discretion make distributions at any time or from time to time to the Partners in accordance with their Percentage Interests, provided that all distributions to the Limited Partners shall be paid by the Partnership directly or through the Transfer Agent or through any other Person or agent only to the Record Holders pro rata according to their respective Percentage Interests as of the Record Date set for such distribution. Such payment shall constitute full payment and satisfaction of the Partnership’s liability in respect of such payment, regardless of any claim of any Person who may have an interest in such payment by reason of an assignment or otherwise. For the avoidance of doubt, the Partnership, the Property Partnership and one or more of the Holding Entities may (but none is obligated to) borrow money in order to obtain sufficient cash to make a distribution. The amount of Taxes withheld or paid by the Partnership or another member of the BPY Group in respect of a Partnership Interest held by a Partner shall be treated either as a distribution to such Partner or as a general expense of the Partnership, as determined by the General Partner in its sole discretion, and the General Partner shall report to the Partners on an annual basis the amount of such Taxes withheld or paid.

 

4.7 Prohibition on Distributions

The General Partner shall not cause the Partnership to make any distribution pursuant to this Article 4:

 

  4.7.1. unless there is sufficient cash available therefor (including as a result of borrowing);


 

21

 

  4.7.2. which would render the Partnership unable to pay its debts as and when they fall due; or

 

  4.7.3. which, in the opinion of the General Partner, would or might leave the Partnership with insufficient funds to meet any future or contingent obligations or which would contravene the Limited Partnership Act.

ARTICLE 5

MANAGEMENT AND OPERATION OF PARTNERSHIP

 

5.1 Management

 

  5.1.1. The General Partner shall conduct, direct and manage all activities of the Partnership. Except as otherwise expressly provided in this Agreement, all management powers over the activities and affairs of the Partnership shall be exclusively vested in the General Partner, and no Limited Partner shall have any management power over the activities and affairs of the Partnership. In addition to the powers now or hereafter granted a general partner of a limited partnership under applicable Law or that are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to Section 5.2, shall have full power and authority to do all things and on such terms as it determines, in its sole discretion, to be necessary or appropriate to conduct the activities and affairs of the Partnership, to exercise all powers set forth in Section 2.3 and to effectuate the purposes set forth in Section 2.2.

 

  5.1.2. In exercising its authority under this Agreement, the General Partner may, but shall be under no obligation to, take into account the tax consequences to any Partner (including the General Partner) of any action taken (or not taken) by it. The General Partner and the Partnership shall not have any liability to a Limited Partner for monetary damages or otherwise for losses sustained, liabilities incurred or benefits not derived by such Limited Partner in connection with such decisions so long as the General Partner has acted pursuant to its authority under this Agreement.

 

  5.1.3.

Notwithstanding any other provision of this Agreement, the Limited Partnership Act, the Exempted Partnerships Act or any applicable Law, each Person who is a Partner on the date hereof and each other Person who may acquire a Partnership Interest hereby: (i) approves, ratifies and confirms the execution, delivery and performance by the parties thereto of the Property Partnership Agreement, the Master Services Agreement, the Relationship Agreement, the other agreements described in or filed as exhibits to the Registration Statement that are related to the transactions contemplated by the Registration Statement and any other agreement authorized or permitted under such agreements; (ii) agrees that the General Partner (on its own or through any officer of the Partnership) is authorized to execute, deliver and perform the agreements referred to in clause (i) of this sentence and the other agreements, acts, transactions and matters described in or contemplated by the Registration Statement on behalf of the Partnership,


 

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  without any further act, approval, or vote of the Persons who are Partners on the date hereof or the other Persons who may acquire a Partnership Interest; and (iii) agrees that the execution, delivery or performance by the General Partner, the Managers or any Affiliate of any of them, of this Agreement, the Property Partnership Agreement, the Master Services Agreement, the Relationship Agreement, the other agreements described in or filed as exhibits to the Registration Statement that are related to the transactions contemplated by the Registration Statement and any other agreement authorized or permitted under such agreements, shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement (or any other agreements) or of any duty existing at Law, in equity or otherwise.

 

5.2 Restrictions on General Partner’s Authority

 

  5.2.1.

Except as provided in Article 13, the General Partner may not cause the Partnership to sell, exchange or otherwise dispose of all or substantially all of the Partnership’s assets, taken as a whole, in a single transaction or a series of related transactions without the prior approval of the holders of at least 662/3% of the voting power of Outstanding Units; provided however that this provision shall not preclude or limit the General Partner’s ability, in its sole discretion, to mortgage, pledge, hypothecate or grant a security interest in all or substantially all of the assets of the Partnership (including for the benefit of Persons who are not members of the BPY Group and Affiliates of the General Partner) and shall not apply to any forced sale of any or all of the assets of the Partnership pursuant to the foreclosure of, or other realization upon, any such encumbrance.

 

  5.2.2. The General Partner shall not, on behalf of the Partnership, except as permitted under Section 10.6 and Section 12.1, elect or cause the Partnership to elect a successor general partner of the Partnership.

 

5.3 Reimbursement of Partnership Expenses

 

  5.3.1. Except as provided in this Section 5.3 and elsewhere in this Agreement, the General Partner shall not be compensated for its services as General Partner of the Partnership.

 

  5.3.2.

The General Partner shall be reimbursed on a monthly basis, or such other basis as the General Partner may determine in its discretion, for (i) all direct and indirect expenses it incurs or payments it makes on behalf of the Partnership (including amounts paid to any Person to perform services for the Partnership or for the General Partner in the discharge of its duties to the Partnership), and (ii) all other necessary or appropriate expenses allocable to the Partnership or otherwise reasonably incurred by the General Partner in connection with conducting the Partnership’s affairs (including expenses allocated to the General Partner by its Affiliates). The General Partner shall determine the fees and expenses that are allocable to the Partnership in any reasonable manner


 

23

 

  determined by the General Partner in its sole discretion. Reimbursements pursuant to this Section 5.3 shall be in addition to any reimbursement to the General Partner as a result of indemnification pursuant to Section 5.6.

 

5.4 Outside Activities

 

  5.4.1. The General Partner shall, for so long as it is the general partner of the Partnership, maintain as its sole activity the activity of acting as the general partner of the Partnership and undertaking activities that are ancillary or related thereto. The General Partner is not permitted to engage in any business or activity or incur or guarantee any debts or liabilities except in connection with or incidental to its performance as general partner as described above or incurring, guaranteeing, acquiring, owning or disposing of debt or equity securities of any other member of the BPY Group.

 

  5.4.2. Each Indemnified Party (other than the General Partner) shall have the right to engage in businesses of every type and description and other activities for profit, and to engage in and possess interests in business ventures of any and every type or description irrespective of whether (i) such activities are similar to those activities of the General Partner, the Partnership or any other member of the BPY Group, or (ii) such businesses and activities directly compete with, or disfavor or exclude, the Partnership, the General Partner or any other member of the BPY Group. Such business interests, activities and engagements shall be deemed not to constitute a breach of this Agreement or any duties stated or implied by Law or equity, including fiduciary duties, owed to any of the General Partner, the Partnership (or any of their respective investors) or any other member of the BPY Group (or any of their respective investors) and shall be deemed not to be a breach of the General Partner’s fiduciary duties or any other obligation of any type whatsoever of the General Partner. None of the General Partner, the Partnership or any other member of the BPY Group or any other Person shall have any rights by virtue of this Agreement or the partnership relationship established hereby or otherwise in any business ventures of an Indemnified Party.

 

  5.4.3. The General Partner and the Indemnified Parties shall have no obligation hereunder or as a result of any duties stated or implied by Law or equity, including fiduciary duties, to present business or investment opportunities to the Partnership, the Limited Partners or any member of the BPY Group.

 

  5.4.4. The Affiliates of the General Partner shall have no obligation to (i) permit the Partnership or any other member of the BPY Group to use any facilities or assets of the Affiliates of the General Partner (other than the Assets), except as may be provided in contracts, agreements or of the arrangements entered into from time to time specifically dealing with such use, or (ii) to enter into such contracts, agreements or other arrangements.

 

  5.4.5.

Notwithstanding anything to the contrary in this Section 5.4, nothing in this Section 5.4 shall affect any obligation of an Indemnified Party to present a


 

24

 

  business or investment opportunity to the Partnership, the General Partner or any other member of the BPY Group pursuant to a separate written agreement between such Indemnified Party and the Partnership, the General Partner or any other member of the BPY Group.

 

5.5 Disclosure of Interests

 

  5.5.1. The General Partner, its Affiliates and their respective partners, members, shareholders, directors, officers, employees and shareholders (each hereinafter referred to as an “Interested Party”) may become Limited Partners or beneficially interested in Limited Partners in the Partnership and may hold, dispose of or otherwise deal with Units with the same rights they would have if the General Partner were not party to this Agreement.

 

  5.5.2. An Interested Party shall not be liable to account either to other Interested Parties or to the Partnership, the Partners or any other Persons for any profits or benefits made or derived by or in connection with any transaction contemplated by Section 5.4.2.

 

  5.5.3. An Interested Party may sell investments to, purchase Assets from, vest Assets in and contract or enter into any contract, arrangement or transaction with the Partnership, any other member of the BPY Group or any other Person whose securities are held directly or indirectly by or on behalf of the Partnership or another member of the BPY Group, including any contract, arrangement or transaction relating to any financial, banking, investment banking, insurance, secretarial or other services, and may be interested in any such contract, transaction or arrangement and shall not be liable to account either to the Partnership, any other member of the BPY Group or any other Person in respect of any such contract, transaction, arrangement or interest, or any benefits or profits made or derived therefrom, by virtue only of the relationship between the parties concerned, provided that nothing herein contained shall permit an Interested Party or Limited Partner to enter into any such contract, transaction or arrangement as aforesaid, unless the terms thereof are permitted by or approved in accordance with the provisions of the Governing Instruments of the General Partner.

 

  5.5.4. Without limiting the generality of the foregoing, an Interested Party or Limited Partner may enter into any contract, transaction or arrangement with any member of the BPY Group to provide advice or services, including investment management, monitoring or oversight services, services with respect to corporate finance matters and valuations, services relating to the arrangement of new financing, mergers and acquisitions, services relating to the provision of directors or other manager of a Person and other investment banking services, including introduction and transaction organization services.


 

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5.6 Indemnification

 

  5.6.1. The General Partner and any of its Affiliates, and their respective officers, directors, agents, shareholders, partners, members and employees, any Person who serves on the board of directors or other Governing Body of any member of the BPY Group, and any Person that the General Partner designates as an indemnified person (each, an “Indemnified Party”) shall, to the fullest extent permitted by Law, be indemnified on an after Tax basis out of the Assets (and the General Partner shall be entitled to grant indemnities on behalf of the Partnership, and to make payments out of the Assets, to any Indemnified Party in each case in accordance with this Section 5.6) against any and all losses, claims, damages, liabilities, costs and expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements and other amounts (collectively, “Liabilities”) arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which any Indemnified Party is or may be involved, or is threatened to be involved, as a party or otherwise, in connection with the investments and activities of the Partnership or by reason of such Person being the General Partner, or an Affiliate of the General Partner, or an officer, director, agent, shareholder, partner, member or employee of the General Partner or an Affiliate of the General Partner, or a Person who serves on the board of directors or other Governing Body of any member of the BPY Group, provided that no such Indemnified Party shall be so indemnified, with respect to any matter for which indemnification is sought, to the extent that a court of competent jurisdiction determines pursuant to a final and non-appealable judgment that, in respect of such matter, the Indemnified Party acted in bad faith or engaged in fraud or willful misconduct, or in the case of a criminal matter, action that the Indemnified Party knew to be unlawful. An Indemnified Party shall not be denied indemnification in whole or in part under this Section 5.6 because the Indemnified Party had an interest in the transaction with respect to which indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.

 

  5.6.2. To the fullest extent permitted by Law, amounts incurred in respect of Liabilities incurred by an Indemnified Party in defending any claim, demand, action, suit or proceeding, whether civil, criminal, administrative or investigative, shall from time to time be advanced by the Partnership prior to a determination that the Indemnified Party is not entitled to be indemnified, upon receipt by the Partnership of an undertaking by or on behalf of the Indemnified Party to repay such amount if it shall be determined that the Indemnified Party is not entitled to be indemnified as provided by the proviso of Section 5.6.1.

 

  5.6.3.

The indemnification provided by this Section 5.6 shall be in addition to any other rights to which an Indemnified Party may be entitled under any agreement (including the Master Services Agreement), as a matter of the Law or otherwise, both as to actions in the Indemnified Party’s capacity as an Indemnified Party and as to actions in any other capacity, and shall continue as to any Indemnified Party who has ceased to serve in the capacity in which such Indemnified Party became


 

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  entitled to indemnification under this Section 5.6, and shall enure to the benefit of such Person’s heirs, successors, assigns and administrators. The indemnification provisions of this Section 5.6 are for the benefit of each Indemnified Party, its heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Person.

 

  5.6.4. No amendment, modification or repeal of this provision or any other provision of this Agreement shall in any manner terminate, reduce or impair the right of any past, present or future Indemnified Party to be indemnified by the Partnership or the obligations of the Partnership to indemnify any such Indemnified Party under and in accordance with the provisions of this Agreement as in effect immediately prior to such amendment, modification or repeal with respect to any claim, demand, action, suit or proceeding, whether civil, criminal, administrative or investigative, arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claim, demand, action, suit or proceeding may arise or be asserted.

 

  5.6.5. Notwithstanding anything to the contrary in this Agreement, (i) no Indemnified Party shall be liable to the Partnership, any Partner or any other Person who has acquired an interest in a Partnership Interest for any Liabilities sustained or incurred by such Person as a result of any act or omission of the Indemnified Party, except to the extent there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that such Liabilities resulted from the Indemnified Party’s bad faith, fraud, wilful misconduct, or in the case of a criminal matter, actions with knowledge that the conduct was unlawful, and (ii) any matter that is approved by a majority of the members of the Independent Committee shall not constitute a breach of this Agreement or any duties to the Partnership or to the Partners stated or implied by Law or equity, including fiduciary duties.

 

  5.6.6. To the extent that an Indemnified Party has any duties to the Partnership or to the Partners, including fiduciary duties, such Indemnified Party acting in connection with the Partnership’s activities or affairs shall not be liable to the Partnership or to any Partner for its good faith reliance on the provisions of this Agreement.

 

  5.6.7. Any amendment, modification or repeal of this Section 5.6 (or that otherwise affects this Section 5.6) that limits its scope shall be prospective only and shall not in any way affect the limitations on the liability of the Indemnified Parties under this Section 5.6 as in effect immediately prior to such amendment, modification or repeal with respect to any claim, demand, action, suit or proceeding, whether civil, criminal, administrative or investigative, arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claim, demand, action, suit or proceeding may arise or be asserted, provided that the Indemnified Party became an Indemnified Party hereunder prior to such amendment, modification or repeal.

 

  5.6.8. The provisions of this Section 5.6 shall survive the dissolution of the Partnership.


 

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5.7 Resolution of Conflicts of Interest

 

  5.7.1. Notwithstanding anything to the contrary in this Agreement, conflicts of interest and potential conflicts of interest that are approved by a majority of the members of the Independent Committee from time to time are hereby approved by all Partners.

 

  5.7.2. The parties acknowledge and agree that the Independent Committee may grant approvals for any matters that may give rise to a conflict of interest or potential conflict of interest pursuant to the guidelines, policies or procedures adopted by the Independent Committee from time to time with the approval of a majority of the members of the Independent Committee (the “Conflicts Guidelines”), and if and to the extent that such matters are permitted by the Conflicts Guidelines, no further special approval will be required in connection with such matter permitted thereby.

 

5.8 Other Matters Concerning the General Partner

 

  5.8.1. The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties.

 

  5.8.2. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion (including an Opinion of Counsel) of such Persons as to matters that such General Partner reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.

 

  5.8.3. The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers or any duly appointed attorney or attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform each and every act and duty that is permitted or required to be done by the General Partner hereunder.

 

  5.8.4. To the fullest extent permitted by applicable Law, any standard of care applicable to the General Partner shall be modified, waived or limited as required to permit the General Partner to act in accordance with the terms of this Agreement or any other agreement contemplated hereby and to make any decision pursuant to the authority prescribed in this Agreement or any other agreement contemplated hereby.


 

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5.9 Title to Partnership Assets

Title to Assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Assets or any portion thereof. Title to any or all of the Assets may be held in the name of the Partnership, the General Partner, one or more of its Affiliates or one or more nominees, as the General Partner may determine. The General Partner hereby declares and warrants that any Assets for which record title is held in the name of the General Partner or one or more of its Affiliates or one or more nominees shall be held by the General Partner or such Affiliate or nominee for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the General Partner shall use its reasonable efforts to cause record title to such Assets (other than those assets in respect of which the General Partner determines that the expense and difficulty of conveyancing makes transfer of record title to the Partnership impracticable) to be transferred to the Partnership as soon as reasonably practicable; provided that, prior to the withdrawal of the General Partner or as soon thereafter as practicable, the General Partner shall use reasonable efforts to effect the transfer of record title to the Partnership and prior to any such transfer, will provide for the use of such Assets in a manner satisfactory to the Partnership. All Assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which record title to such Assets is held.

 

5.10 Purchase or Sale of Units

The General Partner may cause the Partnership to purchase or otherwise acquire Units. As long as Units are held by the Partnership, such Units shall not be considered Outstanding for any purpose, except as otherwise provided herein. The General Partner or any Affiliate of the General Partner may also purchase or otherwise acquire and sell or otherwise dispose of Units for its own account, subject to the provisions of Article 10 and Article 11.

 

5.11 Reliance by Third Parties

Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority to encumber, sell or otherwise use in any manner any and all Assets and to enter into any contracts on behalf of the Partnership, including contracts related to the incurrence or guarantee of indebtedness, and such Person shall be entitled to deal with the General Partner as if it were the Partnership’s sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies that may be available against such Person to contest, negate or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (ii) the Person executing and delivering such certificate, document or instrument was duly


 

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authorized and empowered to do so for and on behalf of the Partnership and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership.

 

5.12 Services

The General Partner may cause the Partnership to appoint any Person (including any Affiliate of the General Partner) to manage the affairs of the Partnership, in accordance with the Conflicts Guidelines. Any services rendered pursuant to such appointment shall be on terms that are fair and reasonable to the Partnership, provided that the requirements of this Section 5.12 shall be deemed satisfied as to (i) any services provided under the Master Services Agreement and any agreement contemplated thereby, (ii) any transaction approved by a majority of the members of the Independent Committee, or (iii) any transaction entered into in accordance with the Conflicts Guidelines. The provisions of Section 5.3 shall apply to the rendering of services described in this Section 5.12.

ARTICLE 6

INVESTMENTS IN THE PROPERTY PARTNERSHIP

Notwithstanding anything in this Agreement to the contrary, if and to the extent that the Partnership raises funds by way of the issuance of equity or debt securities, or otherwise, pursuant to a public offering, private placement or otherwise, the General Partner shall cause such funds to be invested in securities of the Property Partnership in accordance with the terms of the Property Partnership Agreement, unless otherwise agreed by the Partnership and the Property Partnership.

ARTICLE 7

RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS

 

7.1 Limitation of Liability

The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement or the Limited Partnership Act or the Exempted Partnerships Act.

If it were determined that a Limited Partner was participating in the control or management of the Partnership or conducting the affairs of, signing or executing documents for or otherwise binding the Partnership (or purporting to do any of the foregoing) within the meaning of the Limited Partnership Act or the Exempted Partnerships Act, such legislation provides that such Limited Partner would be liable as if it were a general partner of the Partnership in respect of all debts of the Partnership incurred while that Limited Partner was so acting or purporting to act.

 

7.2 Management of Partnership Affairs

No Limited Partner (other than the General Partner or any officer, director, employee, partner, agent or trustee of the General Partner, in its capacity as such, if such Person shall also be a Limited Partner) shall take part in the management or control of the activities and affairs of the Partnership or have any right or authority to act for or bind the Partnership or to take part or


 

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in any way to interfere in the conduct or management of the Partnership or to vote on matters relating to the Partnership, to have access to the books and records of the Partnership other than as required by applicable Law or as set forth in this Agreement. The transaction of any such activities or affairs by the General Partner or any officer, director, employee, partner, agent or trustee of the General Partner, in its capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners under this Agreement.

 

7.3 Outside Activities

Subject to the provisions of Section 5.4, which shall continue to be applicable to the Persons referred to therein, regardless of whether such Persons shall also be Limited Partners, any Limited Partner shall be entitled to and may have interests and engage in activities in addition to activities relating to the Partnership, including interests and activities in direct competition with the Partnership or the Property Partnership. Neither the Partnership nor any of the other Partners shall have any rights by virtue of this Agreement in any ventures of any Limited Partner.

ARTICLE 8

BOOKS, RECORDS, ACCOUNTING AND REPORTS

 

8.1 Books, Records and Accounting

The General Partner shall keep or cause to be kept at the registered office of the Partnership appropriate books and records with respect to the Partnership’s activities and affairs. Any books and records maintained by or on behalf of the Partnership in the regular course of its activities and undertakings, including the record of the Record Holders, books of account and records of Partnership proceedings, may be kept on information storage devices, provided, that the books and records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial reporting purposes, on an accrual basis in accordance with IFRS-IASB. In accordance with Bermuda Law, the records of account and registers will be kept available for inspection by any Limited Partner or its duly authorized representatives during regular business hours at the registered office of the Partnership. Limited Partners shall not have access to any information of the Partnership contained in its books and records which the General Partner is required by legal or contractual restriction to keep confidential or which, in the opinion of the General Partner, acting reasonably, should be kept confidential in the interests of the Partnership or may be kept confidential as provided in this Agreement, and each Limited Partner hereby waives any right to greater access to the books and records of the Partnership than is permitted herein, to the greatest extent permitted by Law.

 

8.2 Fiscal Year

Subject to Section 14.1.9, the fiscal year of the Partnership shall be the calendar year; provided, however, if the Code requires a taxable year of the Partnership other than a calendar year then, for U.S. tax purposes, the fiscal year of the Partnership shall be such taxable year.


 

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8.3 Reports

 

  8.3.1. Within the period of time required by applicable Law, including any rule of any Securities Exchange, the General Partner shall prepare in accordance with IFRS-IASB and make publicly available as of a date selected by the General Partner in its sole discretion financial statements of the Partnership for such fiscal year of the Partnership audited by a firm of independent public accountants of international standing selected by the General Partner as well as a statement of the accounting policies used in their preparation, such information as may be required by applicable Laws and such information as the General Partner deems appropriate.

 

  8.3.2. As and within the period of time required by any applicable Law, including any rule of any Securities Exchange, the General Partner shall prepare in accordance with IFRS-IASB and make publicly available quarterly financial statements of the Partnership, which may be unaudited, as may be required by applicable Law, including any Securities Exchange.

ARTICLE 9

TAX MATTERS

 

9.1 Tax Information

 

  9.1.1. Following each taxable year of the Partnership, the General Partner shall use commercially reasonable efforts to supply each Person that was a Partner at any time during such taxable year with a Schedule K-1 (or equivalent) within ninety (90) days after the close of such taxable year. The General Partner shall also, where reasonably possible and applicable, prepare and send such Persons such other information required by any non-U.S. Limited Partner for U.S. federal income tax reporting purposes.

 

  9.1.2. Within ninety (90) days following the end of each fiscal year of the Partnership and within the ninety (90) days after the date of the dissolution of the Partnership, the General Partner shall use commercially reasonable efforts to supply each Person that was a Partner at any time during such fiscal year and who is required to file an income tax return under the Income Tax Act (or, in the case of a Partner that is a partnership, that has one or more partners who is required to file an income tax return under the Income Tax Act) all necessary income tax reporting information with respect to such Partner’s income from the Partnership for such fiscal year.

 

9.2 Preparation of Tax Returns

The General Partner shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items required of the Partnership for U.S. federal and state income tax purposes and, where applicable, Canadian Tax Purposes. The classification, realization and recognition of income, gain, losses and deductions and other items shall be computed (i) for U.S. federal income tax purposes, on the accrual method of accounting, and (ii) for Canadian Tax Purposes, in accordance with the Income Tax Act.


 

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9.3 Tax Elections

The General Partner shall determine whether to make, to refrain from making or to revoke the election provided for in Section 754 of the Code, and any and all other elections permitted by the Code, the Income Tax Act or any other national, federal, provincial, state or local tax Law, in its sole discretion.

 

9.4 Tax Controversies

Subject to the provisions hereof, the General Partner is designated the Tax Matters Partner (as defined in Section 6231 of the Code) and the designated partner for the purposes of the Income Tax Act including subsections 152(1.4) to 152(1.8) thereof, and is authorized and required to represent the Partnership (at the Partnership’s expense) in connection with all examinations of the Partnership’s affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Partnership funds for professional services and costs associated therewith. Each Partner agrees to cooperate with the General Partner and to do or refrain from doing any or all things reasonably required by the General Partner to conduct such proceedings.

 

9.5 Withholding

Notwithstanding any other provision of this Agreement, the General Partner is authorized to take any action that it determines in its sole discretion to be necessary or appropriate to cause the Partnership to comply with any withholding requirements established under the Code, the Income Tax Act or any other national, federal, provincial, state or local Law including pursuant to Chapters 3 and 4 of Subtitle A of the Code. To the extent that the Partnership is required to withhold and pay over to any taxing authority any amount resulting from the allocation or distribution of income to any Partner, the amount withheld shall be treated as a distribution of cash or as a general expense of the Partnership pursuant to Section 4.6 in the amount of such withholding from such Partner. To the extent an amount otherwise payable to a member of the BPY Group is required to be withheld and paid over to any taxing authority, and such withheld amount is attributable to a Partner’s ownership of Units, then such withheld amount shall be treated as a distribution of cash to such Partner or as a general expense of the Partnership pursuant to Section 4.6 in the amount of such withholding.

 

9.6 Election to be Treated as a Corporation

Notwithstanding anything to the contrary contained herein, if the General Partner determines in its sole discretion that it is no longer in the best interests of the Partnership to continue as a partnership for U.S. federal income tax purposes, the General Partner may elect to treat the Partnership as an association or as a publicly traded partnership taxable as a corporation for U.S. federal (and applicable state) income tax purposes.


 

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ARTICLE 10

CERTIFICATES; RECORD HOLDERS; TRANSFERS OF PARTNERSHIP

INTERESTS

 

10.1 Certificates

 

  10.1.1. Upon the Partnership’s issuance of Partnership Interests of all or any classes to any Person, the Partnership shall issue one or more Certificates in the name of such Person evidencing the number of such Partnership Interests being so issued. Certificates shall be executed on behalf of the Partnership by the General Partner. No Certificate evidencing the issuance of Partnership Interests shall be valid for any purpose until it has been countersigned by the Transfer Agent, provided that if the General Partner elects to issue Partnership Interests (including Units) in global form, the Certificates of such Partnership Interests (including Units) shall be valid upon receipt of a certificate from the Transfer Agent certifying that the Partnership Interests have been duly registered in accordance with the directions of the Partnership.

 

  10.1.2. Notwithstanding Section 10.1.1, Partnership Interests (including Units) of any class may be traded through an electronic settlement system and held in Uncertificated form in accordance with such arrangements as may from time to time be permitted by any statute, regulation, order, instrument or rule in force affecting the Partnership. Amendments to any provisions of this Agreement which may be necessary or expedient for this purpose may be made by the General Partner in its sole discretion but will not be deemed to vary the rights of any class of Partnership Interests (including Units).

 

  10.1.3. Certificates may bear any legends required by applicable Law or otherwise determined to be appropriate by the General Partner.

 

10.2 Mutilated, Destroyed, Lost or Stolen Certificates

 

  10.2.1. If any mutilated Certificate is surrendered to the Transfer Agent, the General Partner on behalf of the Partnership shall execute, and upon its request the Transfer Agent shall countersign and deliver in exchange therefor, a new Certificate evidencing the same number of Partnership Interests as the Certificate so surrendered.

 

  10.2.2. The General Partner on behalf of the Partnership shall execute, and upon its request the Transfer Agent shall countersign and deliver a new Certificate in place of any Certificate previously issued if the Record Holder of the Certificate:

 

  10.2.2.1 makes proof by affidavit, in form and substance satisfactory to the General Partner, that a previously issued Certificate has been lost, destroyed or stolen;


 

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  10.2.2.2 requests the issuance of a new Certificate before the Partnership has notice that the Certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim;

 

  10.2.2.3 if requested by the General Partner, delivers to the Partnership a bond, in form and substance satisfactory to the General Partner, with surety or sureties and with fixed or open penalty as the General Partner may reasonably direct, in its sole discretion, to indemnify the Partnership, the General Partner and the Transfer Agent against any claim that may be made on account of the alleged loss, destruction or theft of the Certificate; and

 

  10.2.2.4 satisfies any other reasonable requirements imposed by the General Partner.

 

  10.2.3. If a Record Holder fails to notify the Partnership within a reasonable time after the holder has notice of the loss, destruction or theft of a Certificate, and a transfer of the Partnership Interests represented by the Certificate is registered before the Partnership, the General Partner or the Transfer Agent receives such notification, the Record Holder shall be precluded from making any claim against the Partnership, the General Partner or the Transfer Agent for such transfer or for a new Certificate.

 

  10.2.4. As a condition to the issuance of any new Certificate under this Section 10.2, the General Partner may require the payment of a sum sufficient to cover any Tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Transfer Agent) reasonably connected therewith.

 

10.3 Record Holder

In accordance with Section 10.5.2, the Partnership shall be entitled to recognize the Record Holder as the Limited Partner with respect to any Units and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Units on the part of any other Person, whether or not the Partnership shall have actual or other notice thereof, except as otherwise provided by applicable Law. Without limiting the foregoing, when a Person (such as a broker, dealer, bank, trust company or clearing corporation or an agent of any of the foregoing) is acting as nominee, agent or in some other representative capacity for another Person in acquiring and/or holding Units, as between the Partnership on the one hand and such other Person on the other hand, such representative Person shall be the Record Holder of such Partnership Interest. A Person may become a Record Holder without the consent or approval of any Partner.

 

10.4 Transfer Generally

 

  10.4.1.

The term “transfer”, when used in this Agreement with respect to a Partnership Interest, shall be deemed to refer to a transaction (i) by which the General Partner assigns its General Partner Unit to another Person or (ii) by which the holder of a


 

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  Unit assigns such Unit to another Person, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by Law or otherwise.

 

  10.4.2. No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 10. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article 10 shall be null and void.

 

  10.4.3. Nothing contained in this Agreement shall be construed to prevent the parent entity of the General Partner from disposing of all of the issued and outstanding capital stock of the General Partner.

 

10.5 Registration and Transfer of Units

 

  10.5.1. The General Partner shall cause to be kept at its registered office in Bermuda on behalf of the Partnership a register in which, subject to such reasonable regulations as it may prescribe and subject to the provisions of Section 10.5.2, the General Partner will provide for the registration and transfer of Units. The Transfer Agent is hereby appointed registrar and transfer agent for the purpose of registering Units and transfers of such Units as herein provided. The Partnership shall not recognize transfers of Certificates representing Units unless such transfers are effected in the manner described in this Section 10.5. Upon surrender for registration of transfer of any Units evidenced by a Certificate, and subject to the provisions of Section 10.5.2, the General Partner on behalf of the Partnership shall execute and deliver, and the Transfer Agent shall countersign and deliver, in the name of the holder or the designated transferee or transferees, as required pursuant to the holder’s instructions, one or more new Certificates evidencing the same aggregate number of Units as was evidenced by the Certificate so surrendered.

 

  10.5.2. Except as otherwise provided in Article 11, the Partnership shall not recognize any transfer of Units until the Certificates evidencing such Units are surrendered for registration of the transfer.

 

  10.5.3. Subject to (i) the foregoing provisions of this Section 10.5; (ii) Section 10.3; (iii) Section 10.7; (iv) with respect to any class or series of Units, the provisions of any statement of designations or amendment to this Agreement establishing such class or series; (v) any contractual provisions binding on any Limited Partner; and (vi) provisions of applicable Law including the Limited Partnership Act and the Exempted Partnerships Act, Units shall be freely transferable.

 

  10.5.4. The General Partner shall have power to implement such arrangements as it may, in its sole discretion, determine fit in order for any class of Units to be admitted to settlement by means of any clearing system.

 

  10.5.5.

The General Partner may, in its sole discretion and without giving a reason, refuse to register a transfer of any Unit in Certificated form or Uncertificated


 

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  form (subject to Section 10.5.6) which is not fully paid or on which the Partnership has a lien.

 

  10.5.6. The General Partner may only decline to register a transfer of an Uncertificated Unit in the circumstances set out in this Agreement, the listing rules made by any Securities Exchange and the regulations of any clearing system implemented pursuant to Section 10.5.4, or as otherwise required by applicable Law.

 

10.6 Transfer of General Partner Units

 

  10.6.1. The General Partner may transfer its General Partner Units (including upon its merger, consolidation or other combination into any other Person or the transfer by it of all or substantially all of its assets to another Person) if, but only if, (i) the transferee agrees to assume and be bound by the rights and duties of the General Partner, (ii) the transferee agrees to assume and be bound by the provisions of this Agreement and (iii) the Partnership receives an Opinion of Counsel that such transfer (or merger, consolidation or combination) would not result in the loss of limited liability of any Limited Partner or of any limited partner of the Property Partnership, cause the Partnership or the Property Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for tax purposes (to the extent not previously treated as such) or cause the Partnership or the Property Partnership to become an “investment company” under the U.S. Investment Company Act of 1940, as amended, or similar legislation in other jurisdictions; provided, however, that no such opinion shall be required in connection with an election described in Section 9.6 made by the General Partner or in connection with a transfer following such an election.

 

  10.6.2. In the case of a transfer pursuant to this Section 10.6, the transferee or successor (as the case may be) shall be admitted to the Partnership as the General Partner immediately after the transfer of the General Partner Unit, and the Partnership shall continue without dissolution.

 

  10.6.3. The Parties agree that no transfer under this Section 10.6 will occur without the notification to and approval of the relevant Bermuda regulatory authorities in accordance with Bermuda law.

 

10.7 Restrictions on Transfers

Notwithstanding the other provisions of this Article 10, no transfer of any Partnership Interest shall be made if such transfer would (i) violate the then applicable securities Laws or rules and regulations of any securities commission of any jurisdiction or any other Governmental Authorities with jurisdiction over such transfer, (ii) result in the taxation of the Partnership as an association taxable as a corporation or otherwise subject the Partnership to entity-level taxation for tax purposes (in either case, for U.S. tax purposes, to the extent not otherwise elected by the General Partner pursuant to Section 9.6 to be treated as such) or (iii) affect the Partnership’s existence or qualification as an exempted limited partnership under the Limited Partnership Act or Exempted Partnerships Act.


 

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ARTICLE 11

ADMISSION OF ADDITIONAL OR SUCCESSOR PARTNERS

 

11.1 Admission of Additional Limited Partners

 

  11.1.1. By acceptance of the transfer of any Units or the issuance of any Units in accordance with this Agreement, each Person to whom a Unit is transferred or issued (including any nominee holder or an agent or representative acquiring such Units for the account of another Person) shall:

 

  11.1.1.1 be admitted to the Partnership as a Limited Partner with respect to the Units so transferred or issued to such Person when any such transfer or issuance is reflected in the books and records of the Partnership, with or without execution of this Agreement;

 

  11.1.1.2 become bound by, and shall be deemed to have agreed to be bound by, the terms of this Agreement;

 

  11.1.1.3 shall become the Record Holder of the Units so transferred or issued;

 

  11.1.1.4 represents that the transferee or other recipient has the capacity, power and authority to enter into this Agreement;

 

  11.1.1.5 be deemed to grant the powers of attorney set forth in this Agreement;

 

  11.1.1.6 be deemed to make the consents and waivers contained in the Agreement, including with respect to the approval of the transactions and agreements entered into in connection with the formation of the Partnership and the Spin-Off; and

 

  11.1.1.7 be deemed to ratify and confirm all contracts, agreements, assignments and instruments entered into on behalf of the Partnership, in accordance with this Agreement, including the granting of any charge or security interest over the Assets and the assumption of any indebtedness in connection with the affairs of the Partnership.

 

  11.1.2. The transfer of any Unit and/or the admission of any new Limited Partner to the Partnership will not constitute any amendment to this Agreement. A Person may become a Record Holder without the consent or approval of any of the Partners. A Person may not become a Limited Partner without acquiring a Unit.

 

  11.1.3. Any transfer of a Unit shall not entitle the transferee to share in the profits and losses, to receive distributions, to receive allocations of income, gain, loss, deduction or credit or any similar item or to any other rights to which the transferor was entitled until the transferee becomes a Limited Partner and a party to this Agreement pursuant to this Article 11.


 

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11.2 Admission of Successor General Partner

A successor general partner approved pursuant to Section 12.1 or the transferee of or successor to the General Partner’s General Partner Units pursuant to Section 10.6 shall be admitted to the Partnership as the general partner, subject to the requirements of the Limited Partnership Act and the Exempted Partnerships Act, effective immediately prior to the withdrawal of the General Partner pursuant to Section 12.1 or immediately after the transfer of the General Partner’s General Partner Units pursuant to Section 10.6. Any such successor shall conduct the activities and affairs of the Partnership without the Partnership being dissolved. In each case, the admission shall be subject to the successor general partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission. Any such successor is hereby authorized to and shall, subject to the terms hereof, conduct the activities and affairs of the Partnership without the Partnership being dissolved and shall be deemed to ratify and confirm all contracts, agreements, assignments and instruments entered into on behalf of the Partnership, in accordance with this Agreement, including the granting of any charge or security interest over the Assets and the assumption of any indebtedness in connection with the affairs of the Partnership.

ARTICLE 12

WITHDRAWAL OF PARTNERS

 

12.1 Withdrawal of the General Partner

 

  12.1.1. The General Partner shall be deemed to have withdrawn from the Partnership upon the occurrence of any one of the following events (each such event herein referred to as an “Event of Withdrawal”):

 

  12.1.1.1 the General Partner voluntarily withdraws from the Partnership by giving 30 days’ advance written notice to the other Partners;

 

  12.1.1.2 the General Partner transfers all of its rights as General Partner pursuant to Section 10.6;

 

  12.1.1.3 the General Partner (i) makes a general assignment for the benefit of creditors; (ii) files a voluntary bankruptcy petition; (iii) files a petition or answer seeking for itself a reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any Law; (iv) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the General Partner in a proceeding of the type described in Sections (i)-(iii) of this Section 12.1.1.3; or (v) seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator of the General Partner or of all or any substantial part of its properties;

 

  12.1.1.4

a final and non-appealable judgment is entered by a court with appropriate jurisdiction ruling that the General Partner is bankrupt or insolvent, or a final and non-appealable order for relief is entered by a


 

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  court with appropriate jurisdiction against the General Partner, in each case under any federal or state bankruptcy or insolvency Laws as now or hereafter in effect; or

 

  12.1.1.5 a certificate of dissolution or its equivalent is filed for the General Partner, or 90 days expire after the date of notice to the General Partner of revocation of its charter without a reinstatement of its charter, under the Laws of its jurisdiction of incorporation or organization.

 

  12.1.2. If an Event of Withdrawal specified in Sections 12.1.1.3, 12.1.1.4 or 12.1.1.5 occurs or is expected, the withdrawing General Partner shall give notice as soon as reasonably practicable to the Limited Partners. The Partners hereby agree that only the Events of Withdrawal described in this Section 12.1 shall result in the withdrawal of the General Partner from the Partnership.

 

  12.1.3. Withdrawal of the General Partner from the Partnership upon the occurrence of an Event of Withdrawal shall not constitute a breach of this Agreement under the following circumstances: (i) the General Partner voluntarily withdraws by giving at least 90 days’ advance notice to the Limited Partners, such withdrawal to take effect on the date specified in such notice; or (ii) at any time that the General Partner ceases to be a general partner pursuant to Section 12.1.1.2.

 

  12.1.4. If the General Partner gives a notice of withdrawal pursuant to Sections 12.1.1.1 or 12.1.2, holders of at least a majority of the voting power of the Outstanding Units may, prior to the effective date of such withdrawal, elect a successor general partner. If, prior to the effective date of the General Partner’s withdrawal, a successor is not selected by the Limited Partners as provided herein or the Partnership does not receive a Withdrawal Opinion of Counsel in accordance with Section 10.6.1, the Partnership shall be dissolved in accordance with Article 13. Any such successor general partner shall be subject to the provisions of Section 11.2.

 

12.2 Interest of Departing General Partner and Successor General Partner

 

  12.2.1. In the event of withdrawal of the General Partner under circumstances described in Section 12.1.3, the Departing General Partner shall, at its option exercisable prior to the effective date of the departure of such Departing General Partner, promptly receive from its successor in exchange for its General Partner Unit an amount in cash equal to the fair market value of the General Partner Unit, such amount to be determined and payable as of the effective date of its departure. If the General Partner withdraws under circumstances other than as described in Section 12.1.3, its successor shall have the option described in the immediately preceding sentence, and the Departing General Partner shall not have such option.

 

  12.2.2.

For purposes of this Section 12.2.2, the fair market value of the Departing General Partner’s General Partner Units shall be determined by agreement


 

40

 

  between the Departing General Partner and its successor or, failing agreement within 30 days after the effective date of such Departing General Partner’s departure, by an independent investment banking firm or other independent expert selected by the Departing General Partner and its successor, which, in turn, may rely on other experts and the determination of which shall be conclusive as to such matter. If such parties cannot agree upon one independent investment banking firm or other independent expert within 45 days after the effective date of such departure, then the Departing General Partner shall designate an independent investment banking firm or other independent expert, the Departing General Partner’s successor shall designate an independent investment banking firm or other independent expert, and such firms or experts shall mutually select a third independent investment banking firm or independent expert, which shall determine the fair market value of the General Partner Units. In making its determination, such independent investment banking firm or other independent expert shall consider the then current trading price of Units on any Securities Exchange, the value of the Assets, the rights and obligations of the General Partner and other factors it may deem relevant.

 

  12.2.3. If the General Partner Units are not acquired in the manner set forth in Section 12.2.1, the Departing General Partner shall become a Limited Partner and its General Partner Units shall be converted into Units pursuant to a valuation made by an investment banking firm or other independent expert selected pursuant to Section 12.2.2, without reduction in such Partnership Interest (but subject to proportionate dilution by reason of the admission of the Departing General Partner’s successor).

 

12.3 Withdrawal of Limited Partners

No Limited Partner shall have any right to withdraw from the Partnership; provided, however, that when a transferee of a Limited Partner’s Units becomes a Record Holder, such transferring Limited Partner shall, subject to Section 4.4.2, cease to be a Limited Partner with respect to the Units so transferred.

ARTICLE 13

TERMINATION OF THE PARTNERSHIP

 

13.1 General

Subject to the provisions of this Article 13, the Partnership shall terminate on the earlier to occur of:

 

  13.1.1. the date on which all Assets have been disposed of or otherwise realized by the Partnership and the proceeds of such disposals or realizations have been distributed to the Partners;

 

  13.1.2.

the service of notice by the General Partner, with the approval of a majority of the members of the Independent Committee that in the opinion of the General


 

41

 

  Partner the coming into force of any Law or binding authority renders illegal or impracticable the continuation of the Partnership; or

 

  13.1.3. the election of the General Partner, if the Partnership, as determined by the General Partner, is required to register as an “investment company” under the U.S. Investment Company Act of 1940, as amended, or similar legislation in other jurisdictions.

 

13.2 Incapacity

 

  13.2.1. Subject to Section 13.2.2, the Partnership shall be dissolved on the following:

 

  13.2.1.1 the date that the General Partner withdraws from the Partnership without the appointment of a successor pursuant to Section 12.1; or

 

  13.2.1.2 the date on which any court of competent jurisdiction enters a decree of judicial dissolution of the Partnership or an order to wind up or liquidate the General Partner without the appointment of a successor pursuant to Section 12.1.

 

  13.2.2. The Partnership shall be reconstituted and continue without dissolution, if within 30 days of the date of dissolution (and provided that a notice of dissolution with respect to the Partnership has not been provided to the Bermuda Monetary Authority) under this Section 13.2, a successor General Partner appointed pursuant to this Agreement executes a transfer deed pursuant to which the new general partner assumes the rights and undertakes the obligations of the original general partner, but only if the Partnership receives an Opinion of Counsel that the admission of the new general partner will not result in the loss of limited liability of any Limited Partner.

 

13.3 Liquidation

Upon dissolution of the Partnership, unless the Partnership is continued under an election to reconstitute and continue the Partnership pursuant to Section 13.2.2, the General Partner shall act, or cause one or more Persons to act, as the Liquidator. The Liquidator (if other than the General Partner) shall be entitled to receive such compensation for its services as may be approved by a majority of the members of the Independent Committee. If the General Partner is acting as the Liquidator, it shall not be entitled to receive any additional compensation for acting in such capacity. The Liquidator shall agree not to resign at any time without 15 days’ prior notice and (if other than the General Partner) may be removed at any time, with or without cause, by notice of removal approved by a majority of the members of the Independent Committee. Upon dissolution, removal or resignation of the Liquidator, a successor and substitute Liquidator (who shall have and succeed to all rights, powers and duties of the original Liquidator) shall within 30 days thereafter be approved by a majority of the members of the Independent Committee. The right to approve a successor or substitute Liquidator in the manner provided herein shall be deemed to refer also to any such successor or substitute Liquidator approved in the manner herein provided. Except as expressly provided in this Section 13.3, the Liquidator approved in the manner provided herein shall have and may exercise, without further


 

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authorization or consent of any of the parties hereto, all of the powers conferred upon the General Partner under the terms of this Agreement (but subject to all of the applicable limitations, contractual and otherwise, upon the exercise of such powers) to the extent necessary or desirable in the good faith judgment of the Liquidator to carry out the duties and functions of the Liquidator hereunder for and during such period of time as shall be reasonably required in the good faith judgment of the Liquidator to complete the winding-up and liquidation of the Partnership as provided for herein. The Liquidator shall proceed to dispose of the Assets, discharge its liabilities, and otherwise wind up its affairs in such manner and over such period as the Liquidator determines to be in the best interest of the Partners, subject to applicable Laws and the following:

 

  13.3.1. the Assets may be disposed of by public or private sale or by distribution in kind to one or more Partners on such terms as the Liquidators and such Partners or Partners may agree; if any property is distributed in kind, the Partner receiving the property shall be deemed for purposes of Section 13.3.3 to have received cash equal to its fair market value; and contemporaneously therewith, appropriate cash distributions must be made to the other Partners; the Liquidator may distribute the Assets, in whole or in part, in kind if it determines that a sale would be impractical or would cause undue loss to the Partners; the Liquidator may defer liquidation of the Assets for a reasonable time if it determines that an immediate sale or distribution of all or some of the Assets would be impractical or would cause undue loss to the Partners;

 

  13.3.2. liabilities of the Partnership, including amounts owed to the Liquidator as compensation for serving in such capacity (subject to the terms of Section 13.3) and amounts to Partners otherwise than in respect of their distribution rights under Section 4.6, shall be discharged; with respect to any liability that is contingent, conditional or unmatured or is otherwise not yet due and payable, the Liquidator shall either settle such claim for such amount as it thinks appropriate or establish a reserve of cash or other assets to provide for its payment; when paid, any unused portion of the reserve shall be distributed as additional liquidation proceeds; and

 

  13.3.3. all property and all cash in excess of that required to discharge liabilities of the Partnership pursuant to Section 13.3.2 shall be distributed to the Partners in accordance with their Percentage Interests as of the date chosen by the Liquidator. Such distribution shall be made by the end of the taxable year in which the liquidation of the Partnership occurs (or, if later, within 90 days after the date of such liquidation).

 

13.4 Distributions in Kind

Notwithstanding the provisions of Section 13.3, which require the liquidation of the Assets, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership, the Liquidator determines that an immediate sale of part or all of the Assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its absolute discretion, defer for a reasonable time the liquidation of any Assets except those necessary to


 

43

 

satisfy liabilities of the Partnership (including those to Partners as creditors) and/or distribute to the Partners or to specific classes of Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.3, undivided interests in such Assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interest of the Limited Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt.

 

13.5 Cancellation of Certificate of Limited Partnership

Upon the completion of the distribution of Partnership cash and property as provided in Sections 13.3 and 13.4, the Partnership shall be terminated and the Certificate of Limited Partnership and Certificate of Exempted Partnership and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than Bermuda shall be cancelled and such other actions as may be necessary to terminate the Partnership shall be taken.

 

13.6 Reasonable Time for Winding Up

A reasonable time shall be allowed for the orderly winding up of the activities and affairs of the Partnership and the liquidation of its Assets pursuant to Section 13.3 in order to minimize any losses otherwise attendant upon such winding up, and the provisions of this Agreement shall remain in effect between the Partners during the period of liquidation.

 

13.7 Return of Capital

The General Partner shall not be personally liable for, and shall have no obligation to contribute or loan any monies or property to the Partnership to enable it to effectuate, the return of the Capital Contributions of the Limited Partners, or any portion thereof, it being expressly understood that any such return shall be made solely from Assets.

 

13.8 Waiver of Partition

Each Partner hereby waives any right to partition of the Partnership property.

ARTICLE 14

AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE

 

14.1 Amendment to be Adopted Solely by General Partner

Subject to compliance with the requirements of the Limited Partnership Act and the Exempted Partnerships Act, each Limited Partner agrees that the General Partner (pursuant to its powers of attorney from the Limited Partners), without the approval of any Limited Partner, may amend any provision of this Agreement, and execute, swear to, acknowledge, deliver, file and record whatever documents may be required in connection therewith, to reflect:


 

44

 

  14.1.1. a change in the name of the Partnership, the location of the Partnership’s registered office or the Partnership’s registered agent;

 

  14.1.2. the admission, substitution or withdrawal of Partners in accordance with this Agreement;

 

  14.1.3. a change that the General Partner determines is reasonable and necessary or appropriate for the Partnership to qualify or to continue its qualification as an exempted limited partnership under the Laws of Bermuda or a partnership in which the limited partners have limited liability under the Laws of any jurisdiction, or is necessary or advisable in the opinion of the General Partner to ensure that the Partnership will not be treated as an association taxable as a corporation or otherwise taxed as an entity for tax purposes;

 

  14.1.4. an amendment that the General Partner determines to be necessary or appropriate to address changes in tax regulations, legislation or interpretation;

 

  14.1.5. an amendment that is necessary, in the Opinion of Counsel, to prevent the Partnership or the General Partner or its directors or officers from in any manner being subjected to the provisions of the U.S. Investment Company Act of 1940, as amended, or similar legislation in other jurisdictions;

 

  14.1.6. an amendment that the General Partner determines in its sole discretion to be necessary or appropriate in connection with the creation, authorization or issuance of any class or series of Partnership Interests or options, rights, warrants or appreciation rights relating to Partnership Interests pursuant to Section 3.5;

 

  14.1.7. any amendment expressly permitted in this Agreement to be made by the General Partner acting alone;

 

  14.1.8. any amendment that the General Partner determines in its sole discretion is necessary or appropriate to reflect and account for the formation by the Partnership of, or its investment in, any Person, as otherwise permitted by this Agreement;

 

  14.1.9. a change in the Partnership’s fiscal year and related changes; or

 

  14.1.10. any other amendments substantially similar to any of the matters described in Sections 14.1.1 through 14.1.9.

In addition, the General Partner may make amendments to this Agreement without the approval of any Limited Partner if those amendments, in the discretion of the General Partner:

 

  14.1.11. do not adversely affect the Limited Partners considered as a whole (including any particular class of Partnership Interest as compared to other classes of Partnership Interests) in any material respect;


 

45

 

  14.1.12. are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion or binding directive, order, ruling or regulation of any Governmental Authority;

 

  14.1.13. are necessary or appropriate to facilitate the trading of Units or to comply with any rule, regulation, guideline or requirement of any Securities Exchange on which any Units or any other Partnership Interests are or will be listed for trading;

 

  14.1.14. are necessary or appropriate for any action taken by the General Partner relating to splits or combinations of Units or Partnership Interests made in accordance with the provisions of this Agreement; or

 

  14.1.15. are required to effect the intent expressed in the Registration Statement or the intent of the provisions of this Agreement or are otherwise contemplated by this Agreement.

 

14.2 Amendment Procedures

Except as provided in Sections 14.1 and 14.3, all amendments to this Agreement shall be made in accordance with the following procedures:

 

  14.2.1. amendments to this Agreement may only be proposed by or with the consent of the General Partner, provided that the General Partner shall have no duty or obligation to propose any amendment to this Agreement and may decline to do so free of any fiduciary duty or obligation whatsoever to the Partnership or any Limited Partner and, in declining to propose or consent to an amendment to the fullest extent permitted by Law, shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any other agreement contemplated hereby or under the Limited Partnership Act or the Exempted Partnerships Act or any other Law or at equity; and

 

  14.2.2. a proposed amendment shall be effective upon its approval by the General Partner and, where required under this Agreement or by the Limited Partnership Act, on the consent, vote or approval of the amendment by the holders of a majority of the voting power of the Outstanding Units.

 

14.3 Amendment Requirements

 

  14.3.1. Notwithstanding the provisions of Sections 14.1 and 14.2, no provision of this Agreement that establishes a percentage of the voting power of the Outstanding Units required to take any action shall be amended, altered, changed, repealed or rescinded in any respect that would have the effect of reducing such voting requirement unless such amendment is approved by the written consent or the affirmative vote of the voting power of Outstanding Units whose aggregate Outstanding Units constitute voting power not less than the voting requirement sought to be reduced.


 

46

 

  14.3.2. Notwithstanding the provisions of Sections 14.1 and 14.2, no amendment to this Agreement may (i) enlarge the obligations of any Limited Partner without its consent except if the same occurs as a result of any amendment approved pursuant to Section 14.3.3, or (ii) enlarge the obligations, restrict in any way any action by or rights of or reduce in any way the amounts distributable, reimbursable or otherwise payable by the Partnership to the General Partner or any of its Affiliates without the consent of the General Partner, which may be given or withheld in its sole discretion.

 

  14.3.3. Except as otherwise provided, and without limitation of the General Partner’s authority to adopt amendments to this Agreement as contemplated in Section 14.1, the General Partner may amend the Partnership Agreement without the approval of holders of Outstanding Units, except that any amendment that would have a material adverse effect on the rights or preferences of any class of Outstanding Units in relation to other classes of Partnership Interests must be consented to or approved by the holders of at least a majority of the Outstanding Partnership Interests of the class affected.

 

  14.3.4. Notwithstanding any other provision of this Agreement, except for amendments pursuant to Section 14.1, no amendments shall become effective without the approval of at least 90% of the voting power of the Outstanding Units unless the Partnership obtains an Opinion of Counsel to the effect that (i) such amendment will not cause the Partnership to be treated as an association taxable as a corporation or otherwise taxable as an entity for tax purposes (provided that for U.S. tax purposes the General Partner has not made the election contemplated by Section 9.6) and (ii) such amendment will not affect the limited liability of any Limited Partner or any limited partner of the Property Partnership under applicable Law.

 

  14.3.5. This Section 14.3 shall only be amended with the approval of not less than 90% of the Outstanding Units, and, in the case of Section 14.3.2(ii), with the consent of the General Partner, which may be given or withheld in its sole discretion.

 

14.4 Meetings

All acts of Limited Partners to be taken hereunder shall be taken in the manner provided in this Article 14. Meetings of the Limited Partners may only be called by the General Partner. A meeting shall be held at a time and place (outside of Canada) determined by the General Partner on a date not less than 10 days and not more than 60 days after the mailing of notice of the meeting. Limited Partners shall not vote on matters that would cause the Limited Partners to be deemed to be taking part in the management and control of the activities and affairs of the Partnership so as to jeopardize the Limited Partners’ limited liability under the Limited Partnership Act or the Law of any other jurisdiction in which the Partnership is qualified to conduct activities and affairs.


 

47

 

14.5 Notice of Meeting

Notice of a meeting called pursuant to Section 14.4 shall be given to the Record Holders of the class or classes of Partnership Interests in writing by mail or other means of written communication in accordance with Section 15.2 and shall include details of any proposal or other matter required by any provision of this Agreement or Law to be submitted for the consideration and approval of the Limited Partners. The notice shall be deemed to have been given at the time when deposited in the mail or sent by other means of written communication. In addition, notices of special meetings pursuant to Section 14.4 shall be delivered, announced and/or published to the extent required for the Partnership to comply with applicable Law, including any rules of any Securities Exchange.

 

14.6 Record Date

For purposes of determining the Limited Partners entitled to notice of and participation in or to vote at a meeting of the Limited Partners or to provide consents or give approvals to any action by the Partnership as provided in Section 14.11 without a meeting as provided in Section 14.10, the General Partner may set a Record Date, which shall not be less than 10 nor more than 60 days before (a) the date of the meeting (unless such requirement conflicts with any applicable Law or rule, regulation, guideline or requirement of any Securities Exchange, in which case the more stringent requirement shall govern) or (b) in the event that consents or approvals to any action by the Partnership are sought without a meeting, the date by which Limited Partners are requested in writing by the General Partner to provide such consents or approvals.

 

14.7 Adjournment

When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting and a new Record Date need not be fixed if the time and place thereof are announced at the meeting at which the adjournment is taken, unless such adjournment shall be for more than 45 days. At the adjourned meeting, the Partnership may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 45 days or if a new Record Date is fixed for the adjourned meeting, a notice of the adjourned meeting and/or the new Record Date, as applicable, shall be given in accordance with this Article 14.

 

14.8 Quorum

Twenty percent of the Outstanding Units of the class or classes for which a meeting has been called (including Units held by the General Partner) represented in person or by proxy shall constitute a quorum at a meeting of Limited Partners of such class or classes unless any such action by the Limited Partners requires approval by Limited Partners holding a greater percentage of the voting power of such Units, in which case the quorum shall be such greater percentage. At any meeting of the Limited Partners duly called and held in accordance with this Agreement at which a quorum is present, the act of Limited Partners holding Outstanding Units that in the aggregate represent a majority of the Outstanding Units entitled to vote and be present in person or by proxy at such meeting shall be deemed to constitute the act of all Limited


 

48

 

Partners, unless a greater or different percentage is required with respect to such action under the provisions of this Agreement, in which case the act of the Limited Partners holding Outstanding Units that in the aggregate represent at least such greater or different percentage shall be required. The Limited Partners present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough Limited Partners to leave less than a quorum, if any action taken (other than adjournment) is approved by the required percentage of the voting power of Outstanding Units specified in this Agreement (including Outstanding Units deemed owned by the General Partner). In the absence of a quorum, any meeting of Limited Partners may be adjourned from time to time by the affirmative vote of Units holding at least a majority of the voting power of the Outstanding Units entitled to vote at such meeting (including Outstanding Units deemed owned by the General Partner) represented either in person or by proxy, but no other business may be transacted, except as provided in Section 14.7.

 

14.9 Conduct of Meeting

The General Partner shall have full power and authority concerning the manner of conducting any meeting of the Limited Partners or solicitation of consents or approvals in writing, including the determination of Persons entitled to vote, the existence of a quorum, the satisfaction of the requirements of Section 14.4, the conduct of voting, the validity and effect of any proxies and the determination of any controversies, votes or challenges arising in connection with or during the meeting or voting. The General Partner shall designate a Person to serve as chairman of any meeting and shall further designate a Person to take the minutes of any meeting, in either case including a Partner or a director or officer of the General Partner. All minutes shall be kept with the records of the Partnership maintained by the General Partner. The General Partner may make such other regulations consistent with applicable Law and this Agreement as it may deem advisable concerning the conduct of any meeting of the Limited Partners or solicitation of approvals in writing, including regulations in regard to the appointment of proxies, the appointment and duties of inspectors of votes and approvals, the submission and examination of proxies and other evidence of the right to vote, and the revocation of consents or approvals in writing.

 

14.10 Action Without a Meeting

If authorized by the General Partner, any action that may be taken at a meeting of the Limited Partners may be taken without a meeting if (i) written consent to such action is solicited by or on behalf of the General Partner, and (ii) an approval in writing setting forth the action to be taken is signed by Limited Partners owning not less than the minimum percentage of the Outstanding Units that would be necessary to authorize or take such action at a meeting at which all the Limited Partners were present and voted. Prompt notice of the taking of action by written consent or without a meeting shall be given to the Limited Partners who have not approved in writing. The General Partner may specify that any written ballot from Limited Partners for the purpose of taking any action without a meeting shall be returned to the Partnership within the time period, which shall be not less than 20 days, specified by the General Partner. If a ballot returned to the Partnership does not vote all of the Units held by the Limited Partner, the Partnership shall be deemed to have failed to receive a ballot for the Units that were not voted.


 

49

 

14.11 Voting and Other Rights

 

  14.11.1. Only those Record Holders of Units on the Record Date set pursuant to Section 14.6 (and also subject to the limitations contained in the definition of “Outstanding”) shall be entitled to notice of, and to vote at, a meeting of Partners or to act with respect to matters as to which the holders of the Outstanding Units have the right to vote or to act. All references in this Agreement to votes, consents or approvals of, or other acts that may be taken by, the Outstanding Units shall be deemed to be references to the votes, consents, approvals or acts of the Record Holders of such Outstanding Units.

 

  14.11.2. Each Outstanding Unit shall entitle the holder thereof to one vote for the purposes of any approval at a meeting of Limited Partners or by written consent.

 

  14.11.3. With respect to Units that are held for a Person’s account by another Person (such as a broker, dealer, bank, trust company or clearing corporation, or an agent of any of the foregoing), in whose name such Units are registered, such other Person shall, in exercising the voting or consent rights in respect of such Units on any matter, and unless the arrangement between such Persons provides otherwise, vote such Units in favor of, and at the direction of, the Person who is the beneficial owner, and the Partnership shall be entitled to assume it is so acting without further inquiry. The provisions of this Section 14.11.3 (as well as all other provisions of this Agreement) are subject to the provisions of Section 10.3.

ARTICLE 15

GENERAL PROVISIONS

 

15.1 Enurement

This Agreement will enure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns.

 

15.2 Notices

 

  15.2.1. To the Partnership and General Partner

 

  15.2.1.1 Any notice, payment demand, request, report or other document required or permitted to be given or made under this Agreement (“Notice”) by a Limited Partner to the Partnership or General Partner shall be given or sent by fax or letter post or by other means of written communication to the address of the General Partner specified below, or at such other address as the General Partner may notify to the Record Holders, in compliance with applicable Laws, including any rules of any Securities Exchange:

 

       1648285 Alberta ULC 73
       Front Street


 

50

 

       Hamilton HM 12
       Bermuda

 

       Attention: Secretary
       Telecopier number: 441-796-4475

 

  15.2.2. To the Limited Partners

 

  15.2.2.1 Any Notice by the General Partner or Partnership to a Limited Partner shall, unless otherwise required by applicable Laws, including any rules of any Securities Exchange, be deemed given or made to the Limited Partner when delivered in person or when sent to the relevant Record Holder by fax, letter post or by other means of written communication at the address described in Section 15.2.2.2 or when provided as set forth in Section 15.2.2.3.

 

  15.2.2.2 Any Notice to be given or made to a Limited Partner hereunder shall be deemed conclusively to have been given or made, and the obligation to give any Notice shall, unless otherwise required by applicable Laws, including any rules of any Securities Exchange, be deemed conclusively to have been fully satisfied, upon sending of such Notice to the Record Holder of the Partnership Interests, at such Person’s address as shown on the records of the Transfer Agent, or as otherwise shown on the records of the Partnership, regardless of any claim of any Person who may have an interest in such Partnership Interests by reason of any transfer or otherwise. An affidavit or certificate of making of any Notice in Section 15.2 executed by the General Partner, the Transfer Agent or the mailing organization shall be prima facie evidence of the giving or making of such Notice. If any Notice addressed to a Record Holder at the address of such Record Holder appearing on the books and records of the Transfer Agent or the Partnership is returned by letter post marked to indicate that the relevant postal service is unable to deliver it, such Notice and any subsequent Notices shall be deemed to have been duly given or made without further mailing (until such time as such Record Holder or another Person notifies the Transfer Agent or the Partnership of a change in his address) if they are available for the Limited Partner at the principal office of the Partnership for a period of one year from the date of the giving or making of such Notice to the other Limited Partners.

 

  15.2.2.3

Any Notice to be given or made to a Limited Partner hereunder shall be deemed conclusively to have been given or made, and the obligation to give any Notice shall, unless otherwise required by applicable Laws, including any rules of any Securities Exchange, be deemed conclusively to have been fully satisfied, upon issuing a press release complying with applicable Laws, including any rules of any


 

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  Securities Exchange, if deemed by the General Partner in its sole discretion to be a reasonable or appropriate means of providing such Notice.

 

15.3 Further Assurances

Each of the parties hereto will promptly do, make, execute or deliver, or cause to be done, made, executed or delivered, all such further acts, documents and things as the other party hereto may reasonably require from time to time for the purpose of giving effect to this Agreement and will use reasonable efforts and take all such steps as may be reasonably within its power to implement to their full extent the provisions of this Agreement.

 

15.4 Counterparts

This Agreement may be signed in counterparts and each of such counterparts will constitute an original document and such counterparts, taken together, will constitute one and the same instrument.

[NEXT PAGE IS SIGNATURE PAGE]


 

52

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth above.

 

GENERAL PARTNER:

 

1648285 ALBERTA ULC

By:    
 

Name:

Title:


 

53

 

LIMITED PARTNERS:

 

INITIAL LIMITED PARTNER:
BROOKFIELD ASSET MANAGEMENT INC.
By:    
 

Name:

Title:

 

LIMITED PARTNER:
BREF HOLDINGS LLC
By:    
 

Name:

Title:

All Limited Partners now and hereafter admitted as limited partners of the Partnership, pursuant to Powers of Attorney now and hereafter executed in favor of, and granted and delivered to, the General Partner.

 

GENERAL PARTNER:
1648285 ALBERTA ULC
By:    
 

Name:

Title:


SCHEDULE A

Capital Contributions

EX-4.2 3 d384817dex42.htm EX-4.2 EX-4.2

Exhibit 4.2

BROOKFIELD ASSET MANAGEMENT INC.

- and -

BROOKFIELD PROPERTY PARTNERS L.P.

- and -

BROOKFIELD PROPERTY L.P.

- and -

each of the Managers that has executed this Agreement on Schedule A hereto

- and -

each of the Holding Entities that has executed this Agreement on Schedule B hereto

 

 

FORM OF MASTER SERVICES AGREEMENT

 

 

n, 2012


TABLE OF CONTENTS

 

ARTICLE 1

  

INTERPRETATION

     1   

1.1

 

Definitions

     1   

1.2

 

Headings and Table of Contents

     6   

1.3

 

Interpretation

     6   

1.4

 

Actions by the Managers or the Service Recipients

     7   

1.5

 

Generally Accepted Accounting Principles

     7   

1.6

 

Invalidity of Provisions

     7   

1.7

 

Entire Agreement

     7   

1.8

 

Waiver, Amendment

     8   

1.9

 

Governing Law

     8   

ARTICLE 2

  

APPOINTMENT OF THE MANAGERS

     8   

2.1

 

Appointment and Acceptance

     8   

2.2

 

Other Holding Entities

     8   

2.3

 

Other Managers

     9   

2.4

 

Subcontracting and Other Arrangements

     9   

ARTICLE 3

  

SERVICES AND POWERS OF THE MANAGERS

     9   

3.1

 

Services

     9   

3.2

 

Services Provided to BPY and the Property Partnership

     10   

3.3

 

Supervision of the Managers’ Activities

     11   

3.4

 

Restrictions on the Managers

     11   

3.5

 

Errors and Omissions Insurance

     11   

ARTICLE 4

  

RELATIONSHIP BETWEEN THE MANAGERS AND THE SERVICE RECIPIENTS

     11   

4.1

 

Other Activities

     11   

4.2

 

Exclusivity

     12   

4.3

 

Independent Contractor, No Partnership, Joint Venture or Agency

     12   

ARTICLE 5

  

MANAGEMENT AND EMPLOYEES

     12   

5.1

 

Management and Employees

     12   

5.2

 

Compensation Charges

     12   

ARTICLE 6

  

INFORMATION AND RECORDS

     13   

6.1

 

Books and Records

     13   

6.2

 

Examination of Records by the Service Recipients

     13   

6.3

 

Access to Information by Manager Group

     13   

6.4

 

Additional Information

     14   

ARTICLE 7

  

FEES AND EXPENSES

     14   

7.1

 

Base Management Fee

     14   


7.2

 

Computation and Payment of Base Management Fee

     14   

7.3

 

Failure to Pay When Due

     15   

7.4

 

Amendment to the Fee Amount

     15   

7.5

 

Expenses

     15   

7.6

 

Governmental Charges

     16   

7.7

 

Computation and Payment of Expenses and Governmental Charges

     16   

ARTICLE 8

  

BROOKFIELD’S OBLIGATION

     17   

ARTICLE 9

  

REPRESENTATIONS AND WARRANTIES OF THE MANAGERS AND THE SERVICE RECIPIENTS

     17   

9.1

 

Representations and Warranties of the Managers

     17   

9.2

 

Representations and Warranties of the Service Recipients

     18   

ARTICLE 10

  

LIABILITY AND INDEMNIFICATION

     18   

10.1

 

Indemnity

     18   

10.2

 

Limitation of Liability

     20   

10.3

 

Benefit to all Indemnified Parties

     20   

ARTICLE 11

  

TERM AND TERMINATION

     20   

11.1

 

Term

     20   

11.2

 

Termination by the Service Recipients

     20   

11.3

 

Termination by the Managers

     21   

11.4

 

Survival Upon Termination

     22   

11.5

 

Action Upon Termination

     22   

11.6

 

Release of Money or other Property Upon Written Request

     23   

ARTICLE 12

  

GENERAL PROVISIONS

     23   

12.1

 

Limited Liability of Limited Partners

     23   

12.2

 

Assignment

     23   

12.3

 

Enurement

     24   

12.4

 

Notices

     24   

12.5

 

Further Assurances

     25   

12.6

 

Counterparts

     25   

12.7

 

Other Holding Entities

     25   

 

- ii -


MASTER SERVICES AGREEMENT

THIS AGREEMENT made as of the n day of n, 2012.

BETWEEN:

BROOKFIELD ASSET MANAGEMENT INC. (“Brookfield”), a corporation existing under the laws of the Province of Ontario

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BROOKFIELD PROPERTY PARTNERS L.P. (“BPY”), an exempted limited partnership existing under the laws of Bermuda

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BROOKFIELD PROPERTY L.P. (the “Property Partnership”), an exempted limited partnership existing under the laws of Bermuda

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each of the Managers (as defined below)

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each of the Holding Entities (as defined below)

RECITALS:

A. The Service Recipients (as defined below) directly or indirectly hold interests in commercial property assets and will directly or indirectly acquire, from time to time, interests in other commercial property assets; and

B. BPY, the Property Partnership and the Holding Entities (as defined below) wish to engage the Managers to provide or arrange for other Service Providers (as defined below) to provide to the Service Recipients certain management and administration services, subject to the terms and conditions of this Agreement, and the Managers wish to accept such engagement.

NOW THEREFORE in consideration of the mutual covenants and agreements contained in this Agreement and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties hereto agree as follows:

ARTICLE 1

INTERPRETATION

 

1.1 Definitions

In this Agreement, except where the context otherwise requires, the following terms will have the following meanings:

1.1.1 “Affiliate” means, with respect to a Person, any other Person that, directly or indirectly, through one or more intermediaries, Controls or is Controlled by such Person, or is under common Control of a third Person;


1.1.2 “Agreement” means this Master Services Agreement;

1.1.3 “Available Cash” means all cash and cash equivalents of the BPY Group available for distribution by the Service Recipients determined at the sole discretion of the BPY General Partner, which, for greater certainty, (i) may not in all cases equal an amount of cash held by the Service Recipients after the payment of expenses, debt service obligations on any indebtedness and any other expense or reserve for any liability, working capital or capital expenditure and (ii) may include cash that has been borrowed by any of the Service Recipients;

1.1.4 “Base Management Fee” means the base management fee, calculated quarterly in arrears, equal to 25% of the Fee Amount;

1.1.5 “BPY” has the meaning assigned thereto in the preamble;

1.1.6 “BPY General Partner” means Brookfield Property Partners Limited, which is the general partner of BPY;

1.1.7 “BPY Group” means BPY, the Property Partnership, the Holding Entities, the Operating Entities and any other direct or indirect Subsidiary of a Holding Entity;

1.1.8 “Brookfield” has the meaning assigned thereto in the preamble;

1.1.9 “Brookfield Fund” means any private investment entity, managed account, joint venture, consortium, partnership or investment fund established, sponsored or managed by a member of the Brookfield Group;

1.1.10 “Brookfield Group” means Brookfield, any of its Affiliates and any Brookfield Fund, but excludes any member of the BPY Group;

1.1.11 “Business Day” means every day except a Saturday or Sunday, or a day which is a statutory or civic holiday in Bermuda, the Province of Ontario, or the State of New York;

1.1.12 “Claims” has the meaning assigned thereto in Section 10.1.1;

1.1.13 “Compensation Charge” has the meaning assigned thereto in Section 5.2;

1.1.14 “Control” means the control by one Person of another Person in accordance with the following: a Person (“A”) controls another Person (“B”) where A has the power to determine the management and policies of B by contract or status (for example, the status of A being the general partner of B) or by virtue of the beneficial ownership of or control over a majority of the voting interests in B; and, for greater certainty and without limitation, if A owns or has control over shares or other securities to which are attached more than 50% of the votes permitted to be cast in the election of directors to the Governing Body of B, or A is the general partner of B, a limited partnership, then in each case A Controls B for this purpose; and the term “Controlled” has the corresponding meaning;

1.1.15 “Effective Date” means the date of the Spin-Off;

 

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1.1.16 “Equity Enhancement Distribution” has the meaning assigned thereto in Section 7.4;

1.1.17 “Expense Statement” has the meaning assigned thereto in Section 7.7;

1.1.18 “Expenses” has the meaning assigned thereto in Section 7.5.2;

1.1.19 “Fair Market Value” means, with respect to a Unit, (i) if such Unit is listed on a stock exchange or public quotation system, the Trading Price of such Unit, or (ii) if such Unit is not listed on a stock exchange or public quotation system, the fair market value of such Unit determined by the Governing Body of the BPY General Partner;

1.1.20 “Fee Amount” means an amount equal to $50 million, which amount shall be adjusted for inflation annually beginning on January 1, 2014 at the Inflation Factor;

1.1.21 “Governing Body” means (i) with respect to a corporation or limited company, the board of directors of such corporation or limited company, (ii) with respect to a limited liability company, the manager(s) or managing partner(s) of such limited liability company, (iii) with respect to a partnership, the board, committee or other body of each general partner or managing partner of such partnership, that serves a similar function (or if any such general partner or managing partner is itself a partnership, the board, committee or other body of such general or managing partner’s general or managing partner that serves a similar function), and (iv) with respect to any other Person, the body of such Person that serves a similar function, and in the case of each of (i) through (iv) includes any committee or other subdivision of such body and any Person to whom such body has delegated any power or authority, including any officer or managing director;

1.1.22 “Governing Instruments” means (i) the Memorandum of Association and Bye-laws in the case of any exempted company existing under the Laws of Bermuda, (ii) the certificate of incorporation, amalgamation or continuance, as applicable, and by-laws in the case of a corporation, (iii) the memorandum and articles of association in the case of a limited company, (iv) the partnership agreement in the case of a partnership, (v) the articles of formation and operating agreement in the case of a limited liability company, (vi) the trust instrument in the case of a trust and (vii) any other similar governing document under which an entity was organized, formed or created or operates, including any conflict guidelines or protocols in place from time to time;

1.1.23 “Governmental Authority” means any (i) international, multinational, national, federal, provincial, state, regional, municipal, local or other government, governmental or public department, central bank, court, tribunal, arbitral body, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) self-regulatory organization or stock exchange, (iii) subdivision, agent, commission, board, or authority of any of the foregoing, or (iv) quasi-governmental or private body exercising any regulatory, expropriation or taxing authority under or for the account of any of the foregoing;

1.1.24 “Governmental Charge” has the meaning assigned thereto in Section 7.6;

 

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1.1.25 “Holding Entities” means the entities that have executed this Agreement on Schedule B hereto and any direct wholly-owned Subsidiary of the Property Partnership created or acquired after the date of this Agreement, excluding, for greater certainty, any Operating Entities;

1.1.26 “Indemnified Party” has the meaning assigned thereto in Section 10.1.1;

1.1.27 “Indemnifying Party” has the meaning assigned thereto in Section 10.1.1;

1.1.28 “Independent Committee” means a committee of the board of directors of the BPY General Partner made up of directors that are “independent” of Brookfield and its Affiliates, in accordance with the BPY General Partner’s Governing Instruments;

1.1.29 “Inflation Factor” means, at any time, the fraction obtained where the numerator is the Consumer Price Index for the United States of America (all items) for the then current year and the denominator is the Consumer Price Index for the United States of America (all items) for the year immediately preceding the then current year, with appropriate mathematical adjustment made to ensure that both the numerator and the denominator have been prepared on the same basis;

1.1.30 “Interest Rate” means, for any day, the rate of interest equal to the overnight U.S. dollar London interbank offered rate on such day;

1.1.31 “Laws” means any and all applicable (i) laws, constitutions, treaties, statutes, codes, ordinances, principles of common and civil law and equity, rules, regulations and municipal by-laws, whether domestic, foreign or international, (ii) judicial, arbitral, administrative, ministerial, departmental and regulatory judgments, orders, writs, injunctions, decisions, and awards of any Governmental Authority, and (iii) policies, practices and guidelines of any Governmental Authority which, although not actually having the force of law, are considered by such Governmental Authority as requiring compliance as if having the force of law; and the term “applicable”, with respect to such Laws and in the context that refers to one or more Persons, means such Laws that apply to such Person or Persons or its or their business, undertaking, property or securities at the relevant time and that emanate from a Governmental Authority having jurisdiction over the Person or Persons or its or their business, undertaking, property or securities;

1.1.32 “Liabilities” has the meaning assigned thereto in Section 10.1.1;

1.1.33 “Managers” means the entities that have executed this Agreement on Schedule A hereto and any other Affiliate of Brookfield that is appointed from time to time to act as a manager pursuant to this Agreement;

1.1.34 “Manager Group” means the Managers and any other Service Providers;

1.1.35 “Operating Entities” means, from time to time, the Persons in which the Holding Entities, directly or indirectly, hold interests and that (i) directly hold real estate assets, or (ii) indirectly hold real estate assets but all of the interests of which are not held, directly or indirectly, by the Holding Entities, other than, in the case of each of (i) and (ii), any Person in which the Holding Entities, directly or indirectly, hold interests for investment purposes only of less than 5% of the outstanding equity securities of that Person;

 

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1.1.36 “Permit” means any consent, license, approval, registration, permit or other authorization granted by any Governmental Authority;

1.1.37 “Person” means any natural person, partnership, limited partnership, limited liability partnership, joint venture, syndicate, sole proprietorship, company or corporation (with or without share capital), limited liability corporation, unlimited liability company, joint stock company, unincorporated association, trust, trustee, executor, administrator or other legal personal representative, Governmental Authority or other entity however designated or constituted and pronouns have a similarly extended meaning;

1.1.38 “Principal Exchange” means the principal stock exchange or public quotation system (determined on the basis of aggregate trading volume for the prior four months) on which the Units are listed;

1.1.39 “Property General Partner” means Brookfield Property General Partner Limited, which is the general partner of Property GP LP;

1.1.40 “Property GP LP” means Brookfield Property GP L.P., which is the general partner of the Property Partnership;

1.1.41 “Property Partnership” has the meaning assigned thereto in the preamble;

1.1.42 “Property Partnership Units” means the limited partnership units of the Property Partnership;

1.1.43 “Quarter” means a calendar quarter ending on the last day of March, June, September or December;

1.1.44 “Relationship Agreement” means the agreement dated as of the date hereof entered into among BPY, the Property Partnership, the Holding Entities, Brookfield and the Managers that governs aspects of the relationship among them;

1.1.45 “Service Providers” means the Managers and any member of the Brookfield Group that the Managers have arranged to provide the Services to any Service Recipient;

1.1.46 “Service Recipients” means BPY, the Property Partnership, the Holding Entities and, at the option of the Holding Entities, any wholly-owned Subsidiary of a Holding Entity, excluding, for greater certainty, any Operating Entities;

1.1.47 “Services” has the meaning assigned thereto in Section 3.1;

1.1.48 “Spin-Off” means the distribution by Brookfield of its interests in BPY to the shareholders of Brookfield;

 

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1.1.49 “Subsidiary” means, with respect to any Person, (i) any other Person that is directly or indirectly Controlled by such Person, (ii) any trust in which such Person holds all of the beneficial interests, or (iii) any partnership, limited liability company or similar entity in which such Person holds all of the interests other than the interests of any general partner, managing member or similar Person;

1.1.50 “Third Party Claim” has the meaning assigned thereto in Section 10.1.2;

1.1.51 “Trading Price” means, in any Quarter, with respect to any Unit that is listed on a stock exchange or public quotation system, the volume-weighted average trading price of such Unit on the Principal Exchange for the five trading days ending on the last trading day of such Quarter; provided that where the Trading Price of such Unit is calculated in any currency other than U.S. dollars, such amount will be converted to U.S. dollars for purposes of this Agreement in accordance with the applicable exchange rate, as determined by the Managers acting reasonably; and

1.1.52 “Units” means the limited partnership units of BPY.

 

1.2 Headings and Table of Contents

The inclusion of headings and a table of contents in this Agreement are for convenience of reference only and will not affect the construction or interpretation hereof.

 

1.3 Interpretation

In this Agreement, unless the context otherwise requires:

1.3.1 words importing the singular will include the plural and vice versa, words importing gender will include all genders or the neuter, and words importing the neuter will include all genders;

1.3.2 the words “include”, “includes”, “including”, or any variations thereof, when following any general term or statement, are not to be construed as limiting the general term or statement to the specific items or matters set forth or to similar items or matters, but rather as referring to all other items or matters that could reasonably fall within the broadest possible scope of the general term or statement;

1.3.3 references to any Person include such Person’s successors and permitted assigns;

1.3.4 except as otherwise provided in this Agreement, any reference in this Agreement to a statute, regulation, policy, rule or instrument will include, and will be deemed to be a reference also to, all rules and regulations made under such statute, in the case of a statute, to all amendments made to such statute, regulation, policy, rule or instrument, and to any statute, regulation, policy, rule or instrument that may be passed which has the effect of supplementing or superseding the statute, regulation, policy, rule or instrument so referred to;

 

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1.3.5 any reference to this Agreement or any other agreement, document or instrument will be construed as a reference to this Agreement or, as the case may be, such other agreement, document or instrument as the same may have been, or may from time to time be, amended, varied, replaced, amended and restated, supplemented or otherwise modified;

1.3.6 in the event that any day on which any amount is to be determined or any action is required to be taken hereunder is not a Business Day, then such amount will be determined or such action will be required to be taken at or before the requisite time on the next succeeding day that is a Business Day; and

1.3.7 except where otherwise expressly provided, all amounts in this Agreement are stated and will be paid in U.S. currency.

 

1.4 Actions by the Managers or the Service Recipients

Unless the context requires otherwise, where the consent of or a determination is required by any Manager or Service Recipient hereunder, the parties will be entitled to conclusively rely upon it having been given or taken, as applicable, if, such Manager or Service Recipient, as applicable, has communicated the same in writing.

 

1.5 Generally Accepted Accounting Principles

In this Agreement, references to “generally accepted accounting principles” mean the generally accepted accounting principles used by BPY in preparing its financial statements from time to time.

 

1.6 Invalidity of Provisions

Each of the provisions contained in this Agreement is distinct and severable and a declaration of invalidity or unenforceability of any such provision or part thereof by a court of competent jurisdiction will not affect the validity or enforceability of any other provision hereof. To the extent permitted by applicable law, the parties waive any provision of law which renders any provision of this Agreement invalid or unenforceable in any respect. The parties will engage in good faith negotiations to replace any provision which is declared invalid or unenforceable with a valid and enforceable provision, the economic effect of which comes as close as possible to that of the invalid or unenforceable provision which it replaces.

 

1.7 Entire Agreement

This Agreement constitutes the entire agreement between the parties pertaining to the subject matter of this Agreement. There are no warranties, conditions, or representations (including any that may be implied by statute) and there are no agreements in connection with such subject matter except as specifically set forth or referred to in this Agreement. No reliance is placed on any warranty, representation, opinion, advice or assertion of fact made either prior to, contemporaneous with, or after entering into this Agreement, or any amendment or supplement hereto, by any party to this Agreement or its directors, officers, employees or agents, to any other party to this Agreement or its directors, officers, employees or agents, except to the extent that the same has been reduced to writing and included as a term of this Agreement, and

 

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none of the parties to this Agreement has been induced to enter into this Agreement or any amendment or supplement hereto by reason of any such warranty, representation, opinion, advice or assertion of fact. Accordingly, there will be no liability, either in tort or in contract, assessed in relation to any such warranty, representation, opinion, advice or assertion of fact, except to the extent contemplated above.

 

1.8 Waiver, Amendment

Except as expressly provided in this Agreement, no amendment or waiver of this Agreement will be binding unless executed in writing by the party to be bound thereby. No waiver of any provision of this Agreement will constitute a waiver of any other provision nor will any waiver of any provision of this Agreement constitute a continuing waiver unless otherwise expressly provided. A party’s failure or delay in exercising any right under this Agreement will not operate as a waiver of that right. A single or partial exercise of any right will not preclude a party from any other or further exercise of that right or the exercise of any other right.

 

1.9 Governing Law

This Agreement will be governed by and interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein. Each party irrevocably attorns and submits to the non-exclusive jurisdiction of the Ontario courts situated in the City of Toronto and waives objection to the venue of any proceeding in such court or any argument that such court provides an inconvenient forum.

ARTICLE 2

APPOINTMENT OF THE MANAGERS

 

2.1 Appointment and Acceptance

2.1.1 Subject to and in accordance with the terms, conditions and limitations in this Agreement, the Service Recipients hereby appoint the Managers to provide or arrange for other Service Providers to provide the Services to the Service Recipients. This appointment will be subject to each Service Recipient’s Governing Body’s supervision of the Managers and obligation to manage and control the affairs of such Service Recipient.

2.1.2 The Managers hereby accept the appointment provided for in Section 2.1.1 and agree to act in such capacity and to provide or arrange for other Service Providers to provide the Services to the Service Recipients upon the terms, conditions and limitations in this Agreement.

 

2.2 Other Holding Entities

The parties acknowledge that any Holding Entity that is not a party to this Agreement will execute a counterpart of this Agreement agreeing to be bound by the terms of this Agreement.

 

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2.3 Other Managers

The Managers may, from time to time, appoint an Affiliate of Brookfield to act as a new Manager under this Agreement, effective upon the execution of a joinder agreement by the new Manager in the form set forth on Schedule C hereto.

 

2.4 Subcontracting and Other Arrangements

The Managers may subcontract to any other Service Provider or any of its other Affiliates, or arrange for the provision of any or all of the Services to be provided by it under this Agreement by any other Service Provider or any other of its Affiliates, and the Service Recipients hereby consent to any such subcontracting or arrangement; provided that the Managers will remain responsible to the Service Recipients for any Services provided by such other Service Provider or Affiliate.

ARTICLE 3

SERVICES AND POWERS OF THE MANAGERS

 

3.1 Services

The Managers will provide or arrange for the provision by other Service Providers of, and will have the exclusive power and authority to provide or arrange for the provision by other Service Providers of, the following services (the “Services”) to the Service Recipients:

3.1.1 supervising the carrying out of all day-to-day management, secretarial, accounting, banking, treasury, administrative, liaison, representative, regulatory and reporting functions and obligations;

3.1.2 providing overall strategic advice to the Holding Entities including advising with respect to the expansion of their business into new markets;

3.1.3 supervising the establishment and maintenance of books and records;

3.1.4 identifying and recommending to the Holding Entities acquisitions or dispositions from time to time and, where requested to do so, assisting in negotiating the terms of such acquisitions or dispositions;

3.1.5 recommending and, where requested to do so, assisting in the raising of funds whether by way of debt, equity or otherwise, including the preparation, review or distribution of any prospectus or offering memorandum in respect thereof and assisting with communications support in connection therewith;

3.1.6 recommending to the Holding Entities suitable candidates to serve on the Governing Bodies of the Operating Entities;

3.1.7 making recommendations with respect to the exercise of any voting rights to which the Holding Entities are entitled in respect of the Operating Entities;

 

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3.1.8 making recommendations with respect to the payment of dividends by the Holding Entities or any other distributions by the Service Recipients, including distributions by BPY to its unitholders;

3.1.9 monitoring and/or oversight of the applicable Service Recipient’s accountants, legal counsel and other accounting, financial or legal advisors and technical, commercial, marketing and other independent experts and managing litigation in which a Service Recipient is sued or commencing litigation after consulting with, and subject to the approval of, the relevant Governing Body;

3.1.10 attending to all matters necessary for any reorganization, bankruptcy proceedings, dissolution or winding up of a Service Recipient, subject to approval by the relevant Governing Body;

3.1.11 supervising the making of all tax elections, determinations and designations, the timely calculation and payment of taxes payable and the filing of all tax returns due, by each Service Recipient;

3.1.12 supervising the preparation of the Service Recipients’ annual consolidated financial statements, quarterly interim financial statements and other public disclosure;

3.1.13 making recommendations in relation to and effecting the entry into insurance of each Service Recipient’s assets, together with other insurances against other risks, including directors and officers insurance, as the relevant Service Provider and the relevant Governing Body may from time to time agree;

3.1.14 arranging for individuals to carry out the functions of the principal executive, accounting and financial officers for BPY only for purposes of applicable securities laws;

3.1.15 providing individuals to act as senior officers of the Holding Entities as agreed from time to time, subject to the approval of the relevant Governing Body;

3.1.16 providing advice, when requested, to the Service Recipients regarding the maintenance of compliance with applicable Laws and other obligations; and

3.1.17 providing all such other services as may from time to time be agreed with the Service Recipients that are reasonably related to the Service Recipient’s day-to-day operations.

 

3.2 Services Provided to BPY and the Property Partnership

3.2.1 Notwithstanding any provision herein to the contrary, the Managers other than BGRE Partners LP shall solely be responsible for the provision of Services to BPY and the Property Partnership. BGRE Partners LP shall not be responsible for the provision of any Services to BPY and the Property Partnership.

 

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3.2.2 For greater certainty and notwithstanding any other provision herein in the contrary, any Services provided to the Property Partnership in connection with any securities, whether equity or debt, of Brookfield BPY Holdings (Canada) Inc. that are held by the Property Partnership shall be provided by a Manager other than BGRE Partners LP or an Affiliate of such Manager that is not resident in Canada with whom such Manager has made arrangements for the provision of such Services or to whom such Manager has sub-contracted the provision of such Services.

 

3.3 Supervision of the Managers’ Activities

The Managers will, at all times, be subject to the supervision of the relevant Service Recipient’s Governing Body and will only provide or arrange for the provision of such Services as such Governing Body may request from time to time.

 

3.4 Restrictions on the Managers

3.4.1 The Managers will, and will cause any other Service Provider to, refrain from taking any action that is not in compliance with or would violate any Laws or that otherwise would not be permitted by the Governing Instruments of the Service Recipients. If any Manager or any Service Provider is instructed to take any action that is not in such compliance by a Service Recipient’s Governing Body, such person will promptly notify such Governing Body of its judgment that such action would not comply with or violate any such Laws or otherwise would not be permitted by such Governing Instrument.

3.4.2 In performing its duties under this Agreement, each member of the Manager Group will be entitled to rely in good faith on qualified experts, professionals and other agents (including on accountants, appraisers, consultants, legal counsel and other, professional advisors) and will be permitted to rely in good faith upon the direction of a Service Recipient’s Governing Body to evidence any approvals or authorizations that are required under this Agreement. All references in this Agreement to the Service Recipients or Governing Body for the purposes of instructions, approvals and requests to the Managers will refer to the Governing Body.

 

3.5 Errors and Omissions Insurance

The Managers will, and will cause, any other Service Provider to, at all times during the term of this Agreement maintain “errors and omissions” insurance coverage and other insurance coverage which is customarily carried by Persons performing functions that are similar to those performed by the Service Providers under this Agreement and in an amount which is comparable to that which is customarily maintained by such other Persons.

ARTICLE 4

RELATIONSHIP BETWEEN THE MANAGERS AND THE SERVICE RECIPIENTS

 

4.1 Other Activities

Subject to the terms of the Relationship Agreement, no member of the Manager Group (and no Affiliate, director, officer, member, partner, shareholder or employee of any

 

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member of the Manager Group) will be prohibited from engaging in other business activities or sponsoring, or providing services to, third parties that compete directly or indirectly with the Service Recipients.

 

4.2 Exclusivity

The Service Recipients will not, during the term of this Agreement, engage any other Person to provide any services comparable to the Services without the prior written consent of the Managers, which may be withheld in the absolute discretion of the Managers.

 

4.3 Independent Contractor, No Partnership, Joint Venture or Agency

The parties acknowledge that the Managers are providing or arranging for the provision of the Services hereunder as independent contractors and that the Service Recipients and the Managers are not partners or joint venturers with or agents of each other, and nothing herein will be construed so as to make them partners, joint venturers or agents or impose any liability as such on any of them as a result of this Agreement; provided however that nothing herein will be construed so as to prohibit the Service Recipients and the Managers from embarking upon an investment together as partners, joint venturers or in any other manner whatsoever.

ARTICLE 5

MANAGEMENT AND EMPLOYEES

 

5.1 Management and Employees

5.1.1 The Managers will arrange, or will arrange for another member of the Manager Group to arrange, for such qualified personnel and support staff to be available to carry out the Services. Such personnel and support staff will devote such of their time to the provision of the Services to the Service Recipients as the relevant member of the Manager Group reasonably deems necessary and appropriate in order to fulfill its obligations hereunder. Such personnel and support staff need not have as their primary responsibility the provision of the Services to the Service Recipients or be dedicated exclusively to the provision of the Services to the Service Recipients.

5.1.2 Each of the Service Recipients will do all things reasonably necessary on its part as requested by any member of the Manager Group consistent with the terms of this Agreement to enable the members of the Manager Group to fulfill their obligations, covenants and responsibilities and to exercise their rights pursuant to this Agreement, including making available to the Manager Group, and granting the Manager Group access to, the employees and contractors of the Service Recipients as any member of the Manager Group may from time to time request.

 

5.2 Compensation Charges

5.2.1 The parties acknowledge and agree that it may be desirable for employees and other personnel of any member of the BPY Group or the Brookfield Group to provide services not included in the Services to a member of the other group. In these cases, all or a portion of the compensation (including cash, options or other security-based compensation) paid or payable to employees or other personnel who devote a portion of their time to the provision of services to the other group may be allocated to a member of such other group (a “Compensation Charge”).

5.2.2 At the end of each calendar year, Brookfield and BPY agree to negotiate in good faith the terms of any Compensation Charge in respect of that calendar year; provided that the amount of any Compensation Charge allocated to a member of the BPY Group must be approved by the nominating and governance committee of the BPY General Partner.

 

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ARTICLE 6

INFORMATION AND RECORDS

 

6.1 Books and Records

6.1.1 The Managers will, or will cause any other member of the Manager Group to, as applicable, maintain proper books, records and documents in which complete, true and correct entries, in conformity in all material respects with generally accepted accounting principles and all requirements of applicable Laws, will be made.

6.1.2 The Service Recipients will maintain proper books, records and documents in which complete, true and correct entries, in conformity in all material respects with generally accepted accounting principles and all requirements of applicable Laws, will be made.

 

6.2 Examination of Records by the Service Recipients

Upon reasonable prior notice by the Service Recipients to the relevant member of the Manager Group, the relevant member of the Manager Group will make available to the Service Recipients and their authorized representatives, for examination during normal business hours on any Business Day, all books, records and documents required to be maintained under Section 6.1.1. In addition, the Manager Group will make available to the Service Recipients or their authorized representatives such financial and operating data in respect of the performance of the Services under this Agreement as may be in existence and as the Service Recipients or their authorized representatives may from time to time reasonably request, including for the purposes of conducting any audit in respect of expenses of the Service Recipients or other matters necessary or advisable to be audited in order to conduct an audit of the financial affairs of the Service Recipients. Any examination of records will be conducted in a manner which will not unduly interfere with the conduct of the Service Recipients’ activities or of the Manager Group’s business in the ordinary course.

 

6.3 Access to Information by Manager Group

6.3.1 The Service Recipients will:

6.3.1.1 grant, or cause to be granted, to the Manager Group full access to all documentation and information, including all of the books, records, documents and financial and operating data of the Service Recipients required to be maintained under Section 6.1.2, necessary in order for the Manager Group to perform its obligations, covenants and responsibilities pursuant to the terms hereof and to enable the Manager Group to provide the Services; and

6.3.1.2 provide, or cause to be provided, all documentation and information as may be reasonably requested by any member of the Manager Group, and promptly notify the appropriate member of the Manager Group of any material facts or information of which the Service Recipients is aware, including any known, pending or threatened suits, actions, claims, proceedings or orders by or against any member of the BPY Group before any Governmental Authority, that

 

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may affect the performance of the obligations, covenants or responsibilities of the Manager Group pursuant to this Agreement, including the maintenance of proper financial records.

 

6.4 Additional Information

The parties acknowledge and agree that conducting the activities and providing the Services contemplated herein may have the incidental effect of providing additional information which may be utilized with respect to, or may augment the value of, business interests and related assets in which any Service Provider or any of its Affiliates has an interest and that, subject to compliance with this Agreement, none of the Service Providers or any of their respective Affiliates will be liable to account to the Service Recipients with respect to such activities or results; provided, however, that the relevant Service Provider will not (and will cause its Affiliates not to), in making any use of such additional information, do so in any manner that the relevant Service Provider or any of its Affiliates knows, or ought reasonably to know, would cause or result in a breach of any confidentiality provision of agreements to which any Service Recipient is a party or is bound.

ARTICLE 7

FEES AND EXPENSES

 

7.1 Base Management Fee

The Service Recipients hereby agree to pay as provided by this Article 7, during the term of this Agreement, the Base Management Fee, quarterly in arrears. The Base Management Fee will accrue commencing on the date hereof and will be pro-rated based on the number of days during the first Quarter in which this Agreement is in effect.

 

7.2 Computation and Payment of Base Management Fee

7.2.1 The Managers or another Service Provider will compute each instalment and allocation of the Base Management Fee as soon as practicable, but in any event no later than five Business Days, following the end of the Quarter with respect to which such instalment is payable. A copy of the computations and allocations made will thereafter, for informational purposes only, promptly be delivered to each Service Recipient by the relevant Service Provider upon request. Payment of the Base Management Fee for any Quarter (whether in cash, Units, Property Partnership Units or any combination of the foregoing) will be due and payable no later than the 45th day following the end of such Quarter.

7.2.2 For any Quarter in which the BPY General Partner determines that the Service Recipients have insufficient Available Cash to pay the Base Management Fee as well as the next regular distribution on Units, the Service Recipients may elect to pay all or a portion of the Base Management Fee payable in such Quarter in Units or Property Partnership Units, provided that (i) any such election will be made within 45 days following the end of the applicable Quarter, and (ii) no such payment will be made in Property Partnership Units without the written consent of the Managers. If the Service

 

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Recipients elect to pay all or a portion of the Base Management Fee in Units or Property Partnership Units, BPY or the Property Partnership, as applicable, will issue, and the applicable Manager hereby agrees to acquire, Units or Property Partnership Units, as applicable, equal to the portion of the Base Management Fee elected to be paid in Units or Property Partnership Units divided by the Fair Market Value of a Unit on the date the Service Recipients make such election (provided that no fractional Units or Property Partnership Units will be issued, and such number will be rounded down to the nearest whole number with the remainder payable to the Managers in cash). In such case, BPY or the Property Partnership, as applicable, shall apply such payment against the subscription price for such Units or Property Partnership Units, as applicable.

7.2.3 If the Service Recipients elect to pay all or any portion of the Base Management Fee for any Quarter in Units or Property Partnership Units, the Service Recipients will take or cause to be taken all appropriate action to issue such Units or Property Partnership Units, as applicable, including any action required to ensure that such Units or Property Partnership Units, as applicable, are issued in accordance with applicable Laws and listed on any applicable stock exchanges and public quotation systems.

 

7.3 Failure to Pay When Due

Any amount payable by any Service Recipient to any member of the Manager Group hereunder which is not remitted when so due will remain due (whether on demand or otherwise) and interest will accrue on such overdue amounts (both before and after judgment) at a rate per annum equal to the Interest Rate.

 

7.4 Amendment to the Fee Amount

The parties acknowledge and agree that it may be desirable to increase the Fee Amount from time to time. The parties agree to negotiate in good faith the amount of such increase, which increase (i) may only be made if Property GP LP is then entitled to receive an equity enhancement distribution under the limited partnership agreement of the Property Partnership (the “Equity Enhancement Distribution”), and (ii) will only be payable in a Quarter if and to the extent that the increase does not result in a net increase in the Equity Enhancement Distribution and the adjusted Base Management Fee when taken together (as compared to the Equity Enhancement Distribution and Base Management Fee ignoring such increase).

 

7.5 Expenses

7.5.1 The Managers acknowledge and agree that the Service Recipients will not be required to reimburse any member of the Manager Group for the salaries and other remuneration of the management, personnel or support staff who provide the Services to such Service Recipients or overhead for such persons, other than as contemplated by Section 5.2.

7.5.2 Each of the Service Recipients will reimburse the relevant member of the Manager Group for all out-of-pocket fees, costs and expenses, including those of any third party (other than those contemplated by Section 7.5.1) (“Expenses”), incurred by the relevant member of the Manager Group in connection with the provision of the Services. Such Expenses are expected to include, among other things:

7.5.2.1 fees, costs and expenses relating to any debt or equity financing;

 

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7.5.2.2 fees, costs and expenses incurred in connection with the general administration of any Service Recipient;

7.5.2.3 taxes, licenses and other statutory fees or penalties levied against or in respect of a Service Recipient in respect of Services;

7.5.2.4 amounts owed by the relevant member of the Manager Group under indemnification, contribution or similar arrangements;

7.5.2.5 fees, costs and expenses relating to financial reporting, regulatory filings and investor relations and the fees, costs and expenses of agents, advisors and other Persons who provide Services to a Service Recipient;

7.5.2.6 any other fees, costs and expenses incurred by the relevant member of the Manager Group that are reasonably necessary for the performance by the relevant member of the Manager Group of its duties and functions under this Agreement; and

7.5.2.7 fees, costs and expenses incurred in connection with the investigation, acquisition, holding or disposal of any asset or business that is made or that is proposed to be made.

 

7.6 Governmental Charges

Without limiting Section 7.5, the Service Recipients will pay or reimburse the relevant member of the Manager Group for all sales taxes, use taxes, value added taxes, goods and services taxes, harmonized sales taxes, withholding taxes or other similar taxes, customs duties or other governmental charges (“Governmental Charges”) that are levied or imposed by any Governmental Authority by reason of this Agreement or the fees or other amounts payable hereunder, except for any income taxes, corporation taxes, capital taxes or other similar taxes payable by any member of the Manager Group which are personal to such member of the Manager Group. Any failure by the Manager Group to collect monies on account of these Governmental Charges will not constitute a waiver of the right to do so.

 

7.7 Computation and Payment of Expenses and Governmental Charges

From time to time the Managers will, or will cause the other Service Providers to, prepare statements (each an “Expense Statement”) documenting the Expenses and Governmental Charges to be reimbursed by the Service Recipients pursuant to this Article 7 and will deliver such statements to the relevant Service Recipient. All Expenses and Governmental Charges reimbursable pursuant to this Article 7 will be reimbursed by the relevant Service Recipient no later than the date which is 30 days after the receipt of an Expense Statement. The provisions of this Section 7.7 will survive the termination of this Agreement.

 

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ARTICLE 8

BROOKFIELD’S OBLIGATION

Brookfield’s sole obligation pursuant to this Agreement will be to use its commercially reasonable efforts to cause its Subsidiaries (other than any member of the BPY Group) to provide Services to the Service Recipients, as applicable, in accordance with the direction of the Managers. Brookfield’s obligations pursuant to this Article 8 shall terminate at such time that all of the Managers cease to be Affiliates of Brookfield.

ARTICLE 9

REPRESENTATIONS AND WARRANTIES

OF THE MANAGERS AND THE SERVICE RECIPIENTS

 

1.1 Representations and Warranties of the Managers

Each of the Managers (or, as applicable, its general partner on its behalf) hereby represents and warrants to the Service Recipients that:

9.1.1 it (and, as applicable, its general partner) is validly organized and existing under the Laws governing its formation and existence;

9.1.2 it, or another Service Provider, holds such Permits necessary to perform its obligations hereunder and is not aware of any reason why such Permits might be cancelled;

9.1.3 it (or, as applicable, its general partner on its behalf) has the power, capacity and authority to enter into this Agreement and to perform its duties and obligations hereunder;

9.1.4 it (or, as applicable, its general partner) has taken all necessary action to authorize the execution, delivery and performance of this Agreement;

9.1.5 the execution and delivery of this Agreement by it (or, as applicable, its general partner on its behalf) and the performance by it of its obligations hereunder do not and will not contravene, breach or result in any default under its Governing Instruments (or, as applicable, the Governing Instruments of its general partner), or under any mortgage, lease, agreement or other legally binding instrument, Permit or applicable Law to which it is a party or by which it or any of its properties or assets may be bound;

9.1.6 no authorization, consent or approval, or filing with or notice to any Person is required in connection with the execution, delivery or performance by it (or, as applicable, its general partner on its behalf) of this Agreement; and

9.1.7 this Agreement constitutes a valid and legally binding obligation of it enforceable against it in accordance with its terms, subject to: (i) applicable bankruptcy, insolvency, moratorium, fraudulent conveyance, reorganization and other laws of general application limiting the enforcement of creditors’ rights and remedies generally; and (ii) general principles of equity, including standards of materiality, good faith, fair dealing and reasonableness, equitable defenses and limits as to the availability of equitable remedies, whether such principles are considered in a proceeding at law or in equity.

 

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9.2 Representations and Warranties of the Service Recipients

Each of the Service Recipients (or, as applicable, its general partner on its behalf) hereby represents and warrants to the Managers that:

9.2.1 it (and, as applicable, its general partner) is validly organized and existing under the Laws governing its formation and existence;

9.2.2 it, or the relevant Operating Entity, holds such Permits necessary to own and operate the assets that it directly or indirectly owns or operates from time to time and is not aware of any reason why such Permits might be cancelled;

9.2.3 it (or, as applicable, its general partner on its behalf) has the power, capacity and authority to enter into this Agreement and to perform its duties and obligations hereunder;

9.2.4 it (or, as applicable, its general partner) has taken all necessary action to authorize the execution, delivery and performance of this Agreement;

9.2.5 the execution and delivery of this Agreement by it (or, as applicable, its general partner on its behalf) and the performance by it of its obligations hereunder do not and will not contravene, breach or result in any default under its Governing Instruments (or, if applicable, the Governing Instruments of its general partner), or under any mortgage, lease, agreement or other legally binding instrument, Permit or applicable Law to which it is a party or by which any of its properties or assets may be bound;

9.2.6 no authorization, consent or approval, or filing with or notice to any Person is required in connection with the execution, delivery or performance by it (or, as applicable, its general partner on its behalf) of this Agreement; and

9.2.7 this Agreement constitutes a valid and legally binding obligation of it enforceable against it in accordance with its terms, subject to: (i) applicable bankruptcy, insolvency, moratorium, fraudulent conveyance, reorganization and other laws of general application limiting the enforcement of creditors’ rights and remedies generally; and (ii) general principles of equity, including standards of materiality, good faith, fair dealing and reasonableness, equitable defenses and limits as to the availability of equitable remedies, whether such principles are considered in a proceeding at law or in equity.

ARTICLE 10

LIABILITY AND INDEMNIFICATION

 

10.1 Indemnity

10.1.1 The Service Recipients (for the purposes of this Article 10, each an “Indemnifying Party”) hereby jointly and severally agree, to the fullest extent permitted by applicable Laws, to indemnify and hold harmless each member of the Manager Group, any of its Affiliates (other than any member of the BPY Group) and any directors, officers, agents, subcontractors, contractors, delegates, members, partners, shareholders, employees and other representatives of each of the foregoing (each, an “Indemnified Party”) from

 

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and against any claims, liabilities, losses, damages, costs or expenses (including legal fees) (“Liabilities”) incurred by them or threatened in connection with any and all actions, suits, investigations, proceedings or claims of any kind whatsoever, whether arising under statute or action of a Governmental Authority or otherwise or in connection with the business, investments and activities of the Service Recipients or in respect of or arising from this Agreement or the Services provided hereunder (“Claims”), including any Claims arising on account of the Governmental Charges contemplated by Section 7.6; provided that no Indemnified Party will be so indemnified with respect to any Claim to the extent that such Claim is finally determined by a final and non-appealable judgment entered by a court of competent jurisdiction, or pursuant to a settlement agreement agreed to by such Indemnified Party, to have resulted from such Indemnified Party’s bad faith, fraud, wilful misconduct, gross negligence or, in the case of a criminal matter, conduct undertaken with knowledge that the conduct was unlawful.

10.1.2 The Managers and the Service Recipients agree that if any action, suit, investigation, proceeding or Claim is made or brought by any third party with respect to which an Indemnifying Party is obligated to provide indemnification under this Agreement (a “Third Party Claim”), the Indemnified Party will have the right to employ its own counsel in connection therewith, and the reasonable fees and expenses of such counsel, as well as the reasonable costs (excluding an amount reimbursed to such Indemnified Party for the time spent in connection therewith) and out of pocket expenses incurred in connection therewith will be paid by the Indemnifying Party in such case, as incurred but subject to recoupment by the Indemnifying Party if ultimately it is not liable to pay indemnification hereunder.

10.1.3 The Managers and the Service Recipients agree that, promptly after the receipt of notice of the commencement of any Third Party Claim, the Indemnified Party in such case will notify the Indemnifying Party in writing of the commencement of such Third Party Claim (provided that any accidental failure to provide any such notice will not prejudice the right of any such Indemnified Party hereunder) and, throughout the course of such Third Party Claim, such Indemnified Party will use its best efforts to provide copies of all relevant documentation to such Indemnifying Party and will keep the Indemnifying Party apprised of the progress thereof and will discuss with the Indemnifying Party all significant actions proposed.

10.1.4 The parties hereto expressly acknowledge and agree that the right to indemnity provided in this Section 10.1 will be in addition to and not in derogation of any other liability which the Indemnifying Party in any particular case may have or of any other right to indemnity or contribution which any Indemnified Party may have by statute or otherwise at law.

10.1.5 The indemnity provided in this Section 10.1 will survive the completion of Services rendered under, or any termination or purported termination of, this Agreement.

 

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10.2 Limitation of Liability

10.2.1 The Managers assume no responsibility under this Agreement other than to render the Services in good faith and will not be responsible for any action of a Service Recipient’s Governing Body in following or declining to follow any advice or recommendations of the relevant Service Provider, including as set forth in Section 3.3 hereof.

10.2.2 The Service Recipients hereby agree that no Indemnified Party will be liable to a Service Recipient, a Service Recipient’s Governing Body (including, for greater certainty, a director or officer of a Service Recipient or another individual with similar function or capacity) or any security holder or partner of a Service Recipient for any Liabilities that may occur as a result of any acts or omissions by the Indemnified Party pursuant to or in accordance with this Agreement, except to the extent that such Liabilities are finally determined by a final and non-appealable judgment entered by a court of competent jurisdiction to have resulted from the Indemnified Party’s bad faith, fraud, wilful misconduct, gross negligence, or in the case of a criminal matter, conduct undertaken with knowledge that the conduct was unlawful.

10.2.3 The maximum amount of the aggregate liability of the Indemnified Parties pursuant to this Agreement will be equal to the amounts previously paid in respect of Services pursuant to this Agreement in the two most recent calendar years by the Service Recipients pursuant to Article 7.

10.2.4 For the avoidance of doubt, the provisions of this Section 10.2 will survive the completion of the Services rendered under, or any termination or purported termination of, this Agreement.

 

10.3 Benefit to all Indemnified Parties

The Service Recipients hereby constitute the Managers as trustees for each of the Indemnified Parties of the covenants of the Service Recipients under this Article 10 with respect to such Indemnified Parties and the Managers hereby accept such trust and agree to hold and enforce such covenants on behalf of the Indemnified Parties.

ARTICLE 11

TERM AND TERMINATION

 

11.1 Term

This Agreement will continue in full force and effect, in perpetuity, until terminated in accordance with Section 11.2 or Section 11.3.

 

11.2 Termination by the Service Recipients

11.2.1 The Service Recipients may, subject to Section 11.2.2, terminate this Agreement effective upon written notice of termination to the Managers without payment of any termination fee if:

11.2.1.1 any of the Managers defaults in the performance or observance of any material term, condition or agreement contained in this Agreement in a manner that results in material harm to the Service Recipients and such default continues for a period of 60 days after written notice thereof specifying such default and requesting that the same be remedied in such 60-day period; provided, however, that if the fact, circumstance or condition that is the subject of such obligation cannot reasonably be remedied within such 60-day period and if, within such period, the Managers provide reasonable evidence to the Service Recipients that they have commenced, and thereafter proceed with all due diligence, to remedy the fact, circumstance or condition that is the subject of such obligation, such period will be extended for a reasonable period satisfactory to the Service Recipients, acting reasonably, for the Managers to remedy the same;

 

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11.2.1.2 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;

11.2.1.3 there is an event of any gross negligence on the part of any of the Managers in the performance of its obligations under this Agreement and such gross negligence results in material harm to the Service Recipients; or

11.2.1.4 each of the Managers makes a general assignment for the benefit of its creditors, institutes proceedings to be adjudicated voluntarily bankrupt, consents to the filing of a petition of bankruptcy against it, is adjudicated by a court of competent jurisdiction as being bankrupt or insolvent, seeks reorganization under any bankruptcy law or consents to the filing of a petition seeking such reorganization or has a decree entered against it by a court of competent jurisdiction appointing a receiver liquidator, trustee or assignee in bankruptcy or in insolvency.

11.2.2 This Agreement may only be terminated pursuant to Section 11.2.1 by the BPY General Partner on behalf of BPY with the prior unanimous approval of the members of the Independent Committee.

11.2.3 Each of the Service Recipients hereby agrees and confirms that this Agreement may not be terminated due solely to the poor performance or underperformance of any of the BPY Group’s operations or any investment made by any member of the BPY Group on the recommendation of any member of the Manager Group.

 

11.3 Termination by the Managers

11.3.1 The Managers may terminate this Agreement effective upon written notice of termination to the Service Recipients without payment of any termination fee if:

11.3.1.1 any Service Recipient defaults in the performance or observance of any material term, condition or agreement contained in this Agreement in a manner that results in material harm to the Managers and such default continues for a period of 60 days after written notice thereof specifying such default and

 

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requesting that the same be remedied in such 60-day period; provided, however, that if the fact, circumstance or condition that is the subject of such obligation cannot reasonably be remedied within such 60-day period and if, within such period, the Service Recipients provide reasonable evidence to the Managers that they have commenced, and thereafter proceed with all due diligence, to remedy the fact, circumstance or condition that is the subject of such obligation, such period will be extended for a reasonable period satisfactory to the Managers, acting reasonably, for the Service Recipients to remedy the same; or

11.3.1.2 any Service Recipient makes a general assignment for the benefit of its creditors, institutes proceedings to be adjudicated voluntarily bankrupt, consents to the filing of a petition of bankruptcy against it, is adjudicated by a court of competent jurisdiction as being bankrupt or insolvent, seeks reorganization under any bankruptcy law or consents to the filing of a petition seeking such reorganization or has a decree entered against it by a court of competent jurisdiction appointing a receiver liquidator, trustee or assignee in bankruptcy or in insolvency.

 

11.4 Survival Upon Termination

If this Agreement is terminated pursuant to this Article 11, such termination will be without any further liability or obligation of any party hereto, except as provided in Section 6.4, Section 7.3, Section 7.7, Article 10, Section 11.5 and Section 11.6.

 

11.5 Action Upon Termination

11.5.1 From and after the effective date of the termination of this Agreement, the Managers will not be entitled to receive the Base Management Fee for further Services under this Agreement, but will be paid all compensation accruing to and including the date of termination.

11.5.2 Upon any termination of this Agreement, the Managers will forthwith:

11.5.2.1 after deducting any accrued compensation and reimbursements for any Expenses to which it is then entitled, pay over to the Service Recipients all money collected and held for the account of the Service Recipients pursuant to this Agreement;

11.5.2.2 deliver to the Service Recipients’ Governing Bodies a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Governing Bodies with respect to the Service Recipients; and

11.5.2.3 deliver to the Service Recipients’ Governing Bodies all property and documents of the Service Recipients then in the custody of the Manager Group.

 

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11.6 Release of Money or other Property Upon Written Request

The Managers hereby agree that any money or other property of the Service Recipients or their Subsidiaries held by the Manager Group under this Agreement will be held by the relevant member of the Manager Group as custodian for such Person, and the relevant member of the Manager Group’s records will be appropriately marked clearly to reflect the ownership of such money or other property by such Person. Upon the receipt by the relevant member of the Manager Group of a written request signed by a duly authorized representative of a Service Recipient requesting the relevant member of the Manager Group to release to the Service Recipient any money or other property then held by the relevant member of the Manager Group for the account of such Service Recipient under this Agreement, the relevant member of the Manager Group will release such money or other property to the Service Recipient within a reasonable period of time, but in no event later than 60 days following such request. The relevant member of the Manager Group will not be liable to any Service Recipient, a Service Recipient’s Governing Body or any other Person for any acts performed or omissions to act by a Service Recipient in connection with the money or other property released to the Service Recipient in accordance with the second sentence of this Section 11.6. Each Service Recipient will indemnify and hold harmless the relevant member of the Manager Group, any of its Affiliates (other than any member of the BPY Group) and any directors, officers, agents, subcontractors, delegates, members, partners, shareholders, employees and other representatives of each of the foregoing from and against any and all Liabilities which arise in connection with the relevant member of the Manager Group’s release of such money or other property to the Service Recipient in accordance with the terms of this Section 11.6. Indemnification pursuant to this provision will be in addition to any right of such Persons to indemnification under Section 10.1 hereof. For the avoidance of doubt, the provisions of this Section 11.6 will survive termination of this Agreement. The Service Recipients hereby constitute the Managers as trustees for each Person entitled to indemnification pursuant to this Section 11.6 of the covenants of the Service Recipients under this Section 11.6 with respect to such Persons and the Managers hereby accept such trust and agree to hold and enforce such covenants on behalf of such Persons.

ARTICLE 12

GENERAL PROVISIONS

 

12.1 Limited Liability of Limited Partners

The parties acknowledge that each of BPY, the Property Partnership and BGRE Partners LP is a limited partnership, a limited partner of which is liable for any liabilities or losses of the relevant partnership only to the extent of the amount that such limited partner has contributed, or agreed to contribute, to the capital of the relevant partnership and such limited partner’s pro rata share of any undistributed income.

 

12.2 Assignment

12.2.1 This Agreement will not be assigned by the Managers without the prior written consent of BPY, except (i) pursuant to Section 2.4, or (ii) in the case of assignment by any

 

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of the Managers to an Affiliate or to a Person that is its successor by merger, amalgamation or acquisition of the business of the Manager, in which case the Affiliate or successor will be bound under this Agreement and by the terms of the assignment in the same manner as such Manager is bound under this Agreement. In addition, provided that the Managers provide prior written notice to the Service Recipients for informational purposes only, nothing contained in this Agreement will preclude any pledge, hypothecation or other transfer or assignment of any of the Managers’ rights under this Agreement, including any amounts payable to the Managers under this Agreement, to a bona fide lender as security.

12.2.2 This Agreement will not be assigned by any of the Service Recipients without the prior written consent of the Managers, except in the case of assignment by a Service Recipient to a Person that is its successor by merger, amalgamation or acquisition of the business of the Service Recipient, in which case the successor will be bound under this Agreement and by the terms of the assignment in the same manner as the Service Recipient is bound under this Agreement.

12.2.3 Any purported assignment of this Agreement in violation of this section 12.2 will be null and void.

 

12.3 Enurement

This Agreement will enure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns.

 

12.4 Notices

Any notice or other communication required or permitted to be given hereunder will be in writing and will be given by prepaid first-class mail, by facsimile or other means of electronic communication or by hand-delivery as hereinafter provided. Any such notice or other communication, if mailed by prepaid first-class mail at any time other than during a general discontinuance of postal service due to strike, lockout or otherwise, will be deemed to have been received on the fourth Business Day after the post-marked date thereof, or if sent by facsimile or other means of electronic communication, will be deemed to have been received on the Business Day following the sending, or if delivered by hand will be deemed to have been received at the time it is delivered to the applicable address noted below either to the individual designated below or to an individual at such address having apparent authority to accept deliveries on behalf of the addressee. Notice of change of address will also be governed by this section. In the event of a general discontinuance of postal service due to strike, lock-out or otherwise, notices or other communications will be delivered by hand or sent by facsimile or other means of electronic communication and will be deemed to have been received in accordance with this section. Notices and other communications will be addressed as follows:

12.4.1 if to BPY:

Brookfield Property Partners Limited

73 Front Street

Hamilton HM 12

Bermuda

Attention: Secretary

 

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12.4.2 if to the Property Partnership:

Brookfield Property General Partner Limited

73 Front Street

Hamilton HM 12

Bermuda

Attention: Secretary

12.4.3 if to Brookfield:

Brookfield Asset Management Inc.

Suite 300, Brookfield Place

181 Bay Street, Box 762,

Toronto, Ontario

M5J 2T3

Attention: Vice President, Legal Affairs

12.4.4 if to any of the Managers, at the applicable address listed on Schedule A hereto

12.4.5 if to any of the Holding Entities, at the applicable address listed on Schedule B hereto

or to such other addresses as a party may from time to time notify the others in accordance with this Section 12.4.

 

12.5 Further Assurances

Each of the parties hereto will promptly do, make, execute or deliver, or cause to be done, made, executed or delivered, all such further acts, documents and things as the other party hereto may reasonably require from time to time for the purpose of giving effect to this Agreement and will use reasonable efforts and take all such steps as may be reasonably within its power to implement to their full extent the provisions of this Agreement.

 

12.6 Counterparts

This Agreement may be signed in counterparts and each of such counterparts will constitute an original document and such counterparts, taken together, will constitute one and the same instrument.

 

12.7 Other Holding Entities

The parties acknowledge that any Holding Entity that is not a party to this Agreement will execute a counterpart of this Agreement agreeing to be bound by the terms of this Agreement.

 

- 25 -


[NEXT PAGE IS SIGNATURE PAGE]

 

- 26 -


IN WITNESS WHEREOF the parties have executed this Agreement as of the day and year first above written.

 

BROOKFIELD ASSET MANAGEMENT INC.
By:  

 

  Name:
  Title:
BROOKFIELD PROPERTY PARTNERS L.P.,
By:   1648285 ALBERTA ULC, its general partner
 

 

  Name:
  Title:
BROOKFIELD PROPERTY L.P.
By:   BROOKFIELD PROPERTY GP L.P., its general partner
By:   1648287 ALBERTA ULC, its general partner
 

 

  Name:
  Title:


Schedule A

IN WITNESS WHEREOF the Managers have executed this Agreement as of the day and year first above written.

 

BROOKFIELD ASSET MANAGEMENT (BARBADOS) INC.
By:  

 

  Name:  
  Title:  
Address for Notice:
Brookfield Asset Management (Barbados) Inc.
Cedar Court, 2nd Floor
Wildey Business Park
St. Michael, Barbados
Attention: Secretary
BGRE PARTNERS LP
By:   BGRE PARTNERS GP INC., its general partner
 

 

  Name:  
  Title:  
Address for Notice:
BGRE Partners GP Inc.
Suite 300, Brookfield Place
181 Bay Street, Box 762
Toronto, Ontario
M5J 2T3
Attention: General Counsel


BROOKFIELD DEVELOPMENTS EUROPE LTD.
By:  

 

  Name:  
  Title:  
Address for Notice:
Brookfield Developments Europe Ltd.
23 Hanover Square
London W1S 1JB
Attention: Secretary
BROOKFIELD GLOBAL REAL ESTATE LLC
By:  

 

  Name:  
  Title:  
Address for Notice:
Brookfield Global Real Estate LLC
Three World Financial Center
200 Vesey Street, 11th Floor
New York, New York
10281-1021
Attention: General Counsel


Schedule B

IN WITNESS WHEREOF the Holding Entities have executed this Agreement as of the day and year first above written.

 

BROOKFIELD BPY HOLDINGS (CANADA) INC.
By:  

 

  Name:  
  Title:  
Address for Notice:
Brookfield BPY Holdings (Canada) Inc.
Suite 300, Brookfield Place
181 Bay Street, Box 762
Toronto, Ontario
M5J 2T3
Attention: General Counsel
BPY BERMUDA HOLDINGS I LIMITED
By:  

 

  Name:  
  Title:  
Address for Notice:
BPY Bermuda Holdings I Limited
73 Front Street
Hamilton HM 12
Bermuda
Attention: Secretary


BROOKFIELD BPY PROPERTY HOLDINGS I INC.
By:  

 

  Name:  
  Title:  
Address for Notice:
Brookfield BPY Property Holdings I Inc.
Three World Financial Center
200 Vesey Street, 11th Floor
New York, New York
10281-1021
Attention: General Counsel
BROOKFIELD BPY RETAIL HOLDINGS I INC.
By:  

 

  Name:  
  Title:  
Address for Notice:
Brookfield BPY Retail Holdings I Inc.
Three World Financial Center
200 Vesey Street, 11th Floor
New York, New York
10281-1021
Attention: General Counsel


Schedule C

JOINDER TO MASTER SERVICES AGREEMENT

THIS JOINDER to the Master Services Agreement dated as of n, 2012 among Brookfield Asset Management Inc. (“Brookfield”), Brookfield Property Partners L.P., Brookfield Property L.P., the Managers and the Holding Entities (the “Master Services Agreement”) is made and entered into as of this      day of                     ,              by                                         , a [corporation/partnership/limited partnership] governed by the laws of                      (the “New Manager”). Capitalized terms used herein but not otherwise defined shall have the meanings set forth in the Master Services Agreement.

RECITALS:

A. The Master Services Agreement provides that the Managers may, from time to time, appoint an Affiliate of Brookfield to act as a new Manager under that agreement;

B. The New Manager is an Affiliate of Brookfield; and

C. The Managers wish to appoint the New Manager to act as a new Manager under the Master Services Agreement and the New Manager wishes to accept such appointment.

NOW THEREFORE in consideration of the mutual covenants and agreements contained in this Joinder and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties hereto agree as follows:

1. Agreement to be Bound. The New Manager hereby agrees that upon execution of this Joinder, it shall become a party to the Master Services Agreement and acknowledges that it is fully bound by, and subject to, all of the covenants, representations, terms and conditions of the Managers under the Master Services Agreement.

2. Successors and Assigns. Any purported assignment of this Joinder in violation of section 12.2 of the Master Services Agreement will be null and void.

3. Enurement. This Joinder will enure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns.

4. Notices. Notices and other communications to the New Manager will be addressed as follows:

 

n

5. Counterparts. This Joinder may be signed in counterparts and each of such counterparts will constitute an original document and such counterparts, taken together, will constitute one and the same instrument.


6. Governing Law. This Joinder will be governed by and interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.

[NEXT PAGE IS SIGNATURE PAGE]


IN WITNESS WHEREOF the parties have executed this Joinder as of the day and year first above written.

 

BROOKFIELD ASSET MANAGEMENT (BARBADOS) INC.
By:  

 

  Name:  
  Title:  
BGRE PARTNERS LP
By:   BGRE PARTNERS GP INC., its general partner
 

 

  Name:  
  Title:  
BROOKFIELD DEVELOPMENTS EUROPE LTD.
By:  

 

  Name:  
  Title:  
BROOKFIELD GLOBAL REAL ESTATE LLC
By:  

 

  Name:  
  Title:  
n    
By:  

 

  Name:  
  Title:  
EX-4.3 4 d384817dex43.htm EX-4.3 EX-4.3

Exhibit 4.3

BROOKFIELD PROPERTY GP L.P.

- and -

BROOKFIELD PROPERTY PARTNERS L.P.

- and -

BPY I L.P.

- and -

BPY II L.P.

- and -

EACH PERSON WHO IS ADMITTED TO THE PARTNERSHIP AS A LIMITED

PARTNER FROM TIME TO TIME

 

 

FORM OF AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT

OF BROOKFIELD PROPERTY L.P.

 

 

n, 2012


TABLE OF CONTENTS

 

ARTICLE 1

  

INTERPRETATION

     2   

1.1

   Definitions      2   

1.2

   Headings and Table of Contents      14   

1.3

   Interpretation      14   

1.4

   Invalidity of Provisions      15   

1.5

   Entire Agreement      15   

1.6

   Waiver, Amendment      16   

1.7

   Governing Law; Submission to Jurisdiction      16   

ARTICLE 2

  

ORGANIZATIONAL MATTERS

     16   

2.1

   Formation      16   

2.2

   Purpose      17   

2.3

   Powers      17   

2.4

   Name      17   

2.5

   Registered Office; Principal Office      17   

2.6

   Power of Attorney      18   

2.7

   Term      19   

ARTICLE 3

  

CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS

     19   

3.1

   Formation of the Partnership      19   

3.2

   Initial Capital Contributions by the General Partner and the Initial Limited Partner      19   

3.3

   Reorganization      20   

3.4

   Interest and Withdrawal      20   

3.5

   Issuances of Additional Partnership Interests      20   

3.6

   Pre-emptive Rights      21   

3.7

   Splits and Combinations      21   

3.8

   Fully Paid and Non-Assessable Nature of Units      22   

3.9

   Issuance of Units to BPY      22   

ARTICLE 4

  

ALLOCATIONS

     22   

4.1

   Maintenance of Capital Accounts      22   

4.2

   Allocations – Overview      23   

4.3

   General Allocations      23   

4.4

   Special Allocations      24   

4.5

   Allocation of Nonrecourse Liabilities      25   

4.6

   Transfer of Interest      25   

4.7

   Allocations for U.S. Tax Purposes      25   

4.8

   Allocations for Canadian Federal Income Tax Purposes      26   

4.9

   Currency Translation      27   

4.10

   Authority of General Partner      27   


 

- ii -

 

ARTICLE 5

  

DISTRIBUTIONS

     27   

5.1

   In General      27   

5.2

   Distributions Prior to Dissolution      28   

5.3

   Distributions on or After Dissolution      29   

5.4

   Adjustment to Incentive Distributions Payable to General Partner      30   

5.5

   Distributions Paid in the Form of Redemption Exchange Units      30   

5.6

   Prohibition on Distributions      30   

ARTICLE 6

  

REDEMPTION-EXCHANGE RIGHTS

     31   

6.1

   Redemption-Exchange Rights      31   

6.2

   Redemption and Exchange Procedures      31   

6.3

   Redemption-Exchange Date      32   

6.4

   Withdrawal of Exercise      32   

6.5

   Effect of Exercise of the Redemption-Exchange Right      32   

ARTICLE 7

  

REDEMPTION AMOUNT AND EXCHANGE RATIO

     33   

7.1

   Redemption Amount      33   

7.2

   Exchange Ratio and Adjustments      33   

ARTICLE 8

  

ADJUSTMENTS

     33   

8.1

   Unit Reorganization      33   

8.2

   Unit Reclassification      34   

8.3

   Adjustments Cumulative      34   

ARTICLE 9

  

MANAGEMENT AND OPERATION OF PARTNERSHIP

     34   

9.1

   Management      34   

9.2

   Restrictions on General Partner’s Authority      35   

9.3

   Reimbursement of Partnership Expenses      35   

9.4

   Outside Activities      36   

9.5

   Disclosure of Interests      37   

9.6

   Indemnification      38   

9.7

   Resolution of Conflicts of Interest      39   

9.8

   Other Matters Concerning the General Partner      40   

9.9

   Title to Partnership Assets      40   

9.10

   Purchase or Sale of Units      41   

9.11

   Reliance by Third Parties      41   

9.12

   Services      41   

ARTICLE 10

  

RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS

     42   

10.1

   Limitation of Liability      42   

10.2

   Management of Partnership Affairs      42   


 

- iii -

 

10.3

   Outside Activities      42   

ARTICLE 11

  

BOOKS, RECORDS, ACCOUNTING AND REPORTS

     43   

11.1

   Books, Records and Accounting      43   

11.2

   Fiscal Year      43   

11.3

   Delivery of Financial Statements      43   

11.4

   Reports      43   

ARTICLE 12

  

TAX MATTERS

     44   

12.1

   Tax Information      44   

12.2

   Preparation of Tax Returns      44   

12.3

   Tax Elections      44   

12.4

   Tax Controversies      44   

12.5

   Withholding      45   

12.6

   Election to be Treated as a Corporation      45   

12.7

   U.S. Tax Classification of the Partnership      45   

ARTICLE 13

  

CERTIFICATES; RECORD HOLDERS; TRANSFERS OF PARTNERSHIP INTERESTS

     46   

13.1

   Certificates      46   

13.2

   Mutilated, Destroyed, Lost or Stolen Certificates      46   

13.3

   Record Holder      47   

13.4

   Transfer Generally      47   

13.5

   Registration and Transfer of Units      47   

13.6

   Transfer of General Partner Units      48   

13.7

   Restrictions on Transfers      49   

ARTICLE 14

  

ADMISSION OF ADDITIONAL OR SUCCESSOR PARTNERS

     49   

14.1

   Admission of Additional Limited Partners      49   

14.2

   Admission of Successor General Partner      50   

ARTICLE 15

  

WITHDRAWAL OR REMOVAL OF PARTNERS

     50   

15.1

   Withdrawal of the General Partner      50   

15.2

   Removal of the General Partner      52   

15.3

   Interest of Departing General Partner and Successor General Partner      52   

15.4

   Withdrawal of Limited Partners      53   

ARTICLE 16

  

TERMINATION OF THE PARTNERSHIP

     53   

16.1

   Dissolution      53   

16.2

   Reconstitution of Partnership      53   

16.3

   Liquidation      54   

16.4

   Distributions in Kind      56   


 

- iv -

 

16.5

   Cancellation of Certificate of Limited Partnership      57   

16.6

   Reasonable Time for Winding Up      57   

16.7

   Return of Capital      57   

16.8

   No Capital Account Restoration      57   

16.9

   Waiver of Partition      57   

ARTICLE 17

  

AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE

     57   

17.1

   Amendment to be Adopted Solely by General Partner      57   

17.2

   Amendment Procedures      59   

17.3

   Amendment Requirements      59   

17.4

   Meetings      60   

17.5

   Notice of Meeting      61   

17.6

   Record Date      61   

17.7

   Adjournment      61   

17.8

   Quorum      62   

17.9

   Conduct of Meeting      62   

17.10

   Action Without a Meeting      62   

17.11

   Voting and Other Rights      63   

ARTICLE 18

  

GENERAL PROVISIONS

     63   

18.1

   Enurement      63   

18.2

   Notices      63   

18.3

   Further Assurances      65   

18.4

   Counterparts      65   

Schedule A – Capital Contributions


 

 

AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT

OF BROOKFIELD PROPERTY L.P.

THIS AGREEMENT is made as of the nth day of n, 2012 among BROOKFIELD PROPERTY GP L.P. (the “General Partner”), an exempted limited partnership existing under the laws of Bermuda, as the General Partner, BROOKFIELD PROPERTY PARTNERS L.P. (the “Initial Limited Partner” or “BPY”), an exempted limited partnership existing under the laws of Bermuda, as a limited partner, BPY I L.P., a limited partnership existing under the laws of the Province of Manitoba, as a limited partner, BPY II L.P., a limited partnership existing under the laws of the Province of Manitoba, as a limited partner, and each person who is admitted to the Partnership (as hereinafter defined) as a limited partner in accordance with the provisions of this Agreement.

WHEREAS the General Partner and the Initial Limited Partner formed a limited partnership under the laws of Bermuda upon the entering into of a limited partnership agreement between the General Partner and the Initial Limited Partner dated as of January 5, 2012 (the “Initial Limited Partnership Agreement”). A Certificate of Registration for the Partnership (as hereinafter defined) confirming the registration of the Partnership as an “Exempted Partnership” pursuant to a Certificate of Exempted Partnership under the Exempted Partnerships Act 1992 (Bermuda) (as supplemented, the “Certificate of Exempted Partnership”) and as a “Limited Partnership” pursuant to a Certificate of Limited Partnership under the Limited Partnership Act 1883 (Bermuda) (as supplemented, the “Certificate of Limited Partnership”) was issued by the Bermuda Registrar of Companies on January 5, 2012;

AND WHEREAS the General Partner and the Initial Limited Partner wish to amend the Initial Limited Partnership Agreement by making the modifications reflected herein, to restate the Initial Limited Partnership Agreement as so amended and to admit BPY II L.P. and BPY I L.P. as limited partners;

AND WHEREAS this Amended and Restated Limited Partnership Agreement shall replace the Initial Limited Partnership Agreement in its entirety;

AND WHEREAS immediately following the Reorganization (as hereinafter defined), the Class A Units will be held by BPY and the Redemption-Exchange Units will be held by BPY II L.P. and BPY I L.P.;

AND WHEREAS the Partners (as hereinafter defined) desire to set forth the rights, powers and duties of the Partners, the affairs of the Partnership and the conduct of the Partnership’s activities, all upon the terms and conditions provided for in this Amended and Restated Limited Partnership Agreement.

NOW THEREFORE in consideration of the premises, mutual covenants and agreements contained in this Agreement and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties covenant and agree, each with the others, as follows:


 

2

 

ARTICLE 1

INTERPRETATION

 

1.1 Definitions

The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.

 

  1.1.1. Adjusted Capital Account Deficit” means, with respect to any Partner, the deficit balance, if any, in such Partner’s Capital Account as of the end of the relevant fiscal year, after giving effect to the following adjustments:

 

  1.1.1.1 credit to such Capital Account any amounts which such Partner is obligated to restore pursuant to any provision of this Agreement or is deemed obligated to restore pursuant to the penultimate sentences of Treasury Regulations Section 1.704-2(g)(1) and 1.704-2(i)(5); and

 

  1.1.1.2 debit to such Capital Account the items described in Treasury Regulations Sections 1.704-l(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6); provided that, the foregoing definition of “Adjusted Capital Account Deficit” is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations and shall be interpreted consistently therewith;

 

  1.1.2. Affiliate” means, with respect to a Person, any other Person that, directly or indirectly, through one or more intermediaries, Controls or is Controlled by such Person, or is under common Control of a third Person;

 

  1.1.3. Agreement” means this Amended and Restated Limited Partnership Agreement of Brookfield Property L.P.;

 

  1.1.4. Applicable Number of BPY Units” means the product of the number of Redemption-Exchange Units specified in an Exchange Notice multiplied by the Exchange Ratio;

 

  1.1.5. Applied Incentive Amount” has the meaning assigned to such term in Section 5.4;

 

  1.1.6. Assets” means all assets, whether tangible or intangible and whether real, personal or mixed, at any time owned by the Partnership (or by the General Partner, one or more of its Affiliates or one or more nominees for the benefit of the Partnership, in each case in accordance with Section 9.9) or acquired by the General Partner for the account of the Partnership in the course of carrying on the activities of the Partnership;

 

  1.1.7.

Available Cash” means all cash and cash equivalents available for distribution by the Partnership determined at the sole discretion of the General Partner, subject to Section 5.5, which, for greater certainty, (i) may not in all cases equal an amount of cash held by the Partnership after the payment of expenses, debt service obligations on any


 

3

 

  indebtedness and any other expense or reserve for any liability, working capital or capital expenditure and (ii) may include cash that has been borrowed by the Partnership or another member of the BPY Group for purposes of being available for distribution by the Partnership;

 

  1.1.8. Base Management Fee” has the meaning assigned to such term in the Master Services Agreement;

 

  1.1.9. Book Item” has the meaning assigned to such term in Section 4.7;

 

  1.1.10. BPO” means Brookfield Office Properties Inc.;

 

  1.1.11. BPY” has the meaning assigned to such term in the recitals;

 

  1.1.12. BPY Capital” means, with respect to any Operating Entity, at any time, the amount that a member of the BPY Group (excluding for this purpose any Operating Entity) has committed and/or contributed at such time (either as debt or equity) to such Operating Entity (and, in the case of a commitment, as set forth in the terms of the subscription agreement or other underlying documentation with respect to such Operating Entity at or prior to such time);

 

  1.1.13. BPY Group” means BPY, the Partnership, the Holding Entities, the Operating Entities and any other direct or indirect Subsidiary of a Holding Entity;

 

  1.1.14. BPY Partnership Agreement” means the limited partnership agreement of BPY;

 

  1.1.15. BPY Unit” is a Unit (as that term is defined in the BPY Partnership Agreement) in BPY;

 

  1.1.16. Brookfield” means Brookfield Asset Management Inc.;

 

  1.1.17. Brookfield Group” means Brookfield and any Affiliates of Brookfield, other than any member of the BPY Group;

 

  1.1.18. Business” means the business to be acquired by the BPY Group, as described in the Registration Statement;

 

  1.1.19. Business Day” means every day except a Saturday or Sunday, or a day which is a statutory or civic holiday in Bermuda, the Province of Ontario, or the State of New York;

 

  1.1.20. Canadian Tax Purposes” means, for the purposes of determining liability for Tax, pursuant to Canadian federal and provincial Tax Laws;

 

  1.1.21. CanHoldco” means Brookfield BPY Holdings (US) Inc.;

 

  1.1.22. CanHoldco Shares” has the meaning assigned to such term in Section 4.8.3;


 

4

 

  1.1.23. Capital Account” means, in relation to each Partner, the account maintained in the books of the Partnership for each Partner in accordance with Section 4.1;

 

  1.1.24. Capital Amount” means, as of the date hereof and with respect to each Unit and General Partner Unit the amount received in exchange for the Initial GP Capital Contribution and the Initial LP Capital Contribution of $1.00; provided, however, that the Capital Amount with respect to each Unit and General Partner Unit shall hereafter be adjusted as provided in Section 3.5.3;

 

  1.1.25. Capital Contribution” means the amount of capital contributed to the Partnership by each Record Holder (or the Person from which the Record Holder purchased or acquired the Partnership Interests) in respect of the Partnership Interests purchased or acquired by or issued to that Record Holder;

 

  1.1.26. Capital Surplus” has the meaning assigned to such term in Section 5.2.4;

 

  1.1.27. Cause” means a court of competent jurisdiction has entered a final, non-appealable judgment finding the General Partner liable for actual fraud, gross negligence, bad faith or willful misconduct in its capacity as General Partner of the Partnership;

 

  1.1.28. Certificate” means a certificate issued by the Partnership evidencing ownership of one or more Units or any other Partnership Interests, or of options, rights, warrants or appreciation rights relating to Partnership Interests, in such form as may be adopted by the General Partner from time to time;

 

  1.1.29. Certificate of Exempted Partnership” has the meaning assigned to such term in the recitals;

 

  1.1.30. Certificate of Limited Partnership” has the meaning assigned to such term in the recitals;

 

  1.1.31. Class A Units” means the limited partner interests in the Partnership having the rights and obligations specified in this Agreement and that are designated as Class A Units;

 

  1.1.32. Closing Date” means the date of the Spin-Off;

 

  1.1.33. Code” means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder, and any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provisions of future law;

 

  1.1.34. Conflicts Guidelines” has the meaning assigned to such term in Section 9.7.2;

 

  1.1.35.

Control” means the control by one Person of another Person in accordance with the following: a Person (“A”) controls another Person (“B”) where A has the power to determine the management and policies of B by contract or status (for example, the status of A being the general partner of B) or by virtue of the beneficial ownership of or control over


 

5

 

  a majority of the voting interests in B; and, for greater certainty and without limitation, if A owns or has control over shares or other securities to which are attached more than 50% of the votes permitted to be cast in the election of directors to the Governing Body of B, or A is the general partner of B, a limited partnership, then in each case A Controls B for this purpose; and the term “Controlled” has the corresponding meaning;

 

  1.1.36. Creditable Operating Entity Payment” means the proportion of each cash payment made by an Operating Entity to any member of the Brookfield Group, including any payment made in the form of a dividend, distribution or other profit entitlement, which the General Partner determines to be comparable to the Equity Enhancement Distribution Amount that is attributable to the BPY Capital invested in or committed to that Operating Entity, as applicable; provided that the aggregate amount of any Creditable Operating Entity Payments made by such Operating Entity in respect of any such Quarter shall not exceed an amount equal to 0.3125% of the amount of the BPY Capital invested in such Operating Entity;

 

  1.1.37. Departing General Partner” means a former General Partner, from and after the effective date of any withdrawal or removal of such former General Partner pursuant to Section 15.1 or 15.2;

 

  1.1.38. Depreciation” means, for each fiscal year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable for U.S. federal income tax purposes with respect to an asset for such fiscal year, except that (i) with respect to any asset the Gross Asset Value of which differs from its adjusted tax basis for U.S. federal income tax purposes at the beginning of such fiscal year and which difference is being eliminated by use of the “remedial method” as defined by Section 1.704-3(d) of the Treasury Regulations, Depreciation for such fiscal year shall be the amount of book basis recovered for such fiscal year under the rules prescribed by Section 1.704-3(d)(2) of the Treasury Regulations, and (ii) with respect to any other asset the Gross Asset Value of which differs from its adjusted tax basis for U.S. federal income tax purposes at the beginning of such fiscal year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the U.S. federal income tax depreciation, amortization, or other cost recovery deduction for such fiscal year bears to such beginning adjusted tax basis; provided, however, that in the case of clause (ii) above, if the adjusted tax basis for U.S. federal income tax purposes of an asset at the beginning of such fiscal year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the General Partner;

 

  1.1.39. Equity Enhancement Distribution” means, with respect to any Quarter, an amount equal to 0.3125% of the amount by which the Total Capitalization as of the last day of such Quarter exceeds the Initial Capitalization (such amount, the “Equity Enhancement Distribution Amount”), less (i) the amount by which the Base Management Fee for such Quarter exceeds $12.5 million, which amount shall be adjusted for inflation annually beginning on January 1, 2014, at the Inflation Factor (as defined in the Master Services Agreement) and (ii) any Creditable Operating Entity Payments paid or payable in relation to such Quarter.


 

6

 

  1.1.40. Event of Withdrawal” has the meaning assigned to such term in Section 15.1.1;

 

  1.1.41. Exchange Notice” has the meaning assigned to such term in Section 6.2.2;

 

  1.1.42. Exchange Ratio” has the meaning assigned to such term in Section 7.2;

 

  1.1.43. Exchange Right” has the meaning assigned to such term in Section 6.1.3;

 

  1.1.44. Exempted Partnerships Act” means the Exempted Partnerships Act 1992 (Bermuda);

 

  1.1.45. First Distribution Threshold” means $0.275 per Unit per Quarter (pro rated for any Quarter in which (i) a Unit is not Outstanding for the entire Quarter, or (ii) the Capital Amount in respect of a Unit is adjusted pursuant to Section 3.5.3);

 

  1.1.46. fiscal year” as such term relates to the Partnership shall be the fiscal year of the Partnership as determined in accordance with Section 11.2;

 

  1.1.47. General Partner” means Brookfield Property GP L.P., an exempted limited partnership existing under the laws of Bermuda, and includes any person who becomes a successor or replacement general partner of the Partnership pursuant to the terms of this Agreement after the date hereof;

 

  1.1.48. General Partner Units” means the interests in the Partnership owned by the General Partner, having the rights and obligations specified in this Agreement, and which are designated as General Partner Units;

 

  1.1.49. Governing Body” means (i) with respect to a corporation or limited company, the board of directors of such corporation or limited company, (ii) with respect to a limited liability company, the manager(s) or managing partner(s) of such limited liability company, (iii) with respect to a partnership, the board, committee or other body of each general partner or managing partner of such partnership, respectively, that serves a similar function (or if any such general partner is itself a partnership, the board, committee or other body of such general or managing partner’s general or managing partner that serves a similar function), and (iv) with respect to any other Person, the body of such Person that serves a similar function, and in the case of each of (i) through (iv) includes any committee or other subdivision of such body and any Person to whom such body has delegated any power or authority, including any officer or managing director;

 

  1.1.50. Governing Instruments” means (i) the Memorandum of Association and Bye-laws in the case of any exempted company existing under the Laws of Bermuda, (ii) the certificate of incorporation, amalgamation or continuance, as applicable, and bylaws in the case of a corporation, (iii) the memorandum and articles of association and by-laws, as applicable, in the case of a limited company, (iv) the partnership agreement in the case of a partnership, (v) the articles of formation and operating agreement in the case of a limited liability company, (vi) the trust instrument in the case of a trust, and (vii) any other similar governing document under which an entity was organized, formed or created and operates, in each case as amended, supplemented or otherwise modified from time to time;


 

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  1.1.51. Governmental Authority” means any (i) international, multinational, national, federal, provincial, state, regional, municipal, local or other government, governmental or public department, central bank, court, tribunal, arbitral body, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) self-regulatory organization or stock exchange, (iii) subdivision, agent, commission, board, or authority of any of the foregoing, or (iv) quasi-governmental or private body exercising any regulatory, expropriation or taxing authority under or for the account of any of the foregoing;

 

  1.1.52. Gross Asset Value” means, with respect to any asset, the asset’s adjusted basis for U.S. federal income tax purposes, except as follows:

 

  1.1.52.1 the Gross Asset Value of any property contributed by a Partner to the Partnership is the gross fair market value of such property as determined by the General Partner at the time of contribution;

 

  1.1.52.2 the Gross Asset Value of all Assets (i) shall be adjusted to equal their respective gross fair market values, as determined by the General Partner, effective as of the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution, unless the General Partner determines that such adjustment is not necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership; and (ii) may be so adjusted, as determined by the General Partner, as of the following times: (a) the distribution by the Partnership to the Partner of more than a de minimis amount of property as consideration for an interest in the Partnership; (b) the grant of an interest in the Partnership (other than a de minimis interest) as consideration for the provision of services to or for the benefit of the Partnership by an existing Partner acting in a Partner capacity, or by a new Partner acting in a Partner capacity or in anticipation of becoming a Partner; and (c) the liquidation of the Partnership within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to clauses (ii)(a) and (ii)(b) above shall be made only if the General Partner reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership;

 

  1.1.52.3 the Gross Asset Value of an Asset distributed to any Partner shall be adjusted to equal the gross fair market value of such asset on the date of distribution as determined by the General Partner; and

 

  1.1.52.4 if the Gross Asset Value of an Asset has been determined or adjusted pursuant to 1.1.52.1 or 1.1.52.2 above, such Gross Asset Value shall thereafter be adjusted by Depreciation taken into account with respect to such asset for purposes of computing Net Income or Net Loss;

 

  1.1.53. Gross Proceeds” has the meaning assigned to such term in Section 3.9;

 

  1.1.54.

Holding Entities” means BPY Bermuda Holdings Limited, CanHoldco, Brookfield BPY Property Holdings I Inc., and Brookfield BPY Retail Holdings I Inc. and


 

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  any direct wholly-owned Subsidiary of the Property Partnership created or acquired after the date of this Agreement;

 

  1.1.55. IFRS-IASB” means International Financial Reporting Standards as issued by the International Accounting Standards Board consistently applied or such other applicable accounting principles;

 

  1.1.56. Incentive Distribution” means any performance-based dividend, distribution or other profit entitlement but, for greater certainty, does not include Creditable Operating Entity Payments;

 

  1.1.57. Incentive Distribution Account” has the meaning assigned to such term in Section 5.4;

 

  1.1.58. Income for Canadian Tax Purposes” means, in respect of any fiscal year of the Partnership, the income of the Partnership for that fiscal year, determined in accordance with the Income Tax Act;

 

  1.1.59. Income Tax Act” means the Income Tax Act (Canada), and includes the regulations promulgated thereunder;

 

  1.1.60. Indemnified Party” has the meaning assigned to such term in Section 9.6.1;

 

  1.1.61. Independent Committee” means a committee of the board of directors of the General Partner’s general partner made up of directors that are “independent” of Brookfield and its Affiliates, as contemplated by applicable securities Laws;

 

  1.1.62. Initial Capitalization” means the sum of (i) the Initial Market Value of a BPY Unit multiplied by the number of BPY Units issued and outstanding on the last trading day of the Initial Trading Period (assuming full conversion or exchange of any limited partnership interests held by any member of the Brookfield Group in the Partnership into BPY Units), plus (ii) for each class or series of security of other members of the BPY Group (excluding for this purpose any Operating Entity) that are not held by the BPY Group, the Initial Market Value of a security of such class or series multiplied by the number of securities of such class or series issued and outstanding on the last trading day of the Initial Trading Period (calculated on a fully-diluted basis), plus (iii) the principal amount of all debt not captured by paragraph (ii) of this Section 1.1.62 owed by each member of the BPY Group (excluding for this purpose any Operating Entity and amounts owed to any member of the Brookfield Group under the Revolving Credit Facility) on the date of the Spin-Off, which debt has recourse to any member of the BPY Group (excluding for this purpose any Operating Entity), less any amount of cash held by all members of the BPY Group (excluding for this purpose any Operating Entity) on the date of the Spin-Off;

 

  1.1.63. Initial GP Capital Contribution” has the meaning assigned to such term in Section 3.2;

 

  1.1.64. Initial Limited Partner” has the meaning assigned to such term in the recitals;


 

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  1.1.65. Initial Limited Partnership Agreement” has the meaning assigned to such term in the recitals;

 

  1.1.66. Initial LP Capital Contribution” has the meaning assigned to such term in Section 3.2;

 

  1.1.67. Initial Market Value” means the volume-weighted average trading price of a security traded on the principal stock exchange (determined on the basis of trading volumes) for the Initial Trading Period; provided that, for purposes of calculating the Initial Capitalization or the Total Capitalization, if a security is not traded on a stock exchange, the fair market value of such security is determined by the General Partner;

 

  1.1.68. Initial Trading Period” means the 30 trading days commencing on the date of the Spin-Off ;

 

  1.1.69. Interested Party” has the meaning assigned to such term in Section 9.5.1;

 

  1.1.70. Interim Capital Transactions” means sales or other voluntary or involuntary dispositions of any Assets (other than cash, cash equivalents, marketable securities and the like) prior to the commencement of the dissolution and liquidation of the Partnership.

 

  1.1.71. Invested Capital” means, on any particular date, the amount of capital contributed (directly or indirectly and either as debt or equity) to an Operating Entity or Holding Entity prior to such date;

 

  1.1.72. Laws” means any and all applicable (i) laws, constitutions, treaties, statutes, codes, ordinances, principles of common and civil law and equity, rules, regulations and municipal by-laws, whether domestic, foreign or international, (ii) judicial, arbitral, administrative, ministerial, departmental and regulatory judgments, orders, writs, injunctions, decisions, and awards of any Governmental Authority, and (iii) policies, practices and guidelines of any Governmental Authority which, although not actually having the force of law, are considered by such Governmental Authority as requiring compliance as if having the force of law; and the term “applicable”, with respect to such Laws and in the context that refers to one or more Persons, means such Laws that apply to such Person or Persons or its or their business, undertaking, property or securities at the relevant time and that emanate from a Governmental Authority having jurisdiction over the Person or Persons or its or their business, undertaking, property or securities;

 

  1.1.73. Liabilities” has the meaning assigned to such term in Section 9.6.1;

 

  1.1.74. Limited Partner” means a Person who is the direct beneficial owner of a Unit, without regard to the Record Holder (unless the Record Holder is such Person), and includes holders of Class A Units and Redemption-Exchange Unit;

 

  1.1.75. Limited Partnership Act” means the Limited Partnership Act 1883 (Bermuda);

 

  1.1.76. Liquidator” means the General Partner or other Person approved pursuant to Section 16.3 who performs the functions described therein;


 

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  1.1.77. Loss for Canadian Tax Purposes” means, in respect of any fiscal year of the Partnership, the loss of the Partnership for that fiscal year, determined in accordance with the Income Tax Act;

 

  1.1.78. Managers” means Brookfield Asset Management (Barbados) Inc., BGRE Partners LP, Brookfield Developments Europe Ltd. and Brookfield Global Real Estate LLC and any other Affiliate of Brookfield that is appointed from time to time to act as a manager pursuant to the Master Services Agreement;

 

  1.1.79. Market Value” means, at any time, the volume-weighted average trading price of a security traded on the principal stock exchange (determined on the basis of trading volumes) for the preceding five trading days; provided that, for purposes of calculating the Total Capitalization, if a security is not traded on a stock exchange, the fair market value of such security is determined by the General Partner;

 

  1.1.80. Master Services Agreement” means the master services agreement dated the date hereof among, inter alia, the Managers, the Partnership, BPY, the Holding Entities and others;

 

  1.1.81. Net Income” and “Net Loss” means, for each fiscal year or other period, an amount equal to the Partnership’s taxable income or loss for such fiscal year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss) with the following adjustments:

 

  1.1.81.1 any income of the Partnership that is exempt from U.S. federal income tax, and to the extent not otherwise taken into account in computing Net Income or Net Loss pursuant to this paragraph, shall be added to such taxable income or loss;

 

  1.1.81.2 any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(i), and to the extent not otherwise taken into account in computing Net Income or Net Loss pursuant to this paragraph, shall be subtracted from such taxable income or loss;

 

  1.1.81.3 in the event the Gross Asset Value of any Asset is adjusted pursuant to subdivisions 1.1.52.2 or 1.1.52.3 of the definition of Gross Asset Value herein, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Income or Net Loss;

 

  1.1.81.4 gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for U.S. federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value;


 

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  1.1.81.5 in lieu of depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year; and

 

  1.1.81.6 any items which are specially allocated pursuant to the provisions of Section 4.4 shall not be taken into account in computing Net Income or Net Loss;

 

  1.1.82. Nonrecourse Deductions” has the meaning set forth in Treasury Regulations Section 1.704-2(b)(1) and 1.704-2(c);

 

  1.1.83. Nonrecourse Liability” has the meaning set forth in Treasury Regulations Section 1.752-1(a)(2);

 

  1.1.84. Notice” has the meaning assigned to such term in Section 18.2;

 

  1.1.85. Operating Entities” means, from time to time, the Persons in which the Holding Entities, directly or indirectly, hold interests and that (i) directly hold real estate assets, or (ii) indirectly hold real estate assets but all of the interests of which are not held, directly or indirectly, by the Holding Entities, other than, in the case of each of (i) and (ii), any Person in which the Holding Entities, directly or indirectly, hold interests for investment purposes only of less than 5% of the outstanding equity securities of that Person;

 

  1.1.86. Opinion of Counsel” means a written opinion of counsel acceptable to the General Partner;

 

  1.1.87. Outstanding” means, with respect to Units or Partnership Interests, all Units or Partnership Interests that are issued by the Partnership and reflected as outstanding on the Partnership’s books and records as of the date of determination;

 

  1.1.88. Partner” means the General Partner or a Limited Partner;

 

  1.1.89. Partner Nonrecourse Debt” has the meaning set forth in Treasury Regulations Section 1.704-2(b)(4);

 

  1.1.90. Partner Nonrecourse Debt Minimum Gain” means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if the Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i)(3);

 

  1.1.91. Partner Nonrecourse Deductions” has the meaning set forth in Treasury Regulations Sections 1.704-2(i)(1) and 1.704-2(i)(2);

 

  1.1.92. Partnership” means Brookfield Property L.P., the limited partnership heretofore formed and continued pursuant to this Agreement;

 

  1.1.93. Partnership Interest” means any partnership interest, including any General Partner Unit, Class A Unit or Redemption-Exchange Unit;


 

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  1.1.94. Partnership Minimum Gain” has the meaning set forth in Treasury Regulations Sections 1.704-2(b)(2) and 1.704-2(d);

 

  1.1.95. Percentage Interest” means, as of the date of such determination, as to any Partner, the quotient of the number of Partnership Interests held by such Partner divided by the total number of all Partnership Interests then Outstanding, expressed as a percentage;

 

  1.1.96. Person” means any natural person, partnership, limited partnership, limited liability partnership, joint venture, syndicate, sole proprietorship, company or corporation (with or without share capital), limited liability corporation, unlimited liability company, joint stock company, unincorporated association, trust, trustee, executor, administrator or other legal personal representative, Governmental Authority or other entity however designated or constituted and pronouns have a similarly extended meaning;

 

  1.1.97. Quarter” means a calendar quarter ending on the last day of March, June, September or December;

 

  1.1.98. Record Date” means the date established by the General Partner for determining (i) the identity of Record Holders entitled to notice of any meeting of Limited Partners or entitled to consent to a Partnership action in writing without a meeting or entitled to exercise rights in respect of any lawful action of Limited Partners, or (ii) the identity of Record Holders entitled to receive any report or distribution;

 

  1.1.99. Record Holder” means, as of any particular Business Day, the Person in whose name a Unit is registered on the books of the Partnership as of the opening of business on such Business Day, or with respect to other Partnership Interests, the Person in whose name any such other Partnership Interest is registered on the books which the General Partner has caused to be kept as of the opening of business on such Business Day;

 

  1.1.100. Redemption Amount” has the meaning assigned to such term in Section 7.1;

 

  1.1.101. Redemption-Exchange Date” has the meaning assigned to such term in Section 6.3;

 

  1.1.102. Redemption-Exchange Unitholder” means a holder of Redemption-Exchange Units;

 

  1.1.103. Redemption-Exchange Units” means the limited partner interests in the Partnership having the rights and obligations specified in this Agreement and that are designated as Redemption-Exchange Units;

 

  1.1.104. Redemption Notice” has the meaning assigned to such term in Section 6.2.1;

 

  1.1.105. Redemption Right” has the meaning assigned to such term in Section 6.1.2;

 

  1.1.106. Registration Statement” means the final registration statement and prospectus of BPY filed with securities regulators in connection with the Spin-Off;


 

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  1.1.107. Relationship Agreement” means the relationship agreement between certain members of the Brookfield Group, the Partnership, BPY, the Holding Entities and others dated as of the date hereof;

 

  1.1.108. Reorganization” means the transactions relating to the indirect acquisition of the Business by the Holding Entities;

 

  1.1.109. Revolving Credit Facility” means the revolving credit facility provided by one or more members of the Brookfield Group on or before the Spin-Off;

 

  1.1.110. Second Distribution Threshold” means $0.575 per Unit per Quarter (pro rated for any Quarter in which (i) a Unit is not Outstanding for the entire Quarter, or (ii) the Capital Amount in respect of a Unit is adjusted pursuant to Section 3.5.3);

 

  1.1.111. Spin-Off” means the distribution by Brookfield of its interests in BPY to the shareholders of Brookfield;

 

  1.1.112. Subscription Number” has the meaning assigned to such term in Section 3.9;

 

  1.1.113. Subsidiary” means, with respect to any Person, (i) any other Person that is directly or indirectly Controlled by such Person, (ii) any trust in which such Person holds all of the beneficial interests, or (iii) any partnership, limited liability company or similar entity in which such Person holds all of the interests other than the interests of any general partner, managing member or similar Person;

 

  1.1.114. Tax” means all forms of taxation, whether direct or indirect and whether levied by reference to income, profits, gains, net wealth, asset values, turnover, added value or other reference and statutory, governmental, national, federal, state, provincial, local governmental or municipal impositions, duties, contributions and levies (including social security contributions, national insurance contributions and any other payroll taxes), whenever and wherever imposed (whether imposed by way of a withholding or deduction for or on account of tax or otherwise) and in respect of any Person, and all penalties, charges, costs and interest relating thereto;

 

  1.1.115.

Total Capitalization” means with respect to any Quarter the sum of (i) the Market Value of a BPY Unit multiplied by the number of BPY Units issued and outstanding on the last trading day of such Quarter (assuming full conversion or exchange of any limited partnership interests held by any member of the Brookfield Group in the Partnership into BPY Units), plus (ii) for each class or series of security of other members of the BPY Group (excluding for this purpose any Operating Entity) that are not held by the BPY Group, the Market Value of a security of such class or series multiplied by the number of securities of such class or series issued and outstanding on the last trading day of such Quarter (calculated on a fully-diluted basis), plus (iii) the principal amount of all debt not captured by paragraph (ii) of this Section 1.1.115 owed by each member of the BPY Group (excluding for this purpose any Operating Entity and amounts owed to any member of the Brookfield Group under the Revolving Credit Facility) on the last trading day of such Quarter to any Person that is not a member of the BPY Group, which debt has recourse to any member of the BPY Group (excluding for this purpose any Operating Entity), less any


 

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  amount of cash held by all members of the BPY Group (excluding for this purpose any Operating Entity) on such day;

 

  1.1.116. transfer” has the meaning assigned to such term in Section 13.4.1;

 

  1.1.117. Treasury Regulations” means the Income Tax Regulations promulgated under the Code, as amended from time to time;

 

  1.1.118. Underlying Incentive Distribution” has the meaning assigned to such term in Section 5.4.1;

 

  1.1.119. Unit” means any Class A Unit or Redemption-Exchange Unit;

 

  1.1.120. Unit Reclassification” has the meaning assigned to such term in Section 8.2;

 

  1.1.121. Unit Reorganization” has the meaning assigned to such term in Section 8.1;

 

  1.1.122. Unrecovered Capital Amount” means, as of the relevant date of determination and with respect to any Unit or General Partner Unit, an amount equal to the excess of (i) the Capital Amount then applicable to such Unit or General Partner Unit over (ii) the amount of distributions made in respect of such Unit or General Partner Unit pursuant to Section 5.2.4 or Section 16.3.3.4.3 during the period of time beginning on the date the Capital Amount in respect of each Unit and General Partner Unit was last adjusted pursuant to Section 3.5.3 and ending on such date of determination; and

 

  1.1.123. Withdrawal Opinion of Counsel” an Opinion of Counsel that withdrawal of the General Partner (following the selection of the successor general partner) will not (i) result in the loss of the limited liability of any Limited Partner, (ii) cause the Partnership or any BPY Group member to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for tax purposes (to the extent not previously treated as such), or (iii) cause the Partnership or BPY to become an “investment company” under the U.S. Investment Company Act of 1940, as amended, or similar legislation in other jurisdictions.

 

1.2 Headings and Table of Contents

The inclusion of headings and a table of contents in this Agreement are for convenience of reference only and will not affect the construction or interpretation hereof.

 

1.3 Interpretation

In this Agreement, unless the context otherwise requires:

 

  1.3.1. words importing the singular shall include the plural and vice versa, words importing gender shall include all genders or the neuter, and words importing the neuter shall include all genders;

 

  1.3.2.

the words “include”, “includes”, “including”, or any variations thereof, when following any general term or statement, are not to be construed as limiting the general


 

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  term or statement to the specific items or matters set forth or to similar items or matters, but rather as referring to all other items or matters that could reasonably fall within the broadest possible scope of the general term or statement;

 

  1.3.3. references to any Person include such Person’s successors and permitted assigns;

 

  1.3.4. except as otherwise provided in this Agreement, any reference in this Agreement to a statute, regulation, policy, rule or instrument shall include, and shall be deemed to be a reference also to, all rules and regulations made under such statute, in the case of a statute, to all amendments made to such statute, regulation, policy, rule or instrument, and to any statute, regulation, policy, rule or instrument that may be passed which has the effect of supplementing or superseding the statute, regulation, policy, rule or instrument so referred to;

 

  1.3.5. any reference to this Agreement or any other agreement, document or instrument shall be construed as a reference to this Agreement or, as the case may be, such other agreement, document or instrument as the same may have been, or may from time to time be, amended, varied, replaced, amended and restated, supplemented or otherwise modified;

 

  1.3.6. in the event that any day on which any amount is to be determined or any action is required to be taken hereunder is not a Business Day, then such amount shall be determined or such action shall be required to be taken at or before the requisite time on the next succeeding day that is a Business Day; and

 

  1.3.7. except where otherwise expressly provided, all amounts in this Agreement are stated and shall be paid in U.S. currency.

 

1.4 Invalidity of Provisions

Each of the provisions contained in this Agreement is distinct and severable and a declaration of invalidity or unenforceability of any such provision or part thereof by a court of competent jurisdiction will not affect the validity or enforceability of any other provision hereof. To the extent permitted by applicable Law, the parties waive any provision of Law which renders any provision of this Agreement invalid or unenforceable in any respect. The parties will engage in good faith negotiations to replace any provision which is declared invalid or unenforceable with a valid and enforceable provision, the economic effect of which comes as close as possible to that of the invalid or unenforceable provision which it replaces.

 

1.5 Entire Agreement

This Agreement constitutes the entire agreement between the parties pertaining to the subject matter of this Agreement. There are no warranties, conditions, or representations (including any that may be implied by statute) and there are no agreements in connection with such subject matter except as specifically set forth or referred to in this Agreement. No reliance is placed on any warranty, representation, opinion, advice or assertion of fact made either prior to, contemporaneous with, or after entering into this Agreement, or any amendment or supplement hereto, by any party to this Agreement or its directors, officers, employees or agents, to any other party to this Agreement or its directors, officers, employees or agents, except to the


 

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extent that the same has been reduced to writing and included as a term of this Agreement, and none of the parties to this Agreement has been induced to enter into this Agreement or any amendment or supplement by reason of any such warranty, representation, opinion, advice or assertion of fact. Accordingly, there will be no liability, either in tort or in contract, assessed in relation to any such warranty, representation, opinion, advice or assertion of fact, except to the extent contemplated above.

 

1.6 Waiver, Amendment

Except as expressly provided in this Agreement, no amendment or waiver of this Agreement will be binding unless executed in writing by the party to be bound thereby. No waiver of any provision of this Agreement will constitute a waiver of any other provision nor will any waiver of any provision of this Agreement constitute a continuing waiver unless otherwise expressly provided. A party’s failure or delay in exercising any right under this Agreement will not operate as a waiver of that right. A single or partial exercise of any right will not preclude a party from any other or further exercise of that right or the exercise of any other right.

 

1.7 Governing Law; Submission to Jurisdiction

This Agreement will be governed by and construed in accordance with the laws of Bermuda. Each of the Partners (other than governmental entities prohibited from submitting to the jurisdiction of a particular jurisdiction) will submit to the non-exclusive jurisdiction of any court in Bermuda in any dispute, suit, action or proceeding arising out of or relating to this Agreement. Each Partner waives, to the fullest extent permitted by Law, any immunity from jurisdiction of any such court or from any legal process therein and further waives, to the fullest extent permitted by Law, any claim of inconvenient forum, improper venue or that any such court does not have jurisdiction over the Partner. Any final judgment against a Partner in any proceedings brought in any court in Bermuda will be conclusive and binding upon the Partner and may be enforced in the courts of any other jurisdiction of which the Partner is or may be subject, by suit upon such judgment. The foregoing submission to jurisdiction and waivers will survive the dissolution, liquidation, winding up and termination of the Partnership.

ARTICLE 2

ORGANIZATIONAL MATTERS

 

2.1 Formation

The Partnership has been formed as an exempted limited partnership on January 5, 2012, pursuant to the provisions of the Limited Partnership Act and the Exempted Partnerships Act. Except as expressly provided to the contrary in this Agreement, the rights, duties (including fiduciary duties), liabilities and obligations of the Partners and the administration, dissolution and termination of the Partnership shall be governed by the Limited Partnership Act and the Exempted Partnerships Act. All Partnership Interests shall constitute personal property of the owner thereof for all purposes and a Partner has no interest in any specific Partnership property.


 

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2.2 Purpose

The purpose of the Partnership shall be to: (i) acquire and hold interests in the Holding Entities and, subject to the approval of the General Partner, interests in any other entity; (ii) engage in any activity related to the capitalization and financing of the Partnership’s interests in those Holding Entities and such other Persons; and (iii) engage in any activity that is incidental to or in furtherance of the foregoing and that is approved by the General Partner and that lawfully may be conducted by a limited partnership organized under the Limited Partnership Act and the Exempted Partnerships Act and this Agreement. To the fullest extent permitted by Law, the General Partner shall have no duty or obligation to propose or approve, and may decline to propose or approve, the conduct by the Partnership of any activity free of any duty (including any fiduciary duty) or obligation whatsoever to the Partnership or any Limited Partner or Record Holder and, in declining to so propose or approve, shall not be deemed to have breached this Agreement, any other agreement contemplated hereby, the Limited Partnership Act, the Exempted Partnerships Act or any other provision of Law.

 

2.3 Powers

The Partnership shall be empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and activities described in Section 2.2 and for the protection and benefit of the Partnership.

 

2.4 Name

The name of the Partnership shall be “Brookfield Property L.P.” The Partnership’s activities and affairs may be conducted under any other name or names deemed necessary or appropriate by the General Partner, including the name of the General Partner or any Affiliate thereof. The words “Limited Partnership”, “L.P.” or similar words or letters shall be included in the Partnership’s name where necessary for the purposes of complying with the Laws of any jurisdiction that so requires. Subject to compliance with the requirements of the Limited Partnership Act and the Exempted Partnerships Act, the General Partner in its sole discretion may change the name of the Partnership at any time and from time to time and shall notify the Record Holders of such change in the next regular communication to Record Holders.

If the General Partner ceases to be the general partner of the Partnership and the new general partner is not an Affiliate of Brookfield, the Partnership shall change its name so that it does not include “Brookfield” and could not be capable of confusion in any way with such name. This obligation shall be enforceable and waivable by the General Partner notwithstanding that it may have ceased to be the general partner of the Partnership.

 

2.5 Registered Office; Principal Office

Unless and until changed by the General Partner, the registered office of the Partnership shall be located at 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda. The head office of the Partnership and the General Partner shall be 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda, or such other place as the General Partner may from time to time designate by


 

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notice to the Record Holders. The Partnership may maintain offices at such other place or places within Bermuda as the General Partner deems necessary or appropriate.

 

2.6 Power of Attorney

 

  2.6.1. Each Limited Partner hereby constitutes and appoints each of the General Partner and, if a Liquidator shall have been selected pursuant to Section 16.3, the Liquidator severally (and any successor to either thereof by merger, transfer, assignment, election or otherwise) and each of their authorized officers and attorneys-in-fact, with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead, to:

 

  2.6.1.1 execute, swear to, acknowledge, deliver, file and record in the appropriate public offices: (i) all certificates, documents and other instruments (including this Agreement, the Certificate of Limited Partnership and the Certificate of Exempted Partnership and all amendments or restatements thereof) that the General Partner or the Liquidator deems necessary or appropriate to form, qualify or continue the existence or qualification of the Partnership as an exempted limited partnership (or a partnership in which the limited partners have limited liability) in Bermuda and in all other jurisdictions in which the Partnership may conduct activities and affairs or own property; (ii) all certificates, documents and other instruments that the General Partner or the Liquidator deems necessary or appropriate to reflect, in accordance with its terms, any amendment, change, modification or restatement of this Agreement; (iii) all certificates, documents and other instruments (including conveyances and a certificate of cancellation) that the General Partner or the Liquidator deems necessary or appropriate to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement; (iv) all certificates, documents and other instruments relating to the admission, withdrawal or removal of any Partner pursuant to, or other events described in, Article 14 or Article 15, or to the Capital Contribution of any Partner; (v) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of any class or series of Units or other Partnership Interests issued pursuant to Section 3.5; and (vi) any tax election with any Limited Partner or General Partner on behalf of the Partnership or all Partners; and

 

  2.6.1.2

execute, swear to, acknowledge, deliver, file and record all ballots, consents, approvals, waivers, certificates, documents and other instruments necessary or appropriate, in the sole discretion of the General Partner or the Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action that is made or given by the Partners hereunder or is consistent with the terms of this Agreement or is necessary or appropriate, in the sole discretion of the General Partner or the Liquidator, to effectuate the terms or intent of this Agreement; provided, that when required by any other provision of this Agreement that establishes a percentage of the Limited Partners or of the Limited Partners of any class or series required to take any action, the General Partner or the Liquidator may exercise the power of attorney made in this


 

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  Section 2.6.1.2 only after the necessary vote, consent or approval of the Limited Partners or of the Limited Partners of such class or series, as applicable.

Nothing contained in this Section 2.6.1 shall be construed as authorizing the General Partner to amend this Agreement except in accordance with Article 17 or as may be otherwise expressly provided for in this Agreement.

 

  2.6.2. The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, and it shall survive and not be affected by the subsequent death, incompetency, disability, incapacity, dissolution, bankruptcy or termination of any Limited Partner or the transfer of all or any portion of such Limited Partner’s Partnership Interest and shall extend to such Limited Partner’s heirs, successors, assigns and personal representatives. Each Limited Partner hereby agrees to be bound by any representation made by the General Partner or the Liquidator acting in good faith pursuant to such power of attorney; and each Limited Partner hereby waives any and all defenses that may be available to it to contest, negate or disaffirm the action of the General Partner or the Liquidator taken in good faith under such power of attorney. Each Limited Partner shall execute and deliver to the General Partner or the Liquidator, within 15 days after receipt of the General Partner’s or the Liquidator’s request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator deems necessary to effectuate this Agreement and the purposes of the Partnership.

 

2.7 Term

The Partnership commenced upon the formation of the Partnership on January 5, 2012, pursuant to the Initial Limited Partnership Agreement, the Certificate of Limited Partnership and the Certificate of Exempted Partnership and shall continue in perpetual existence until the termination of the Partnership in accordance with the provisions of Section 16.1.

ARTICLE 3

CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS

 

3.1 Formation of the Partnership

In connection with the formation of the Partnership, the General Partner has been admitted as the General Partner of the Partnership and the Initial Limited Partner has been admitted as a Limited Partner as of the date of the Initial Limited Partnership Agreement.

 

3.2 Initial Capital Contributions by the General Partner and the Initial Limited Partner

 

  3.2.1. The General Partner has made a Capital Contribution of $1,000 to the Partnership (“Initial GP Capital Contribution”) in exchange for 1000 General Partner Units. The Initial Limited Partner has made a Capital Contribution of $1,000 to the Partnership (“Initial LP Capital Contribution”) in exchange for 1000 Units, which are designated as Class A Units.


 

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  3.2.2. Immediately prior to the Reorganization, 960 General Partner Units will be cancelled, and 960 Class A Units held by the Initial Limited Partner will be cancelled.

 

3.3 Reorganization

The Capital Contributions outlined in Schedule A will be made in connection with the Reorganization.

 

3.4 Interest and Withdrawal

No interest on Capital Contributions shall be paid by the Partnership. No Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent, if any, that distributions made pursuant to this Agreement or upon dissolution of the Partnership may be considered as such by Law and then only to the extent provided for in this Agreement. Except to the extent expressly provided in this Agreement, no Partner shall have priority over any other Partner either as to the return of Capital Contributions or as to profits, losses or distributions.

 

3.5 Issuances of Additional Partnership Interests

 

  3.5.1. The Partnership may issue additional Partnership Interests (including new classes of Partnership Interests and options, rights, warrants and appreciation rights relating to such Partnership Interests or class of Partnership Interests) for any Partnership purpose (including in connection with any distribution reinvestment plan and any payment of an Incentive Distribution pursuant to Section 5.5) at any time and from time to time to such Persons for such consideration and on such terms and conditions as the General Partner shall determine in its sole discretion, all without the approval of any Limited Partners.

 

  3.5.2. Upon the issuance of any Class A Units to BPY pursuant to Section 3.9 hereof, the Capital Amount attributable to each such newly issued Class A Unit shall equal the amount paid or contributed to the Partnership in respect of such Class A Unit.

 

  3.5.3. If the General Partner deems it necessary or advisable so as to preserve the economic preferences and rights of the Partners, upon or with respect to any issuance of additional Units or General Partner Units (whether in connection with the issuance of Class A Units pursuant to Section 3.9 or otherwise), the General Partner may (subject to Section 11 of the Limited Partnership Act) adjust (which adjustment may be upward or downward) the Capital Amount attributable to each Unit and General Partner Unit Outstanding prior to such issuance of new Units or General Partner Units to equal the amount that would be distributed pursuant to Section 16.3.3 in respect of such Unit or General Partner Unit (as applicable) assuming the Partnership were liquidated at the end of the day immediately prior to such issuance of new Units or General Partners Units.

 

  3.5.4.

Except with respect to Class A Units issued to BPY pursuant to Section 3.9, and except as provided in Section 3.5.2 or Section 3.5.3, each additional Partnership Interest authorized to be issued by the Partnership pursuant to Section 3.5.1 may be issued in one or more classes, or one or more series of any such classes, with such designations, preferences, rights, powers and duties (which may be senior to existing classes and series of Partnership


 

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  Interests), as shall be fixed by the General Partner in its sole discretion, including (i) the right to share in Partnership profits and losses or items thereof; (ii) the right to share in Partnership distributions; (iii) the rights upon dissolution and liquidation of the Partnership; (iv) whether, and the terms and conditions upon which, the Partnership may or shall be required to redeem the Partnership Interest (including sinking fund provisions); (v) whether such Partnership Interest is issued with the privilege of conversion or exchange and, if so, the terms and conditions of such conversion or exchange; (vi) the terms and conditions upon which each Partnership Interest will be issued, evidenced by certificates and assigned or transferred; and (viii) the requirement, if any, of each such Partnership Interest to consent to certain partnership matters.

 

  3.5.5. The General Partner is hereby authorized to take all actions that it determines to be necessary or appropriate in connection with each issuance of Partnership Interests and options, rights, warrants and appreciation rights relating to Partnership Interests pursuant to this Section 3.5, including the admission of additional Limited Partners in connection therewith and any related amendment of this Agreement, and all additional issuances of Partnership Interests and options, rights, warrants and appreciation rights relating to Partnership Interests. The General Partner is authorized to do all things that it determines to be necessary or appropriate in connection with any future issuance of Partnership Interests or options, rights, warrants or appreciation rights relating to Partnership Interests, including compliance with any Laws or guideline of any Governmental Authority.

 

3.6 Pre-emptive Rights

Unless otherwise determined by the General Partner, in its sole discretion, no Person shall have any pre-emptive, preferential or other similar right with respect to the issuance of any Partnership Interest, whether unissued, held in the treasury or hereafter created.

 

3.7 Splits and Combinations

 

  3.7.1. Subject to Section 3.7.4, the Partnership may make a distribution of Partnership Interests to all Record Holders pro rata to their Percentage Interests or may effect a subdivision or combination of Partnership Interests so long as, after any such event, each Partner shall have the same Percentage Interest in the Partnership as before such event.

 

  3.7.2. Whenever such a distribution, subdivision or combination of Partnership Interests or options, rights, warrants or appreciation rights relating to Partnership Interests is declared, the General Partner shall select a Record Date as of which the distribution, subdivision or combination shall be effective and shall send notice thereof at least 20 days prior to such Record Date to each Record Holder as of a date not less than 10 days prior to the date of such notice. The General Partner also may cause independent public accountants of international standing selected by it to calculate the number of Partnership Interests to be held by each Record Holder after giving effect to such distribution, subdivision or combination. The General Partner shall be entitled to rely on any certificate provided by such firm as conclusive evidence of the accuracy of such calculation.


 

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  3.7.3. Promptly following any such distribution, subdivision or combination, the Partnership may issue Certificates to the Record Holders of Partnership Interests or options, rights, warrants or appreciation rights relating to Partnership Interests as of the applicable Record Date representing the new number of Partnership Interests or options, rights, warrants or appreciation rights relating to Partnership Interests held by such Record Holders, or the General Partner may adopt such other procedures that it determines to be necessary or appropriate to reflect such changes. If any such combination results in a smaller total number of Partnership Interests Outstanding or outstanding options, rights, warrants or appreciation rights relating to Partnership Interests, the Partnership shall require, as a condition to the delivery to a Record Holder of any such new Certificate, the surrender of any Certificate held by such Record Holder immediately prior to such Record Date.

 

  3.7.4. The Partnership shall not be required to issue fractional Units upon any distribution, subdivision or combination of Units. If a distribution, subdivision or combination of Units would result in the issuance of fractional Units but for the provisions of this Section 3.7.4, each fractional Unit shall be rounded to the nearest whole Unit, with each half Unit being rounded to the next higher Unit.

 

3.8 Fully Paid and Non-Assessable Nature of Units

All Units issued pursuant to, and in accordance with the requirements of this Article 3 shall be fully paid and non-assessable Units in the Partnership.

 

3.9 Issuance of Units to BPY

If, and to the extent that, BPY raises funds by way of the issuance of equity or debt securities, or otherwise, and is required under the BPY Partnership Agreement to use the proceeds of such issuance of securities to subscribe for Class A Units, BPY shall, unless otherwise agreed by BPY and the Partnership, invest an amount equal to the gross proceeds of such issuance (the “Gross Proceeds”) for a number of Class A Units (the “Subscription Number”) equal to (i) the quotient of the amount of the Gross Proceeds divided by the issue price of one BPY Unit (in the case of an issuance of BPY Units) or the Market Value of one BPY Unit (in the case of an issuance of another security), multiplied by (ii) the inverse of the Exchange Ratio.

ARTICLE 4

ALLOCATIONS

 

4.1 Maintenance of Capital Accounts

The General Partner will maintain a separate capital account (a “Capital Account”) for each Partner in accordance with the following provisions:

 

  4.1.1. to each Partner’s Capital Account there shall be credited the amount of cash and the Gross Asset Value of any property contributed to the Partnership by such Partner, such Partner’s distributive share of Net Income or any item in the nature of income or gain which is specially allocated pursuant to Section 4.4, and the amount of any Partnership liabilities assumed by such Partner or which are secured by any property distributed to such Partner;


 

23

 

  4.1.2. to each Partner’s Capital Account there shall be debited the amount of cash and the Gross Asset Value of any property distributed to such Partner pursuant to any provision of this Agreement, such Partner’s distributive share of Net Loss and any item in the nature of expense or loss which is specially allocated pursuant to Section 4.4, and the amount of any liabilities of such Partner assumed by the Partnership or which are secured by any property contributed by such Partner to the Partnership;

 

  4.1.3. in the event all or a portion of an interest in the Partnership is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent that it relates to the transferred interest; and

 

  4.1.4. in determining the amount of any liability for the purposes of Sections 4.1.1 and 4.1.2 there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Treasury Regulations.

The provisions of this Section 4.1 and other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulations Section 1.704-1(b) and shall be interpreted and applied in a manner consistent with such Treasury Regulations.

 

4.2 Allocations – Overview

The rules set forth below in this Article 4 shall apply for the purpose of determining each Partner’s allocable share of the items of income, gain, loss and expense of the Partnership comprising Net Income or Net Loss of the Partnership for each fiscal year or other period, determining special allocations of other items of income, gain, loss and expense, and adjusting the balance of each Partner’s Capital Account to reflect the aforementioned general and special allocations. For each fiscal year or other period, the special allocations in Section 4.4 shall be made immediately prior to the general allocations of Section 4.3.

 

4.3 General Allocations

 

  4.3.1. The items of income, gain, loss and expense of the Partnership comprising Net Income or Net Loss for a fiscal year shall be allocated as of the end of such fiscal year (and at such other times as it shall be necessary to allocate Net Income or Net Loss) among the Persons who were Partners during such fiscal year or other period in a manner that will, as nearly as possible, cause the Capital Account balance of each Partner at the end of such fiscal year or other period to equal the excess (which may be negative) of:

 

  4.3.1.1

the amount of the hypothetical distribution (if any) that such Partner would receive if, on the last day of such fiscal year or other period, (x) all Assets, including cash and any amount required to be contributed to the Partnership by the General Partner, were sold for cash in an amount equal to their Gross Asset Values, taking into account any adjustments thereto for such fiscal year or other period, (y) all Partnership liabilities were satisfied in cash according to their terms (limited, with respect to each Nonrecourse Liability or any Partner Nonrecourse Debt in respect of such Partner, to the Gross Asset Values of the assets securing


 

24

 

  such liability), and (z) the net proceeds thereof (after satisfaction of such liabilities) were distributed in full pursuant to Section 16.3.3, over

 

  4.3.1.2 the sum of (x) the amount, if any, without duplication, that such Partner would be obligated to contribute to the capital of the Partnership, (y) such Partner’s share of Partnership Minimum Gain determined pursuant to Treasury Regulations Section 1.704-2(g) and (z) such Partner’s share of Partner Nonrecourse Debt Minimum Gain determined pursuant to Treasury Regulations Section 1.704-2(i)(5), all computed as of the hypothetical sale described in Section 4.3.1.1 above.

 

  4.3.2. Notwithstanding anything to the contrary in this Article 4, the amount of items of Partnership expense and loss allocated pursuant to Section 4.3.1 to any Limited Partner shall not exceed the maximum amount of such items that can be so allocated without causing such Limited Partner to have an Adjusted Capital Account Deficit at the end of any fiscal year. All such items in excess of the limitation set forth in this Section 4.3.2 shall be allocated first, to Partners who would not have an Adjusted Capital Account Deficit, pro rata, in proportion to their Capital Account balances, adjusted as provided in Sections 1.1.1.1 and 1.1.1.2, until no Partner would be entitled to any further allocation, and thereafter to the General Partner.

 

4.4 Special Allocations

The following special allocations shall be made in the following order:

 

  4.4.1. In the event that there is a net decrease during a fiscal year in either Partnership Minimum Gain or Partner Nonrecourse Debt Minimum Gain, then notwithstanding any other provision of this Article 4, each Partner shall receive such special allocations of items of Partnership income and gain as are required in order to conform to Treasury Regulations Section 1.704-2.

 

  4.4.2. Subject to Section 4.4.1, but notwithstanding any other provision of this Article 4, items of income and gain shall be specially allocated to the Partners in a manner that complies with the “qualified income offset” requirement of Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(3).

 

  4.4.3.

In the event that a Partner has a deficit Capital Account balance at the end of any fiscal year which is in excess of the sum of (i) the amount such Partner is then obligated to restore pursuant to this Agreement, and (ii) the amount such Partner is then deemed to be obligated to restore pursuant to the penultimate sentences of Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), respectively, such Partner shall be specially allocated items of Partnership income and gain (consisting of a pro rata portion of each item of income and gain of the Partnership for such fiscal year in accordance with Treasury Regulations Section 1.704-1(b)(2)(ii)(d)) in the amount of such excess as quickly as possible; provided, however, that any allocation under this Section 4.4.3 shall be made only if and to the extent that a Partner would have a deficit Capital Account balance in excess of such sum after all


 

25

 

  allocations provided for in this Article 4 have been tentatively made as if this Section 4.4.3 were not in this Agreement.

 

  4.4.4. Partner Nonrecourse Deductions shall be specially allocated to the Partners in the manner in which they share the economic risk of loss (as defined in Treasury Regulations Section 1.752-2) for such Partner Nonrecourse Debt.

 

  4.4.5. Each Nonrecourse Deduction of the Partnership shall be specially allocated to the Partners, pro rata, in proportion to their respective Percentage Interests.

 

  4.4.6. The amounts of any Partnership income, gain, loss or expense available to be specially allocated pursuant to this Section 4.4 shall be determined by applying rules analogous to those set forth in Section 1.1.81 as modified by Sections 1.1.81.1 through 1.1.81.5.

 

4.5 Allocation of Nonrecourse Liabilities

For purposes of determining each Partner’s share of Nonrecourse Liabilities, if any, of the Partnership in accordance with Treasury Regulations Section 1.752-3(a)(3), the Partners’ interest in Partnership profits shall be determined in the same manner as prescribed by Section 4.4.5.

 

4.6 Transfer of Interest

In the event of a transfer of all or part of any Partnership Interest (in accordance with the provisions of this Agreement) at any time other than the end of a fiscal year, or the admission of an additional Limited Partner in connection with the issuance of additional Partnership Interests pursuant to Section 3.5, the shares of items of Net Income or Net Loss and specially allocated items allocable to the interest transferred shall be allocated between the transferor and the transferee in a manner determined by the General Partner in its sole discretion that is not inconsistent with the applicable provisions of the Code and Treasury Regulations.

 

4.7 Allocations for U.S. Tax Purposes

 

  4.7.1. Each item of income, gain, loss, or deduction for U.S. federal income tax purposes that corresponds to an item of income, gain, loss or expense that is either taken into account in computing Net Income or Net Loss or is specially allocated pursuant to Section 4.4 (a “Book Item”) shall be allocated among the Partners in the same proportion as the corresponding Book Item is allocated among them pursuant to Section 4.3 or Section 4.4 hereof.

 

  4.7.2.

In the event any property of the Partnership is credited to the Capital Account of a Partner at a value other than its tax basis (whether as a result of a contribution of such property or a revaluation of such property pursuant to Section 1.1.52.2), then allocations of taxable income, gain, loss and deductions with respect to such property shall be made in a manner which will comply with Section 704(b) and Section 704(c) of the Code and the Treasury Regulations thereunder. The Partnership, in the discretion of the General Partner,


 

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  may make, or not make, “curative” or “remedial” allocations (within the meaning of the Treasury Regulations under Section 704(c) of the Code) including, but not limited to:

 

  4.7.2.1 “curative” allocations which offset the effect of the “ceiling rule” for a prior fiscal year (within the meaning of Treasury Regulations Section 1.704-3(c)(3)(ii)); and

 

  4.7.2.2 “curative” allocations from dispositions of contributed property (within the meaning of Treasury Regulations Section 1.704-3(c)(3)(iii)(B)).

 

  4.7.3. All tax credits shall be allocated among the Partners as determined by the General Partner in its sole and absolute discretion, consistent with applicable Law.

 

4.8 Allocations for Canadian Federal Income Tax Purposes.

 

  4.8.1. The Income for Canadian Tax Purposes for a given fiscal year of the Partnership will be allocated to each Partner in an amount calculated by multiplying the Income for Canadian Tax Purposes by a fraction, the numerator of which is the sum of the distributions received by such Partner with respect to such fiscal year and the denominator of which is the aggregate amount of the distributions made by the Partnership to Partners with respect to such fiscal year. Generally, the source and character of items of income so allocated to a Partner with respect to a fiscal year of the Partnership will be the same source and character as the distributions received by such Partner with respect to such fiscal year.

 

  4.8.2. If, with respect to a given fiscal year, no distribution is made by the Partnership or the Partnership has a loss for Canadian federal income tax purposes, one quarter of the income, or loss, as the case may be, for Canadian federal income tax purposes of the Partnership for such fiscal year, will be allocated to the Partners of record at the end of each Quarter ending in such fiscal year pro rata to their respective Percentage Interests at each such date. To such end, any Person who was a Partner at any time during such fiscal year but who has disposed of all of such Person’s Units before the last day of that fiscal year may be deemed to be a Partner on the last day of such fiscal year for the purposes of subsection 96(1) of the Income Tax Act. Generally, the source and character of such income or losses so allocated to a Partner at the end of each Quarter will be the same source and character as the income or loss earned or incurred by the Partnership in such Quarter.

 

  4.8.3.

Notwithstanding Sections 4.8.1 and 4.8.2, the gain(s) for Canadian Tax Purposes realized by the Partnership on the disposition of the common shares of CanHoldco (the “CanHoldco Shares”) for any given fiscal year of the Partnership, in an aggregate amount equal to the amount of accrued gain on the CanHoldco Shares on the date of the transfer of the CanHoldco Shares to the Partnership in connection with the Reorganization computed in accordance with the Income Tax Act, will be allocated to the Initial Limited Partner (or to the Initial Limited Partner and any member of the BPY Group to which the Initial Limited Partner assigns any Partnership Interests in proportion to their respective holdings of the aggregate Partnership Interests held by them at the time of the disposition of the CanHoldco Shares or to the general partner of the Partnership if the general partner is a member of the BPY Group at the time of allocation and no other members of the BPY Group hold any


 

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  Partnership Interests of the Partnership at such time); provided, however, that any such gain(s) that exceed in the aggregate the amount of accrued gain on the CanHoldco Shares on the date of the transfer of the CanHoldco Shares to the Partnership in connection with the Reorganization will be allocated in accordance with Sections 4.8.1 and 4.8.2.

 

4.9 Currency Translation

Allocations of amounts other than in U.S. Dollars shall be converted into U.S. Dollars by the General Partner on such date as the General Partner deems appropriate, using rates quoted by appropriate financial institutions of repute or by internationally recognized financial publications or news services to fix the rate of translation.

 

4.10 Authority of General Partner

Except as otherwise specifically provided by this Agreement, all decisions and other matters concerning (i) the computation and allocation of specific items of income, gain, expense or loss among the Partners and (ii) accounting procedures to be employed by the Partnership shall be determined in good faith by the General Partner, which determination shall be final and conclusive as to all Partners. In furtherance of the foregoing, the General Partner may adjust allocations of items that would otherwise be made pursuant to the terms of this Agreement to the extent necessary to (A) comply with the requirements of the Code and Treasury Regulations (including the requirements of Section 704(b) and Section 704(c) of the Code and the Treasury Regulations promulgated thereunder), (B) comply with the requirements of the Income Tax Act, (C) reflect the Partners’ interests in the Partnership or (D) consistently reflect the distributions made by the Partnership to the Partners pursuant to the terms of this Agreement. The General Partner may make or revoke, but shall not be obligated to make or revoke, any tax election provided for under the Code, or any provision of state, local or non-U.S. tax Law or under the Income Tax Act.

ARTICLE 5

DISTRIBUTIONS

 

5.1 In General

Subject to this Article 5 and Section 16.3.3, the General Partner may in its sole discretion make distributions at any time or from time to time to the Partners in accordance with their Percentage Interests. Such payment shall constitute full payment and satisfaction of the Partnership’s liability in respect of such payment, regardless of any claim of any Person who may have an interest in such payment by reason of an assignment or otherwise. For the avoidance of doubt, BPY, the Property Partnership or one or more of the Holding Entities may (but none is obligated to) borrow money in order to obtain sufficient cash in order to make a distribution. The amount of Taxes withheld or paid by the Partnership or another member of the BPY Group in respect of taxable income allocated to a Partner shall be treated as a distribution to such Partner.


 

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5.2 Distributions Prior to Dissolution

 

  5.2.1. Prior to the dissolution of the Partnership pursuant to Section 16.1, distributions of Available Cash shall be made pursuant to this Section 5.2. Any distribution to the General Partner pursuant to Sections 5.2.2.5 to 5.2.2.6 shall be made to the General Partner in its capacity as the general partner and without regard to the number of General Partner Units held by the General Partner.

 

  5.2.2. Subject to Section 5.2.3 and Section 5.2.4, any distributions of Available Cash made by the Partnership with respect to any Quarter shall be distributed:

 

  5.2.2.1 first, 100% to BPY until there has been distributed pursuant to this Section 5.2.2.1 an amount equal to the amount of BPY’s outlays and expenses for the Quarter properly incurred;

 

  5.2.2.2 second, 100% to all Redemption-Exchange Unitholders pro rata in proportion to their respective Percentage Interests (which, for purposes of this Section 5.2.2.2, will be calculated using Redemption-Exchange Units only) (which distribution will be treated as having been made pursuant to Sections 5.2.2.4 or 5.2.2.5, as applicable) all amounts that have been deferred in previous Quarters pursuant to Section 5.2.3 and not yet recovered;

 

  5.2.2.3 third, 100% to the General Partner until an amount equal to the Equity Enhancement Distribution has been distributed pursuant to this Section 5.2.2.3;

 

  5.2.2.4 fourth, 100% to all Partners pro rata in proportion to their respective Percentage Interests until there has been distributed pursuant to this Section 5.2.2.3 in respect of each Unit Outstanding as of the last day of such Quarter an amount equal to the First Distribution Threshold;

 

  5.2.2.5 fifth, (i) 85% to all the Partners pro rata in proportion to their respective Percentage Interests and, (ii) 15% to the General Partner until there has been distributed pursuant to this Section 5.2.2.5 in respect of each Unit Outstanding as of the last day of such Quarter an amount equal to the excess of (a) the Second Distribution Threshold over (b) the First Distribution Threshold; and

 

  5.2.2.6 thereafter, (i) 75% to all Partners pro rata in proportion to their respective Percentage Interests and, (ii) 25% to the General Partner.

 

  5.2.3. Notwithstanding Sections 5.2.2:

 

  5.2.3.1

for any Quarter in which the General Partner determines, in its sole discretion, there is insufficient Available Cash to pay the Equity Enhancement Distribution pursuant to Section 5.2.2.3, the General Partner may elect to pay all or a portion of the distribution pursuant to Section 5.2.2.3 in Redemption-Exchange Units equal to the amount in cash that the General Partner has elected to be paid in respect of Section 5.2.2.3 in Redemption-Exchange Units divided by


 

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  the Market Value of a BPY Unit on the date that the General Partner makes such election, provided that (A) any such election shall be made within 45 days following the end of the applicable Quarter and (B) no fractional Redemption-Exchange Units will be issued, and such number will be rounded down to the nearest whole number with the remainder payable to the General Partner in cash;

 

  5.2.3.2 if the General Partner determines in its sole discretion that, with respect to any Quarter, there is insufficient Available Cash to distribute in respect of each Unit Outstanding as of the last day of such Quarter an amount equal to the then current distribution level, then the General Partner may elect to defer all or a portion of the amounts distributable pursuant to such level in respect of each Redemption-Exchange Unit and instead distribute (A) first, up to an amount not to exceed the then current distribution level to all Partners holding Class A Units pro rata in proportion to their respective Percentage Interest (which, for purposes of this Section 5.2.3.2, will be calculated using Class A Units only) which distribution will be treated as having been made to holders of Class A Units pursuant to Sections 5.2.2.4 or 5.2.2.5, as applicable, and (B) second, the difference, if any, between the amounts distributable pursuant to such then current distribution level in respect of each Redemption-Exchange Unit (after giving effect to clause (A) above) and the amount the General Partner elects to defer pursuant to such level in respect of each Redemption-Exchange Unit, to all Partners holding Redemption-Exchange Units pro rata in proportion to their respective Percentage Interest (which, for purposes of this Section 5.2.3.2, will be calculated using Redemption-Exchange Units only) which distribution will be treated as having been made to holders of Redemption-Exchange Units pursuant to Sections 5.2.2.4 or 5.2.2.5, as applicable; and

 

  5.2.3.3 in any Quarter the General Partner may, in its sole discretion, waive the requirement to make distributions of Available Cash to the General Partner pursuant to clause (ii) in Sections 5.2.2.4 and 5.2.2.5.

 

  5.2.4. Available Cash that is deemed by the General Partner to be cash from Interim Capital Transactions and representative of unrecovered capital (“Capital Surplus”) shall be distributed:

 

  5.2.4.1 first, to Partners pro rata in proportion to the Unrecovered Capital Amounts attributable to the Units and General Partner Units held by the Partners until the Unrecovered Capital Amount attributable to each Unit and General Partner Unit is equal to zero; and

 

  5.2.4.2 thereafter, in accordance with Section 5.2.2.

 

5.3 Distributions on or After Dissolution

Upon a dissolution of the Partnership pursuant to Section 16.1, distributions shall be made in the manner prescribed in Section 16.3.3 hereof.


 

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5.4 Adjustment to Incentive Distributions Payable to General Partner

 

  5.4.1. The General Partner shall maintain a notional account (as adjusted pursuant to this Section 5.4, the “Incentive Distribution Account”) that will track the amount of Incentive Distributions that have been paid or are payable in respect of any period following the Closing Date by any Operating Entity or Holding Entity to any member of the Brookfield Group with respect to the Partnership’s Invested Capital in such Operating Entity or Holding Entity (“Underlying Incentive Distributions”).

 

  5.4.2. Notwithstanding anything to the contrary in this Article 5, any amounts otherwise payable to the General Partner pursuant to clause (ii) of either Section 5.2.2.5 or Section 5.2.2.6 shall, subject to Section 5.4.3, be reduced by (but will not be less than zero) any amount in the Incentive Distribution Account at the time of the distribution (any such amount, once applied to reduce amounts otherwise payable, is referred to as an “Applied Incentive Amount”).

 

  5.4.3. The amount of any reduction pursuant to Section 5.4.2 in the amounts otherwise payable to the General Partner shall be adjusted on an equitable basis as necessary in order to take into account the benefit that Limited Partners would have received had the Underlying Incentive Distributions not been paid or payable.

 

  5.4.4. The Incentive Distribution Account shall be adjusted from time to time to deduct the amount of any Applied Incentive Amount or any clawback or similar amount paid or contributed to an Operating Entity or Holding Entity in respect of an Underlying Incentive Distribution. For greater certainty, it is acknowledged that the Incentive Distribution Account may be negative as a result of the adjustment for such clawback or similar amount. In no event will a negative balance in the Incentive Distribution Account require a payment to the General Partner.

 

  5.4.5. Any amounts in the Incentive Distribution Account shall be taken into account in a similar manner to the foregoing in effecting distributions pursuant to Section 16.3.3.

 

5.5 Distributions Paid in the Form of Redemption Exchange Units

The General Partner may elect, at its sole discretion, to reinvest the distribution amounts paid or payable by the Partnership to the General Partner, as contemplated by Section 5.2.2.3 or by clause (ii) of either Section 5.2.2.5 or Section 5.2.2.6 in exchange for a number of Redemption-Exchange Units issued by the Partnership to the General Partner equal to the amount of cash that would otherwise be paid to the General Partner divided by the Market Value of a BPY Unit on the date that the distribution is declared.

 

5.6 Prohibition on Distributions

The General Partner shall not cause the Partnership to make any distribution of Available Cash pursuant to this Article 5:

 

  5.6.1. unless there is sufficient cash available therefor (including as a result of borrowing);


 

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  5.6.2. which would render the Partnership unable to pay its debts as and when they fall due; or

 

  5.6.3. which, in the opinion of the General Partner, would or might leave the Partnership with insufficient funds to meet any future or contingent obligations or which would contravene the Limited Partnership Act.

ARTICLE 6

REDEMPTION-EXCHANGE RIGHTS

 

6.1 Redemption-Exchange Rights

 

  6.1.1. Subject to Section 6.1.3, the Redemption-Exchange Units entitle a Redemption-Exchange Unitholder to redeem all or any portion of its Redemption-Exchange Units in accordance with this Article 6 at any time after the second anniversary of the Closing Date.

 

  6.1.2. Subject to the provisions of this Agreement, a Redemption-Exchange Unitholder may require the Partnership to redeem all or any portion of the Redemption-Exchange Units (the “Redemption Right”) for an amount of cash equal to the Redemption Amount. Each Redemption-Exchange Unit to be redeemed by the Redemption-Exchange Unitholder must be tendered in accordance with the procedures set out in Section 6.2.

 

  6.1.3. Subject to the provisions of this Agreement, BPY shall have the right (the “Exchange Right”), which shall be exercisable after presentation of the Redemption Notice in accordance with Section 6.2, to elect to acquire all (but not less than all) the Redemption-Exchange Units to be redeemed under the Redemption Notice in consideration for the Applicable Number of BPY Units.

 

6.2 Redemption and Exchange Procedures

 

  6.2.1. In order to exercise its Redemption Right, a Redemption-Exchange Unitholder shall deliver to the Partnership and BPY a notice (the “Redemption Notice”) of its intention to redeem the Redemption-Exchange Units that contains all relevant information (including the Redemption-Exchange Date), and that is presented together with all related certificates and documents that the Partnership or BPY may reasonably require or as may be required by applicable Law to effect the Redemption Right, including the certificates representing the Redemption-Exchange Units being redeemed.

 

  6.2.2. At any time within two Business Days from the date of BPY’s receipt of the Redemption Notice, BPY may elect to exercise the Exchange Right with respect to all (but not less than all) of the Redemption-Exchange Units to be redeemed pursuant to the Redemption Notice and shall give written notice to the Partnership and to the Redemption-Exchange Unitholder of such election (the “Exchange Notice”). The Exchange Notice shall contain all relevant information, and shall be presented together with all related certificates and documents that the Partnership and Redemption-Exchange Unitholder may reasonably require or as may be required by applicable Law to effect the Exchange Right.


 

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  6.2.3. If BPY exercises its Exchange Right, on the Redemption-Exchange Date, BPY will acquire the number of Redemption-Exchange Units specified in the Redemption Notice in exchange for the Applicable Number of BPY Units. BPY shall take all steps necessary under the BPY Partnership Agreement to effect the issuance of the Applicable Number of BPY Units to the Redemption-Exchange Unitholder, including by issuing a certificate in the name of the Redemption-Exchange Unitholder upon request and subject to the terms of the BPY Partnership Agreement. The General Partner and the Partnership shall take all steps necessary under this Agreement to effect the transfer of the Redemption-Exchange Units specified in the Redemption Notice to BPY, including the register of such transfer in the Partnership’s register of Limited Partners and, upon request, by issuing a new certificate in the name of BPY representing the Redemption-Exchange Units transferred to BPY in accordance with this Article 6, without expense to BPY.

 

  6.2.4. If BPY does not exercise its Exchange Right, on the Redemption-Exchange Date, for each Redemption-Exchange Unit that is presented by the Redemption-Exchange Unitholder for redemption, the Partnership will pay to the Redemption-Exchange Unitholder cash in an amount equal to the Redemption Amount. Upon the surrender of certificates representing more Redemption-Exchange Units than the number of Redemption-Exchange Units to be redeemed under the Redemption Notice, the holder thereof will be entitled, upon request, to receive from the Partnership forthwith, without expense to such holder, a new certificate representing the Redemption-Exchange Units not being redeemed at that time.

 

6.3 Redemption-Exchange Date

The date specified in any Redemption Notice (the “Redemption-Exchange Date”) must be a Business Day and must not be less than five Business Days nor more than twenty Business Days after the date upon which the Redemption Notice is received by the Partnership and BPY. If no such Business Day is specified in the Redemption Notice, the Redemption-Exchange Date shall be deemed to be the fifth Business Day after the date on which the Redemption Notice is received by the Partnership and BPY.

 

6.4 Withdrawal of Exercise

At any time prior to the applicable Redemption-Exchange Date, any Redemption-Exchange Unitholder who delivers a Redemption Notice to the Partnership will be entitled to withdraw such Redemption Notice.

 

6.5 Effect of Exercise of the Redemption-Exchange Right

 

  6.5.1. If the Redemption Right has been exercised, at 8:30 a.m. (Bermuda time) on the Redemption-Exchange Date:

 

  6.5.1.1 the closing of the redemption contemplated by the Redemption Notice or, if applicable, the closing of the exchange contemplated by the Exchange Notice will be deemed to have occurred;

 

  6.5.1.2

any Redemption-Exchange Unitholder who exercised the Redemption Right will cease to be a holder of such Redemption-Exchange Units and will not


 

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  be entitled to exercise any of the rights in respect of such Redemption-Exchange Units, other than the right to receive the Redemption Amount or the Applicable Number of BPY Units deliverable hereunder and any right to receive distributions payable in respect of such Redemption-Exchange Units for any Quarter ending prior to the Redemption-Exchange Date;

 

  6.5.1.3 immediately following the closing of the exchange contemplated by Section 6.5.1.1, if applicable, BPY shall exchange the Redemption-Exchange Units for Class A Units on a one for one basis and, in addition to any other Units previously held by BPY, BPY will be considered and deemed for all purposes to be the holder of the number of Class A Units equal to the number of Redemption-Exchange Units exchanged pursuant to the Exchange Right; and

 

  6.5.1.4 other than as specifically contemplated herein, the BPY Units issued to any Redemption-Exchange Unitholder pursuant to Section 6.2.2 will be issued in accordance with the BPY Partnership Agreement.

ARTICLE 7

REDEMPTION AMOUNT AND EXCHANGE RATIO

 

7.1 Redemption Amount

Subject to Section 8.2, the “Redemption Amount” shall be either (i) the product of (a) the Market Value of one BPY Unit multiplied by the number of Redemption-Exchange Units specified in a Redemption Notice to be redeemed and (b) the Exchange Ratio or (ii) such other amount of cash as may be agreed by the relevant Redemption Exchange Unitholder and the Partnership.

 

7.2 Exchange Ratio and Adjustments

The “Exchange Ratio” shall initially be one and shall be adjusted from time to time pursuant to Sections 8.1 or 8.2.

ARTICLE 8

ADJUSTMENTS

 

8.1 Unit Reorganization

In the event that there is any change in the number of Redemption-Exchange Units or BPY Units Outstanding from time to time as a result of a subdivision, consolidation, reclassification, capital reorganization or similar change in the Redemption-Exchange Units or the BPY Units, as the case may be (each such event, a “Unit Reorganization”), the Exchange Ratio shall be adjusted to be the number of BPY Units that would be received in respect of one Redemption-Exchange Unit immediately following the Unit Reorganization as if the Redemption Right and the Exchange Right had been exercised in respect of such Redemption-Exchange Unit immediately before the Unit Reorganization.


 

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8.2 Unit Reclassification

In the event that there is any consolidation, amalgamation, arrangement, merger or other form of combination of BPY with or into any other entity resulting in a reclassification of the Outstanding BPY Units (“Unit Reclassification”), then the Exchange Ratio will be adjusted in a manner approved by the General Partner, acting reasonably, to ensure that:

 

  8.2.1. the Redemption-Exchange Unitholders would receive the amount of cash equal to the Market Value (or, if no Market Value is available, the fair market value) of the securities that such Redemption-Exchange Unitholder would have been entitled to receive pursuant to the Unit Reclassification if, on the effective date of such Unit Reclassification, the holders had been the registered holders of the number of BPY Units that they would have received had such Redemption-Exchange Units been exchanged for the Applicable Number of BPY Units pursuant to the Exchange Right immediately before the effective date of the Unit Reclassification; and

 

  8.2.2. the Redemption-Exchange Unitholders would receive the securities that such Redemption-Exchange Unitholders would have been entitled to receive pursuant to the Unit Reclassification if, on the effective date of the Unit Reclassification, the holders had been the registered holders of the number of BPY Units that they would have received had such Redemption-Exchange Units been exchanged for the Applicable Number of BPY Units pursuant to the Exchange Right immediately before the effective date of the Unit Reclassification.

 

8.3 Adjustments Cumulative

The adjustments to the Exchange Ratio provided for in Section 8.1 and 8.2 shall be cumulative.

ARTICLE 9

MANAGEMENT AND OPERATION OF PARTNERSHIP

 

9.1 Management

 

  9.1.1. The General Partner shall conduct, direct and manage all activities of the Partnership. Except as otherwise expressly provided in this Agreement, all management powers over the activities and affairs of the Partnership shall be exclusively vested in the General Partner, and no Limited Partner shall have any management power over the activities and affairs of the Partnership. In addition to the powers now or hereafter granted a general partner of a limited partnership under applicable Law or that are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to Section 9.2, shall have full power and authority to do all things and on such terms as it determines, in its sole discretion, to be necessary or appropriate to conduct the activities and affairs of the Partnership, to exercise all powers set forth in Section 2.3 and to effectuate the purposes set forth in Section 2.2.

 

  9.1.2.

In exercising its authority under this Agreement, the General Partner may, but shall be under no obligation to, take into account the tax consequences to any Partner


 

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  (including the General Partner) of any action taken (or not taken) by it. The General Partner and the Partnership shall not have any liability to a Limited Partner for monetary damages or otherwise for losses sustained, liabilities incurred or benefits not derived by such Limited Partner in connection with such decisions so long as the General Partner has acted pursuant to its authority under this Agreement.

 

  9.1.3. Notwithstanding any other provision of this Agreement, the Limited Partnership Act, the Exempted Partnerships Act or any applicable Law, each Person who is a Partner on the date hereof and each other Person who may acquire a Partnership Interest hereby: (i) approves, ratifies and confirms the execution, delivery and performance by the parties thereto of the Master Services Agreement, the Relationship Agreement and the other agreements described in or contemplated by the Registration Statement; (ii) agrees that the General Partner (on its own or through any officer of the Partnership) is authorized to execute, deliver and perform the agreements referred to in clause (i) of this sentence and the other agreements, acts, transactions and matters described in or contemplated by the Registration Statement on behalf of the Partnership without any further act, approval, or vote of the Persons who are Partners on the date hereof or the other Persons who may acquire a Partnership Interest; and (iii) agrees that the execution, delivery or performance by the General Partner, the Managers or any Affiliate of any of them, of this Agreement, the Master Services Agreement, the Relationship Agreement or any agreement authorized or permitted under such agreements, shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement (or any other agreements) or of any duty existing at Law, in equity or otherwise.

 

9.2 Restrictions on General Partner’s Authority

Except as provided in Article 16, the General Partner may not cause the Partnership to sell, exchange or otherwise dispose of all or substantially all of the BPY Group’s assets or the Assets, taken as a whole, in a single transaction or a series of related transactions without the prior approval of the holders of a majority of the voting power of Outstanding Units; provided however that this provision shall not preclude or limit the General Partner’s ability, in its sole discretion, to mortgage, pledge, hypothecate or grant a security interest in all or substantially all of the assets of the BPY Group or the Assets (including for the benefit of Persons who are not members of the BPY Group and Affiliates of the General Partner) and shall not apply to any forced sale of any or all of the assets of the BPY Group or the Assets pursuant to the foreclosure of, or other realization upon, any such encumbrance. The General Partner shall not, on behalf of the Partnership, except as permitted under Section 13.6, Section 15.1 and Section 15.2, elect or cause the Partnership to elect a successor general partner of the Partnership.

 

9.3 Reimbursement of Partnership Expenses

 

  9.3.1. Except as provided in this Agreement, the General Partner shall not be compensated for its services as General Partner of the Partnership.


 

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  9.3.2. The General Partner shall be reimbursed on a monthly basis, or such other basis as the General Partner may determine in its sole discretion, for (i) all direct and indirect expenses it incurs or payments it makes on behalf of the Partnership (including amounts paid to any Person to perform services for the Partnership or for the General Partner in the discharge of its duties to the Partnership), and (ii) all other necessary or appropriate expenses allocable to the Partnership or otherwise reasonably incurred by the General Partner in connection with conducting the Partnership’s affairs (including expenses allocated to the General Partner by its Affiliates). The General Partner shall determine the fees and expenses that are allocable to the Partnership in any reasonable manner determined by the General Partner in its sole discretion. Reimbursements pursuant to this Section 9.3 shall be in addition to any reimbursement to the General Partner as a result of indemnification pursuant to Section 9.6.

 

9.4 Outside Activities

 

  9.4.1. The General Partner shall, for so long as it is the general partner of the Partnership, maintain as its sole activity the activity of acting as the general partner of the Partnership and undertaking activities that are ancillary or related thereto. The General Partner is not permitted to engage in any business or activity or incur or guarantee any debts or liabilities except in connection with or incidental to its performance as general partner as described above or incurring, guaranteeing, acquiring, owning or disposing of debt or equity securities of any other member of the BPY Group.

 

  9.4.2. Each Indemnified Party (other than the General Partner) shall have the right to engage in businesses of every type and description and other activities for profit, and to engage in and possess interests in business ventures of any and every type or description, irrespective of whether (i) such activities are similar to those activities of the General Partner, the Partnership or any other member of the BPY Group, or (ii) such businesses and activities directly compete with, or disfavor or exclude, the Partnership, the General Partner or any other member of the BPY Group. Such business interests, activities and engagements shall be deemed not to constitute a breach of this Agreement or any duties stated or implied by Law or equity, including fiduciary duties, owed to any of the General Partner, the Partnership (or any of their respective investors) or any other member of the BPY Group (or any of their respective investors) and shall be deemed not to be a breach of the General Partner’s fiduciary duties or any other obligation of any type whatsoever of the General Partner. None of the General Partner, the Partnership or any other member of the BPY Group or any other Person shall have any rights by virtue of this Agreement or the partnership relationship established hereby or otherwise in any business ventures of an Indemnified Party.

 

  9.4.3. The General Partner and the Indemnified Parties shall have no obligation hereunder or as a result of any duties stated or implied by Law or equity, including fiduciary duties, to present business or investment opportunities to the Partnership, the Limited Partners or any member of the BPY Group.

 

  9.4.4.

The Affiliates of the General Partner shall have no obligation to (i) permit the Partnership or any other member of the BPY Group to use any facilities or assets of the


 

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  Affiliates of the General Partner (other than the Assets), except as may be provided in contracts, agreements or of the arrangements entered into from time to time specifically dealing with such use, or (ii) to enter into such contracts, agreements or other arrangements.

 

  9.4.5. Notwithstanding anything to the contrary in this Section 9.4, nothing in this Section 9.4 shall affect any obligation of an Indemnified Party to present a business or investment opportunity to the Partnership, the General Partner or any other member of the BPY Group pursuant to a separate written agreement between such Indemnified Party and the Partnership, the General Partner or any other member of the BPY Group.

 

9.5 Disclosure of Interests

 

  9.5.1. The General Partner, its Affiliates and their respective partners, members, shareholders, directors, officers, employees and shareholders (each hereinafter referred to as an “Interested Party”) may become Limited Partners or beneficially interested in Limited Partners in the Partnership and may hold, dispose of or otherwise deal with Units with the same rights they would have if the General Partner were not party to this Agreement.

 

  9.5.2. An Interested Party shall not be liable to account either to other Interested Parties or to the Partnership, the Partners or any other Persons for any profits or benefits made or derived by or in connection with any transaction contemplated by Section 9.4.2.

 

  9.5.3. An Interested Party may sell investments to, purchase Assets from, vest Assets in and contract or enter into any contract, arrangement or transaction with the Partnership, any other member of the BPY Group or any other Person whose securities are held directly or indirectly by or on behalf of the Partnership or another member of the BPY Group, including any contract, arrangement or transaction relating to any financial, banking, investment banking, insurance, secretarial or other services, and may be interested in any such contract, transaction or arrangement and shall not be liable to account either to the Partnership, any other member of the BPY Group or any other Person in respect of any such contract, transaction, arrangement or interest, or any benefits or profits made or derived therefrom, by virtue only of the relationship between the parties concerned, provided that nothing herein contained shall permit an Interested Party or Limited Partner to enter into any such contract, transaction or arrangement as aforesaid, unless the terms thereof are permitted by or approved in accordance with the provisions of the Governing Instruments of the General Partner.

 

  9.5.4. Without limiting the generality of the foregoing, an Interested Party or Limited Partner may enter into any contract, transaction or arrangement with any member of the BPY Group to provide advice or services, including investment management, monitoring or oversight services, services with respect to corporate finance matters and valuations, services relating to the arrangement of new financing, mergers and acquisitions, services relating to the provision of directors or other manager of a Person and other investment banking services, including introduction and transaction organization services.


 

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9.6 Indemnification

 

  9.6.1. The General Partner and any of its Affiliates, and their respective officers, directors, agents, shareholders, partners, members and employees, any Person who serves on the board of directors or other Governing Body of any member of the BPY Group, and any Person that the General Partner designates as an indemnified person (each, an “Indemnified Party”) shall, to the fullest extent permitted by Law, be indemnified on an after Tax basis out of the Assets (and the General Partner shall be entitled to grant indemnities on behalf of the Partnership, and to make payments out of the Assets, to any Indemnified Party in each case in accordance with this Section 9.6) against any and all losses, claims, damages, liabilities, costs and expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements and other amounts (collectively, “Liabilities”) arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which any Indemnified Party is or may be involved, or is threatened to be involved, as a party or otherwise, in connection with the investments and activities of the Partnership or by reason of such Person being the General Partner, or an Affiliate of the General Partner, or an officer, director, agent, shareholder, partner, member or employee of the General Partner or an Affiliate of the General Partner, or a Person who serves on the board of directors or other Governing Body of any member of the BPY Group, provided that no such Indemnified Party shall be so indemnified, with respect to any matter for which indemnification is sought, to the extent that a court of competent jurisdiction determines pursuant to a final and non-appealable judgment that, in respect of such matter, the Indemnified Party acted in bad faith or engaged in fraud or willful misconduct, or in the case of a criminal matter, action that the Indemnified Party knew to be unlawful. An Indemnified Party shall not be denied indemnification in whole or in part under this Section 9.6 because the Indemnified Party had an interest in the transaction with respect to which indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.

 

  9.6.2. To the fullest extent permitted by Law, amounts incurred in respect of Liabilities incurred by an Indemnified Party in defending any claim, demand, action, suit or proceeding, whether civil, criminal, administrative or investigative, shall from time to time be advanced by the Partnership prior to a determination that the Indemnified Party is not entitled to be indemnified, upon receipt by the Partnership of an undertaking by or on behalf of the Indemnified Party to repay such amount if it shall be determined that the Indemnified Party is not entitled to be indemnified as provided by the proviso of Section 9.6.1.

 

  9.6.3. The indemnification provided by this Section 9.6 shall be in addition to any other rights to which an Indemnified Party may be entitled under any agreement (including the Master Services Agreement), as a matter of the Law or otherwise, both as to actions in the Indemnified Party’s capacity as an Indemnified Party and as to actions in any other capacity, and shall continue as to any Indemnified Party who has ceased to serve in the capacity in which such Indemnified Party became entitled to indemnification under this Section 9.6, and shall enure to the benefit of such Person’s heirs, successors, assigns and administrators. The indemnification provisions of this Section 9.6 are for the benefit of each Indemnified Party, its heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Person.


 

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  9.6.4. No amendment, modification or repeal of this provision or any other provision of this Agreement shall in any manner terminate, reduce or impair the right of any past, present or future Indemnified Party to be indemnified by the Partnership or the obligations of the Partnership to indemnify any such Indemnified Party under and in accordance with the provisions of this Agreement as in effect immediately prior to such amendment, modification or repeal with respect to any claim, demand, action, suit or proceeding, whether civil, criminal, administrative or investigative, arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claim, demand, action, suit or proceeding may arise or be asserted.

 

  9.6.5. Notwithstanding anything to the contrary in this Agreement, (i) no Indemnified Party shall be liable to the Partnership, any Partner or any other Person who has acquired an interest in a Partnership Interest for any Liabilities sustained or incurred by such Person as a result of any act or omission of the Indemnified Party, except to the extent there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that such Liabilities resulted from the Indemnified Party’s bad faith, fraud, wilful misconduct, or in the case of a criminal matter, actions with knowledge that the conduct was unlawful, and (ii) any matter that is approved by a majority of the members of the Independent Committee shall not constitute a breach of this Agreement or any duties to the Partnership or to the Partners stated or implied by Law or equity, including fiduciary duties.

 

  9.6.6. To the extent that an Indemnified Party has any duties to the Partnership or to the Partners, including fiduciary duties, such Indemnified Party acting in connection with the Partnership’s activities or affairs shall not be liable to the Partnership or to any Partner for its good faith reliance on the provisions of this Agreement.

 

  9.6.7. Any amendment, modification or repeal of this Section 9.6 (or that otherwise affects this Section 9.6) that limits its scope shall be prospective only and shall not in any way affect the limitations on the liability of the Indemnified Parties under this Section 9.6 as in effect immediately prior to such amendment, modification or repeal with respect to any claim, demand, action, suit or proceeding, whether civil, criminal, administrative or investigative, arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claim, demand, action, suit or proceeding may arise or be asserted, provided that the Indemnified Party became an Indemnified Party hereunder prior to such amendment, modification or repeal.

 

  9.6.8. The provisions of this Section 9.6 shall survive the dissolution of the Partnership.

 

9.7 Resolution of Conflicts of Interest

 

  9.7.1. Notwithstanding anything to the contrary in this Agreement, conflicts of interest and potential conflicts of interest that are approved by a majority of the members of the Independent Committee from time to time are hereby approved by all Partners.

 

  9.7.2.

The parties acknowledge and agree that the Independent Committee may grant approvals for any matters that may give rise to a conflict of interest or potential conflict of interest pursuant to the guidelines, policies or procedures adopted by the Independent


 

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  Committee at the date hereof and as amended from time to time with the approval of a majority of the members of the Independent Committee (the “Conflicts Guidelines”), and if and to the extent that such matters are permitted by the Conflicts Guidelines, no further special approval will be required in connection with such matter permitted thereby.

 

9.8 Other Matters Concerning the General Partner

 

  9.8.1. The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties.

 

  9.8.2. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion (including an Opinion of Counsel) of such Persons as to matters that such General Partner reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.

 

  9.8.3. The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers of the General Partner or any duly appointed attorney or attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform each and every act and duty that is permitted or required to be done by the General Partner hereunder.

 

  9.8.4. To the fullest extent permitted by applicable Law, any standard of care applicable to the General Partner shall be modified, waived or limited as required to permit the General Partner to act in accordance with the terms of this Agreement or any other agreement contemplated hereby and to make any decision pursuant to the authority prescribed in this Agreement or any other agreement contemplated hereby.

 

9.9 Title to Partnership Assets

Title to Assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Assets or any portion thereof. Title to any or all of the Assets may be held in the name of the Partnership, the General Partner, the general partner of the General Partner, one or more of its Affiliates or one or more nominees, as the General Partner may determine. The General Partner hereby declares and warrants that any Assets for which record title is held in the name of the General Partner, its general partner or one or more of its Affiliates or one or more nominees shall be held by the General Partner, its general partner or such Affiliate or nominee for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the General Partner shall use its reasonable efforts to cause record title to such Assets (other than those assets in respect of which the General Partner determines that the expense and difficulty of conveyancing makes transfer of record title to the Partnership impracticable) to be transferred


 

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into the name of the Partnership as soon as reasonably practicable; provided that, prior to the withdrawal or removal of the General Partner or as soon thereafter as practicable, the General Partner shall use reasonable efforts to effect the transfer of record title to the Partnership and prior to any such transfer, will provide for the use of such Assets in a manner satisfactory to the Partnership. All Assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which record title to such Assets is held.

 

9.10 Purchase or Sale of Units

The General Partner may cause the Partnership to purchase or otherwise acquire Units. As long as Units are held by the Partnership, such Units shall not be considered Outstanding for any purpose, except as otherwise provided herein. The General Partner or any Affiliate of the General Partner may also purchase or otherwise acquire and sell or otherwise dispose of Units for its own account, subject to the provisions of Article 13 and Article 14.

 

9.11 Reliance by Third Parties

Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority to encumber, sell or otherwise use in any manner any and all Assets and to enter into any contracts on behalf of the Partnership, including contracts related to the incurrence or guarantee of indebtedness, and such Person shall be entitled to deal with the General Partner as if it were the Partnership’s sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies that may be available against such Person to contest, negate or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership.

 

9.12 Services

The General Partner may cause the Partnership to appoint any Person (including any Affiliate of the General Partner) to manage the affairs of the Partnership, in accordance with the Conflicts Guidelines. Any services rendered pursuant to such appointment shall be on terms that are fair and reasonable to the Partnership, provided that the requirements of this Section 9.12 shall be deemed satisfied as to (i) any services provided under the Master Services Agreement and any agreement contemplated thereby, (ii) any transaction approved by a majority of the members of the Independent Committee, or (iii) any transaction entered into in accordance with


 

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the Conflicts Guidelines. The provisions of Section 9.3 shall apply to the rendering of services described in this Section 9.12.

ARTICLE 10

RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS

 

10.1 Limitation of Liability

The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement or the Limited Partnership Act or the Exempted Partnerships Act.

If it were determined that a Limited Partner was participating in the control or management of the Partnership or conducting the affairs of, signing or executing documents for or otherwise binding the Partnership (or purporting to do any of the foregoing) within the meaning of the Limited Partnership Act or the Exempted Partnerships Act, such legislation provides that such Limited Partner would be liable as if it were a general partner of the Partnership in respect of all debts of the Partnership incurred while that Limited Partner was so acting or purporting to act.

 

10.2 Management of Partnership Affairs

No Limited Partner (other than the General Partner or any officer, director, employee, partner, agent or trustee of the General Partner, in its capacity as such, if such Person shall also be a Limited Partner) shall take part in the management or control of the activities and affairs of the Partnership or have any right or authority to act for or bind the Partnership or to take part or in any way to interfere in the conduct or management of the Partnership or to vote on matters relating to the Partnership, to have access to the books and records of the Partnership other than as required by applicable Law or as set forth in this Agreement. The transaction of any such activities or affairs by the General Partner or any officer, director, employee, partner, agent or trustee of the General Partner, in its capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners under this Agreement.

 

10.3 Outside Activities

Subject to the provisions of Section 9.4, which shall continue to be applicable to the Persons referred to therein, regardless of whether such Persons shall also be Limited Partners, any Limited Partner shall be entitled to and may have interests and engage in activities in addition to activities relating to the Partnership, including interests and activities in direct competition with the Partnership or BPY. Neither the Partnership nor any of the other Partners shall have any rights by virtue of this Agreement in any ventures of any Limited Partner.


 

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ARTICLE 11

BOOKS, RECORDS, ACCOUNTING AND REPORTS

 

11.1 Books, Records and Accounting

The General Partner shall keep or cause to be kept at the principal office of the Partnership appropriate books and records with respect to the Partnership’s activities and affairs. Any books and records maintained by or on behalf of the Partnership in the regular course of its activities and undertakings, including the record of the Record Holders, books of account and records of Partnership proceedings, may be kept on information storage devices, provided, that the books and records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial reporting purposes, on an accrual basis in accordance with IFRS-IASB. In accordance with Bermuda Law, the records of account and registers will be kept available for inspection by any Limited Partner or its duly authorized representatives during regular business hours at the registered office of the Partnership. Limited Partners shall not have access to any information of the Partnership contained in its books and records which the General Partner is required by legal or contractual restriction to keep confidential or which, in the opinion of the General Partner, acting reasonably, should be kept confidential in the interests of the Partnership or may be kept confidential as proceed in this Agreement, and each Limited Partner hereby waives any right to greater access to the books and records of the Partnership than is permitted herein, to the greatest extent permitted by Law.

 

11.2 Fiscal Year

Subject to Section 17.1.9, the fiscal year of the Partnership shall be the calendar year; provided, however, if the Code requires a taxable year of the Partnership other than a calendar year then, for U.S. tax purposes, the fiscal year of the Partnership shall be such taxable year.

 

11.3 Delivery of Financial Statements

The General Partner shall deliver to BPY (i) the annual financial statements of the Partnership, and (ii) the accounts and financial statements of any Holding Entity or any other holding entity established by the Partnership.

 

11.4 Reports

 

  11.4.1. If required by applicable Law, including any rule of any stock exchange on which the BPY Units or other partnership interests of BPY are or will be listed for trading, or if required by a Partner, the General Partner shall prepare in accordance with IFRS-IASB and make publicly available as of a date selected by the General Partner, in its sole discretion, financial statements of the Partnership for such fiscal year of the Partnership audited by a firm of independent public accountants of international standing selected by the General Partner as well as a statement of the accounting policies used in their preparation, such information as may be required by applicable Laws and such information as the General Partner deems appropriate.


 

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  11.4.2. If required by applicable Law, including any rule of any stock exchange on which the BPY Units or other partnership interests of BPY are or will be listed for trading, or if required by a Partner, the General Partner shall prepare in accordance with IFRS-IASB and make publicly available quarterly financial statements of the Partnership, which may be unaudited as of a date selected by the General Partner.

ARTICLE 12

TAX MATTERS

 

12.1 Tax Information

 

  12.1.1. Following each taxable year of the Partnership, the General Partner shall use commercially reasonable efforts to supply each Person that was a Partner at any time during such taxable year with a Schedule K-1 (or equivalent) within ninety (90) days after the close of such taxable year. The General Partner shall also, where reasonably possible and applicable, prepare and send such Persons such other information required by any non-U.S. Limited Partner for U.S. federal income tax reporting purposes.

 

  12.1.2. Within ninety (90) days following the end of each fiscal year of the Partnership and within the ninety (90) days after the date of the dissolution of the Partnership, the General Partner shall use commercially reasonable efforts to supply each Person that was a Partner at any time during such fiscal year and who is required to file an income tax return under the Income Tax Act (or, in the case of a Partner that is a partnership, that has one or more partners who is required to file an income tax return under the Income Tax Act) all necessary income tax reporting information with respect to such Partner’s income from the Partnership for such fiscal year.

 

12.2 Preparation of Tax Returns

The General Partner shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items required of the Partnership for U.S. federal and state income tax purposes and, where applicable, Canadian Tax Purposes. The classification, realization and recognition of income, gain, losses and deductions and other items shall be computed (i) for U.S. federal income tax purposes, on the accrual method of accounting, and (ii) for Canadian Tax Purposes, in accordance with the Income Tax Act.

 

12.3 Tax Elections

The General Partner shall determine whether to make, to refrain from making or to revoke the election provided for in Section 754 of the Code, and any and all other elections permitted by the Code, the Income Tax Act or any other national, federal, provincial, state or local tax Law, in its sole discretion.

 

12.4 Tax Controversies

Subject to the provisions hereof, the General Partner is designated the Tax Matters Partner (as defined in Section 6231 of the Code) and the designated partner for the


 

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purposes of the Income Tax Act including subsections 152(1.4) to 152(1.8) thereof, and is authorized and required to represent the Partnership (at the Partnership’s expense) in connection with all examinations of the Partnership’s affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Partnership funds for professional services and costs associated therewith. Each Partner agrees to cooperate with the General Partner and to do or refrain from doing any or all things reasonably required by the General Partner to conduct such proceedings.

 

12.5 Withholding

Notwithstanding any other provision of this Agreement, the General Partner is authorized to take any action that it determines in its sole discretion to be necessary or appropriate to cause the Partnership to comply with any withholding requirements established under the Code, the Income Tax Act or any other national, federal, provincial, state or local Law including pursuant to Chapters 3 and 4 of Subtitle A of the Code. To the extent that the Partnership is required to withhold and pay over to any taxing authority any amount resulting from the allocation or distribution of income to any Partner, the amount withheld shall be treated as a distribution of cash pursuant to Section 5.2 or Section 16.3 (as applicable) in the amount of such withholding from such Partner. To the extent an amount otherwise payable to a member of the BPY Group is required to be withheld and paid over to any taxing authority, and such withheld amount is attributable to a Partner’s ownership of Units, then such withheld amount shall be treated as a distribution of cash to such Partner pursuant to Section 5.2 or Section 16.3 (as applicable) in the amount of such withholding.

 

12.6 Election to be Treated as a Corporation

Notwithstanding anything to the contrary contained herein, if the General Partner determines in its sole discretion that it is no longer in the best interests of the Partnership to continue as a partnership for U.S. federal income tax purposes, the General Partner may elect to treat the Partnership as an association or as a publicly traded partnership taxable as a corporation for U.S. federal (and applicable state) income tax purposes.

 

12.7 U.S. Tax Classification of the Partnership

Prior to the General Partner making an election described in Section 12.6 hereof, it is intended that the Partnership be classified as a partnership for U.S. federal income tax purposes. In furtherance of the foregoing, and prior to the General Partner making an election described in Section 12.6, to ensure that interests in the Partnership are not traded on an established securities market within the meaning of Treasury Regulations Section 1.7704-1(b) or readily tradable on a secondary market or the substantial equivalent thereof within the meaning of Treasury Regulations Section 1.7704-1(c), notwithstanding anything to the contrary contained in this Agreement, (i) the Partnership shall not participate in the establishment of a market or the inclusion of its interests thereon, and (ii) the Partnership shall not recognize any transfer made on any market by (x) redeeming the transferor Partner (in the case of a redemption or repurchase by the Partnership) or (y) admitting the transferee as a Partner or otherwise recognizing any rights of the transferee, such as a right of the transferee to receive Partnership distributions (directly or indirectly) or to acquire an interest in the capital or profits of the Partnership.


 

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ARTICLE 13

CERTIFICATES; RECORD HOLDERS; TRANSFERS OF PARTNERSHIP INTERESTS

 

13.1 Certificates

 

  13.1.1. Upon the Partnership’s issuance of Partnership Interests of all or any classes to any Person and the request of such Person, the Partnership shall issue one or more Certificates in the name of such Person evidencing the number of such Partnership Interests being so issued. Certificates shall be executed on behalf of the Partnership by the General Partner. No Certificate evidencing the issuance of Partnership Interests shall be valid for any purpose until it has been countersigned by the General Partner.

 

  13.1.2. Certificates may bear any legends required by applicable Law or otherwise determined to be appropriate by the General Partner.

 

13.2 Mutilated, Destroyed, Lost or Stolen Certificates

 

  13.2.1. If any mutilated Certificate is surrendered to the General Partner, the General Partner on behalf of the Partnership shall execute, countersign and deliver in exchange therefor, a new Certificate evidencing the same number of Partnership Interests as the Certificate so surrendered.

 

  13.2.2. The General Partner on behalf of the Partnership shall execute, countersign and deliver a new Certificate in place of any Certificate previously issued if the Record Holder of the Certificate:

 

  13.2.2.1 makes proof by affidavit, in form and substance satisfactory to the General Partner, that a previously issued Certificate has been lost, destroyed or stolen;

 

  13.2.2.2 requests the issuance of a new Certificate before the Partnership has notice that the Certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim;

 

  13.2.2.3 if requested by the General Partner, delivers to the Partnership a bond, in form and substance satisfactory to the General Partner, with surety or sureties and with fixed or open penalty as the General Partner may reasonably direct, in its sole discretion, to indemnify the Partnership and the General Partner against any claim that may be made on account of the alleged loss, destruction or theft of the Certificate; and

 

  13.2.2.4 satisfies any other reasonable requirements imposed by the General Partner.

 

  13.2.3.

If a Record Holder fails to notify the Partnership within a reasonable time after the holder has notice of the loss, destruction or theft of a Certificate, and a transfer of the Partnership Interests represented by the Certificate is registered before the Partnership or the


 

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  General Partner receives such notification, the Record Holder shall be precluded from making any claim against the Partnership or the General Partner for such transfer or for a new Certificate.

 

  13.2.4. As a condition to the issuance of any new Certificate under this Section 13.2, the General Partner may require the payment of a sum sufficient to cover any Tax or other governmental charge that may be imposed in relation thereto and any other expenses reasonably connected therewith.

 

13.3 Record Holder

In accordance with Section 13.5.2, the Partnership shall be entitled to recognize the Record Holder as the Limited Partner with respect to any Units and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Units on the part of any other Person, whether or not the Partnership shall have actual or other notice thereof, except as otherwise provided by applicable Law. Without limiting the foregoing, when a Person (such as a broker, dealer, bank, trust company or clearing corporation or an agent of any of the foregoing) is acting as nominee, agent or in some other representative capacity for another Person in acquiring and/or holding Units, as between the Partnership on the one hand and such other Person on the other hand, such representative Person shall be the Record Holder of such Partnership Interest. A Person may become a Record Holder without the consent or approval of any Partner.

 

13.4 Transfer Generally

 

  13.4.1. The term “transfer”, when used in this Agreement with respect to a Partnership Interest, shall be deemed to refer to a transaction (i) by which the General Partner assigns its General Partner Units to another Person or (ii) by which the holder of a Unit assigns such Unit to another Person, and includes a sale, assignment (including the foreclosure of a pledge, encumbrance, hypothecation or mortgage), gift, or exchange; save that the term transfer shall not be deemed to include the grant of a security interest, mortgage, charge or pledge of any kind over a Partnership Interest.

 

  13.4.2. No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 13. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article 13 shall be null and void.

 

  13.4.3. Nothing contained in this Agreement shall be construed to prevent the parent entity of the General Partner from disposing of all of the issued and outstanding capital stock of the General Partner.

 

13.5 Registration and Transfer of Units

 

  13.5.1.

The General Partner shall cause to be kept at its registered office in Bermuda on behalf of the Partnership a register in which, subject to such reasonable regulations as it may prescribe and subject to the provisions of Section 13.5.2, the General Partner will provide for the registration and transfer of Units. The Partnership shall not recognize transfers of


 

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  Certificates representing Units unless such transfers are effected in the manner described in this Section 13.5. Upon surrender for registration of a transfer of any Units evidenced by a Certificate, and subject to the provisions of Section 13.5.2, the General Partner on behalf of the Partnership shall execute, countersign and deliver, in the name of the holder or the designated transferee or transferees, as required pursuant to the holder’s instructions, one or more new Certificates evidencing the same aggregate number of Units as was evidenced by the Certificate so surrendered.

 

  13.5.2. Except as otherwise provided in Article 14, the Partnership shall not recognize any transfer of Units until the Certificates evidencing such Units are surrendered for registration of the transfer.

 

  13.5.3. Subject to (i) the foregoing provisions of this Section 13.5; (ii) Section 13.3; (iii) Section 13.7; (iv) with respect to any class or series of Units, the provisions of any statement of designations or amendment to this Agreement establishing such class or series; (v) any contractual provisions binding on any Limited Partner; (vi) Section 12.7; and (vii) provisions of applicable Law including the Limited Partnership Act and the Exempted Partnerships Act, Units shall be freely transferable.

 

  13.5.4. The General Partner may, in its sole discretion and without giving a reason, refuse to register a transfer of any Unit in Certificated form which is not fully paid or on which the Partnership has a lien.

 

13.6 Transfer of General Partner Units

 

  13.6.1. The General Partner may transfer its General Partner Units (including upon its merger, consolidation or other combination into any other Person or the transfer by it of all or substantially all of its assets to another Person) if, but only if, (i) the transferee agrees to assume and be bound by the rights and duties of the General Partner, (ii) the transferee agrees to assume and be bound by the provisions of this Agreement and (iii) the Partnership receives an Opinion of Counsel that such transfer (or merger, consolidation or combination) would not result in the loss of limited liability of any Limited Partner or of any limited partner of BPY, cause the Partnership or BPY to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for tax purposes (to the extent not previously treated as such) or cause the Partnership to become an “investment company” under the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions); provided, however, that no such opinion shall be required in connection with an election described in Section 12.6 made by the General Partner or in connection with a transfer following such an election.

 

  13.6.2. In the case of a transfer pursuant to this Section 13.6, the transferee or successor (as the case may be) shall be admitted to the Partnership as the General Partner immediately after the transfer of the General Partner Units, and the Partnership shall continue without dissolution.


 

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  13.6.3. The Parties agree that no transfer under this Section 13.6 will occur without the notification to and approval of the relevant Bermuda regulatory authorities in accordance with Bermuda law.

 

13.7 Restrictions on Transfers

Notwithstanding the other provisions of this Article 13, no transfer of any Partnership Interest shall be made if such transfer would (i) violate the then applicable securities Laws or rules and regulations of any securities commission of any jurisdiction or any other Governmental Authorities with jurisdiction over such transfer, (ii) result in the taxation of the Partnership as an association taxable as a corporation or otherwise subject the Partnership to entity-level taxation for tax purposes (in either case, for U.S. tax purposes, to the extent not otherwise elected by the General Partner pursuant to Section 12.6 to be treated as such) or (iii) affect the Partnership’s existence or qualification as an exempted limited partnership under the Limited Partnership Act or Exempted Partnerships Act.

ARTICLE 14

ADMISSION OF ADDITIONAL OR SUCCESSOR PARTNERS

 

14.1 Admission of Additional Limited Partners

 

  14.1.1. By acceptance of the transfer of any Units or the issuance of any Units in accordance with this Agreement, each Person to whom a Unit is transferred or issued (including any nominee holder or an agent or representative acquiring such Units for the account of another Person) shall:

 

  14.1.1.1 be admitted to the Partnership as a Limited Partner with respect to the Units so transferred or issued to such Person when any such transfer or issuance is reflected in the books and records of the Partnership, with or without execution of this Agreement;

 

  14.1.1.2 become bound by, and shall be deemed to have agreed to be bound by, the terms of this Agreement;

 

  14.1.1.3 shall become the Record Holder of the Units so transferred or issued;

 

  14.1.1.4 represents that the transferee or other recipient has the capacity, power and authority to enter into this Agreement;

 

  14.1.1.5 be deemed to grant the powers of attorney set forth in this Agreement;

 

  14.1.1.6 be deemed to make the consents and waivers contained in the Agreement, including with respect to the approval of the transactions and agreements entered into in connection with the formation of the Partnership, the Reorganization and the Spin Off; and

 

  14.1.1.7

be deemed to ratify and confirm all contracts, agreements, assignments and instruments entered into on behalf of the Partnership, in


 

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  accordance with this Agreement, including the granting of any charge or security interest over the Assets and the assumption of any indebtedness in connection with the affairs of the Partnership.

 

  14.1.2. The transfer of any Unit and/or the admission of any new Limited Partner to the Partnership will not constitute any amendment to this Agreement. A Person may become a Record Holder without the consent or approval of any of the Partners. A Person may not become a Limited Partner without acquiring a Unit.

 

  14.1.3. Any transfer of a Unit shall not entitle the transferee to share in the profits and losses, to receive distributions, to receive allocations of income, gain, loss, deduction or credit or any similar item or to any other rights to which the transferor was entitled until the transferee becomes a Limited Partner and a party to this Agreement pursuant to this Article 14.

 

14.2 Admission of Successor General Partner

A successor general partner approved pursuant to Sections 15.1 or 15.2 or the transferee of or successor to the General Partner’s General Partner Units pursuant to Section 13.6 shall be admitted to the Partnership as the general partner, subject to the requirements of the Limited Partnership Act and the Exempted Partnerships Act, effective immediately prior to the withdrawal or removal of the General Partner pursuant to Sections 15.1 or 15.2 or immediately after the transfer of the General Partner’s General Partner Units pursuant to Section 13.6. Any such successor shall conduct the activities and affairs of the Partnership without the Partnership being dissolved. In each case, the admission shall be subject to the successor general partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission. Any such successor is hereby authorized to and shall, subject to the terms hereof, conduct the activities and affairs of the Partnership without the Partnership being dissolved and shall be deemed to ratify and confirm all contracts, agreements, assignments and instruments entered into on behalf of the Partnership, in accordance with this Agreement, including the granting of any charge or security interest over the Assets and the assumption of any indebtedness in connection with the affairs of the Partnership.

ARTICLE 15

WITHDRAWAL OR REMOVAL OF PARTNERS

 

15.1 Withdrawal of the General Partner

 

  15.1.1. The General Partner shall be deemed to have withdrawn from the Partnership upon the occurrence of any one of the following events (each such event herein referred to as an “Event of Withdrawal”):

 

  15.1.1.1 the General Partner voluntarily withdraws from the Partnership by giving 90 days’ advance written notice to the other Partners;

 

  15.1.1.2 the General Partner transfers all of its rights as General Partner pursuant to Section 13.6;


 

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  15.1.1.3 the General Partner is removed pursuant to Section 15.2;

 

  15.1.1.4 the General Partner (i) makes a general assignment for the benefit of creditors; (ii) files a voluntary bankruptcy petition; (iii) files a petition or answer seeking for itself a reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any Law; (iv) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the General Partner in a proceeding of the type described in Sections (i)-(iii) of this Section 15.1.1.4; or (v) seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator of the General Partner or of all or any substantial part of its properties;

 

  15.1.1.5 a final and non-appealable judgment is entered by a court with appropriate jurisdiction ruling that the General Partner is bankrupt or insolvent, or a final and non-appealable order for relief is entered by a court with appropriate jurisdiction against the General Partner, in each case under any federal or state bankruptcy or insolvency Laws as now or hereafter in effect; or

 

  15.1.1.6 a certificate of dissolution or its equivalent is filed for the General Partner, or 90 days expire after the date of notice to the General Partner of revocation of its charter without a reinstatement of its charter, under the Laws of its jurisdiction of incorporation or organization.

 

  15.1.2. If an Event of Withdrawal specified in Sections 15.1.1.4, 15.1.1.5 or 15.1.1.6 occurs or is expected, the withdrawing General Partner shall give notice as soon as reasonably practicable to the Limited Partners. The Partners hereby agree that only the Events of Withdrawal described in this Section 15.1 shall result in the withdrawal of the General Partner from the Partnership.

 

  15.1.3. Withdrawal of the General Partner from the Partnership upon the occurrence of an Event of Withdrawal shall not constitute a breach of this Agreement under the following circumstances: (i) the General Partner voluntarily withdraws by giving at least 90 days’ advance notice to the Limited Partners, such withdrawal to take effect on the date specified in such notice; or (ii) at any time that the General Partner ceases to be a general partner pursuant to Section 15.1.1.2 or is removed pursuant to Section 15.2.

 

  15.1.4. If the General Partner gives a notice of withdrawal pursuant to Sections 15.1.1.1 or 15.1.2, holders of at least a majority of the voting power of the Class A Units may, prior to the effective date of such withdrawal, elect a successor general partner. If, prior to the effective date of the General Partner’s withdrawal, a successor is not selected by the Limited Partners as provided herein or the Partnership does not receive a Withdrawal Opinion of Counsel in accordance with Section 13.6.1, the Partnership shall be dissolved in accordance with Article 16. Any such successor general partner shall be subject to the provisions of Section 14.2.


 

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15.2 Removal of the General Partner

The General Partner may be removed if (i) such removal is approved by holders of at least 66 2/3% of the voting power of the Outstanding Class A Units; and (ii) the Partnership receives a Withdrawal Opinion of Counsel. Any such action by such holders of Class A Units for removal of the General Partner must also provide for the election and succession of a new general partner. Such removal shall be effective immediately following the admission of the successor general partner pursuant to Article 14. The removal of the General Partner is subject to the approval of the successor general partner by holders of a majority of the voting power of the Outstanding Class A Units. Any such successor general partner shall be subject to the provisions of Section 14.2.

 

15.3 Interest of Departing General Partner and Successor General Partner

 

  15.3.1. In the event of (i) withdrawal of the General Partner under circumstances described in Section 15.1.3 or (ii) removal of the General Partner by the Limited Partners under circumstances where Cause does not exist, the Departing General Partner shall, at its option exercisable prior to the effective date of the departure of such Departing General Partner, promptly receive from its successor in exchange for its General Partner Units an amount in cash equal to the fair market value of the General Partner Units, such amount to be determined and payable as of the effective date of its departure. If the General Partner is removed by the Limited Partners under circumstances where Cause exists or if the General Partner withdraws under circumstances other than as described in Section 15.1.3, its successor shall have the option described in the immediately preceding sentence, and the Departing General Partner shall not have such option.

 

  15.3.2. For purposes of this Section 15.3.2, the fair market value of the Departing General Partner’s General Partner Units shall be determined by agreement between the Departing General Partner and its successor or, failing agreement within 30 days after the effective date of such Departing General Partner’s departure, by an independent investment banking firm or other independent expert selected by the Departing General Partner and its successor, which, in turn, may rely on other experts and the determination of which shall be conclusive as to such matter. If such parties cannot agree upon one independent investment banking firm or other independent expert within 45 days after the effective date of such departure, then the Departing General Partner shall designate an independent investment banking firm or other independent expert, the Departing General Partner’s successor shall designate an independent investment banking firm or other independent expert, and such firms or experts shall mutually select a third independent investment banking firm or independent expert, which shall determine the fair market value of the General Partner Units. In making its determination, such independent investment banking firm or other independent expert shall consider the Assets, the rights and obligations of the General Partner and other factors it may deem relevant.

 

  15.3.3.

If the General Partner Units are not acquired in the manner set forth in Section 15.3.1, the Departing General Partner shall become a Limited Partner and its General Partner Units shall be converted into Units pursuant to a valuation made by an investment banking firm or other independent expert selected pursuant to Section 15.3.2,


 

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  without reduction in such Partnership Interest (but subject to proportionate dilution by reason of the admission of the Departing General Partner’s successor).

 

15.4 Withdrawal of Limited Partners

No Limited Partner shall have any right to withdraw from the Partnership; provided, however, that when a transferee of a Limited Partner’s Units becomes a Record Holder, such transferring Limited Partner shall, subject to Section 4.8.2, cease to be a Limited Partner with respect to the Units so transferred.

ARTICLE 16

TERMINATION OF THE PARTNERSHIP

 

16.1 Dissolution

Subject to Section 16.2, the Partnership shall dissolve and its affairs shall be wound up, upon the earliest to occur of:

 

  16.1.1. the service of notice by the General Partner, with the approval of a majority of the members of the Independent Committee, that in the opinion of the General Partner, the coming into force of any Law or binding authority renders illegal or impracticable the continuation of the Partnership;

 

  16.1.2. the election of the General Partner to dissolve, if the Partnership, as determined by the General Partner, is required to register as an “investment company” under the U.S. Investment Company Act of 1940, as amended, or similar legislation in other jurisdictions;

 

  16.1.3. the date that the General Partner withdraws from the Partnership without the appointment of a successor pursuant to Section 15.1 having been implemented;

 

  16.1.4. the date on which any court of competent jurisdiction enters a decree of judicial dissolution of the Partnership or an order to wind up or liquidate the General Partner without the appointment of a successor pursuant to Section 15.1 or 15.2; or

 

  16.1.5. the date on which the General Partner decides to dispose of, or otherwise realize proceeds in respect of, all or substantially all of the Assets in a single transaction or series of transactions.

 

16.2 Reconstitution of Partnership

The Partnership shall be reconstituted and continue without dissolution if within 30 days of the date of dissolution (and provided that a notice of dissolution with respect to the Partnership has not been provided to the Bermuda Monetary Authority), a successor general partner appointed pursuant to this Agreement executes a transfer deed pursuant to which the new general partner assumes the rights and undertakes the obligations of the original general partner, but only if the Partnership receives an Opinion of Counsel that the admission of the new general partner will not result in the loss of limited liability of any Limited Partner.


 

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16.3 Liquidation

Upon dissolution of the Partnership, unless the Partnership is continued under an election to reconstitute and continue the Partnership pursuant to Section 16.2, the General Partner shall act, or cause one or more Persons to act, as the Liquidator. The Liquidator (if other than the General Partner) shall be entitled to receive such compensation for its services as may be approved by a majority of the members of the Independent Committee. If the General Partner is acting as the Liquidator, it shall not be entitled to receive any additional compensation for acting in such capacity. The Liquidator shall agree not to resign at any time without 15 days’ prior notice and (if other than the General Partner) may be removed at any time, with or without cause, by notice of removal approved by a majority of the members of the Independent Committee. Upon dissolution, removal or resignation of the Liquidator, a successor and substitute Liquidator (who shall have and succeed to all rights, powers and duties of the original Liquidator) shall within 30 days thereafter be approved by a majority of the members of the Independent Committee. The right to approve a successor or substitute Liquidator in the manner provided herein shall be deemed to refer also to any such successor or substitute Liquidator approved in the manner herein provided. Except as expressly provided in this Section 16.3, the Liquidator approved in the manner provided herein shall have and may exercise, without further authorization or consent of any of the parties hereto, all of the powers conferred upon the General Partner under the terms of this Agreement (but subject to all of the applicable limitations, contractual and otherwise, upon the exercise of such powers) to the extent necessary or desirable in the good faith judgment of the Liquidator to carry out the duties and functions of the Liquidator hereunder for and during such period of time as shall be reasonably required in the good faith judgment of the Liquidator to complete the winding-up and liquidation of the Partnership as provided for herein. The Liquidator shall proceed to dispose of the Assets, discharge its liabilities, and otherwise wind up its affairs in such manner and over such period as the Liquidator determines to be in the best interest of the Partners, subject to applicable Laws and the following:

 

  16.3.1. the Assets may be disposed of by public or private sale or by distribution in kind to one or more Partners on such terms as the Liquidators and such Partners or Partners may agree; if any property is distributed in kind, the Partner receiving the property shall be deemed for purposes of Section 16.3.3 to have received cash equal to its fair market value; and contemporaneously therewith, appropriate cash distributions must be made to the other Partners; the Liquidator may distribute the Assets, in whole or in part, in kind if it determines that a sale would be impractical or would cause undue loss to the Partners;

 

  16.3.2. liabilities of the Partnership, including amounts owed to the Liquidator as compensation for serving in such capacity (subject to the terms of Section 16.3) and amounts to Partners otherwise than in respect of their distribution rights under Section 5.2, shall be discharged; with respect to any liability that is contingent, conditional or unmatured or is otherwise not yet due and payable, the Liquidator shall either settle such claim for such amount as it thinks appropriate or establish a reserve of cash or other assets to provide for its payment; when paid, any unused portion of the reserve shall be distributed as additional liquidation proceeds; and


 

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  16.3.3. by the end of the taxable year in which the liquidation of the Partnership occurs (or, if later, within 90 days after the date of such liquidation), all property and all cash in excess of that required to discharge liabilities of the Partnership pursuant to Section 16.3.2 shall be distributed to the Partners as provided in this Section 16.3.3:

 

  16.3.3.1 an amount equal to the amount of cash or property held by the Partnership at such time, that is attributable to a realization event occurring prior to the date of an event specified in Section 16.1 and that has not been deemed by the General Partner as Capital Surplus shall be distributed in accordance with Section 5.2.2 as if such distribution were a distribution occurring prior to dissolution;

 

  16.3.3.2 an amount equal to the amount of cash or property held by the Partnership at such time, that is attributable to a realization event occurring prior to the date of an event specified in Section 16.1 and that has been deemed by the General Partner as Capital Surplus shall be distributed in accordance with Section 5.2.3 as if such distribution were a distribution occurring prior to dissolution;

 

  16.3.3.3 to the Partners holding Redemption-Exchange Units pro rata in proportion to their respective Percentage Interests (which, for purposes of this Section 16.3.3.3, will be calculated using Redemption-Exchange Units only), the aggregate amount of distributions previously deferred pursuant to Section 5.2.3.2 and not previously recovered; and

 

  16.3.3.4 all other cash and property of the Partnership shall be distributed to the Partners as follows:

 

  16.3.3.4.1 first, 100% to BPY until BPY has received pursuant to this Section 16.3.3.4.1 an amount equal to the excess of (1) the amount of BPY’s outlays and expenses incurred during the term of the Partnership, over (2) the aggregate amount of distributions received by BPY pursuant to Section 5.2.2.1;

 

  16.3.3.4.2 second, 100% to the General Partner until the General Partner has received pursuant to this Section 16.3.3.4.2 an amount equal to the fair market value of the Equity Enhancement Distribution as determined in good faith by a third party independent valuator engaged by the General Partner; provided that, such third party independent valuator shall be a nationally recognized investment banking, accounting or valuation firm which is independent of the General Partner; provided further that, such amount shall not exceed 2.5 times the aggregate Equity Enhancement Distribution payments made to the General Partner during the immediately prior 24 months;

 

  16.3.3.4.3

third, 100% to the Partners pro rata in proportion to the Unrecovered Capital Amounts attributable to the Units and General


 

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  Partner Units held by the Partners until the Unrecovered Capital Amount attributable to each Unit and General Partner Unit is equal to zero;

 

  16.3.3.4.4 fourth, 100% to the Partners pro rata in proportion to their respective Percentage Interests until there has been distributed pursuant to this Section 16.3.3.4.4 in respect of each Unit Outstanding an amount equal to the excess of (1) the First Distribution Threshold for each Quarter during the period beginning on the date the Capital Amount in respect of each Unit and General Partner Unit was last adjusted pursuant to Section 3.5.3 and ending on the date of distribution pursuant to this Section 16.3.3.4.4, over (2) the aggregate amount of distributions (if any) made in respect of a Unit pursuant to Section 5.2.2.3 during such period of time;

 

  16.3.3.4.5 fifth, 15% to the General Partner and 85% to the Partners, pro rata in proportion to their respective Percentage Interests, until there has been distributed pursuant to this Section 16.3.3.4.5 in respect of each Unit Outstanding an amount equal to the excess of (1) the Second Distribution Threshold less the First Distribution Threshold for each Quarter during the period beginning on the date the Capital Amount in respect of each Unit and General Partner Unit was last adjusted pursuant to Section 3.5.3 and ending on the date of distribution pursuant to this Section 16.3.3.4.5, over (2) the aggregate amount of distributions (if any) made in respect of a Unit pursuant to Section 5.2.2.5 during such period of time; and

 

  16.3.3.4.6 thereafter, 25% to the General Partner and 75% to the Partners, pro rata in proportion to their respective Percentage Interests.

Any distribution to the General Partner pursuant to Sections 16.3.3.4.5-16.3.3.4.6 shall be made to the General Partner in its capacity as the general partner and without regard to the number of General Partner Units held by the General Partner.

 

16.4 Distributions in Kind

Notwithstanding the provisions of Section 16.3, which require the liquidation of the Assets, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership, the Liquidator determines that an immediate sale of part or all of the Assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its absolute discretion, defer for a reasonable time the liquidation of any Assets except those necessary to satisfy liabilities of the Partnership (including those to Partners as creditors) and/or distribute to the Partners or to specific classes of Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 16.3, undivided interests in such Assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interest of the Limited Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any


 

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agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt.

 

16.5 Cancellation of Certificate of Limited Partnership

Upon the completion of the distribution of Partnership cash and property as provided in Sections 16.3 and 16.4, the Partnership shall be terminated and the Certificate of Limited Partnership and Certificate of Exempted Partnership and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than Bermuda shall be cancelled and such other actions as may be necessary to terminate the Partnership shall be taken.

 

16.6 Reasonable Time for Winding Up

A reasonable time shall be allowed for the orderly winding up of the activities and affairs of the Partnership and the liquidation of its Assets pursuant to Section 16.3 in order to minimize any losses otherwise attendant upon such winding up, and the provisions of this Agreement shall remain in effect between the Partners during the period of liquidation.

 

16.7 Return of Capital

The General Partner shall not be personally liable for, and shall have no obligation to contribute or loan any monies or property to the Partnership to enable it to effectuate, the return of the Capital Contributions of the Limited Partners, or any portion thereof, it being expressly understood that any such return shall be made solely from Assets.

 

16.8 No Capital Account Restoration

No Partner shall have any obligation to restore any negative balance in its Capital Account upon liquidation of the Partnership.

 

16.9 Waiver of Partition

Each Partner hereby waives any right to partition of the Partnership property.

ARTICLE 17

AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE

 

17.1 Amendment to be Adopted Solely by General Partner

Subject to compliance with the requirements of the Limited Partnership Act and the Exempted Partnerships Act, each Limited Partner agrees that the General Partner (pursuant to its powers of attorney from the Limited Partners), without the approval of any Limited Partner, may amend any provision of this Agreement, and execute, swear to, acknowledge, deliver, file and record whatever documents may be required in connection therewith, to reflect:

 

  17.1.1. a change in the name of the Partnership, the location of the Partnership’s registered office or the Partnership’s registered agent;


 

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  17.1.2. the admission, substitution, withdrawal or removal of Partners in accordance with this Agreement;

 

  17.1.3. a change that the General Partner determines is reasonable and necessary or appropriate for the Partnership to qualify or to continue its qualification as an exempted limited partnership under the Laws of Bermuda or a partnership in which the limited partners have limited liability under the Laws of any jurisdiction, or is necessary or advisable in the opinion of the General Partner to ensure that the Partnership will not be treated as an association taxable as a corporation or otherwise taxed as an entity for tax purposes;

 

  17.1.4. an amendment that the General Partner determines to be necessary or appropriate to address changes in tax regulations, legislation or interpretation;

 

  17.1.5. an amendment that is necessary, in the Opinion of Counsel, to prevent the Partnership or the General Partner or its directors or officers from in any manner being subjected to the provisions of the U.S. Investment Company Act of 1940, as amended, or similar legislation in other jurisdictions;

 

  17.1.6. an amendment that the General Partner determines in its sole discretion to be necessary or appropriate for the creation, authorization or issuance of any class or series of Partnership Interests or options, rights, warrants or appreciation rights relating to Partnership Interests pursuant to Section 3.5;

 

  17.1.7. any amendment expressly permitted in this Agreement to be made by the General Partner acting alone;

 

  17.1.8. any amendment that the General Partner determines in its sole discretion is necessary or appropriate to reflect and account for the formation by the Partnership of, or its investment in, any Person, as otherwise permitted by this Agreement;

 

  17.1.9. a change in the Partnership’s fiscal year and related changes;

 

  17.1.10. any amendment concerning the computation or allocation of specific items of income, gain, expense or loss among the Partners that, in the sole discretion of the General Partner, is necessary or appropriate to (i) comply with the requirements of any Laws, (ii) reflect the Partners’ interests in the Partnership or (iii) consistently reflect the distributions made by the Partnership to the Partners pursuant to the terms of this Agreement;

 

  17.1.11. any amendment that in the sole discretion of the General Partner is necessary or appropriate to address any statute, rule, regulation, notice, or announcement that affects or could affect the U.S. federal income tax treatment of any allocation or distribution related to any interest of the General Partner in the profits of the Partnership; or

 

  17.1.12. any other amendments substantially similar to any of the matters described in Section 17.1.1 through 17.1.11.


 

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In addition, the General Partner may make amendments to this Agreement without the approval of any Limited Partner if those amendments, in the discretion of the General Partner:

 

  17.1.13. do not adversely affect the Limited Partners considered as a whole (including any particular class of Partnership Interest as compared to other classes of Partnership Interests) in any material respect;

 

  17.1.14. are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion or binding directive, order, ruling or regulation of any Governmental Authority;

 

  17.1.15. are necessary or appropriate for any action taken by the General Partner relating to splits or combinations of Units or Partnership Interests made in accordance with the provisions of this Agreement; or

 

  17.1.16. are required to effect the intent expressed in the Registration Statement or the intent of the provisions of this Agreement or are otherwise contemplated by this Agreement.

 

17.2 Amendment Procedures

Except as provided in Sections 17.1 and 17.3, all amendments to this Agreement shall be made in accordance with the following procedures:

 

  17.2.1. amendments to this Agreement may only be proposed by or with the consent of the General Partner, provided that the General Partner shall have no duty or obligation to propose any amendment to this Agreement and may decline to do so free of any fiduciary duty or obligation whatsoever to the Partnership or any Limited Partner and, in declining to propose or consent to an amendment to the fullest extent permitted by Law, shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any other agreement contemplated hereby or under the Limited Partnership Act or the Exempted Partnerships Act or any other Law or at equity; and

 

  17.2.2. a proposed amendment shall be effective upon its approval by the General Partner and, where required under this Agreement or by the Limited Partnership Act, on the consent, vote or approval of the amendment by the holders of a majority of the voting power of the Outstanding Units.

 

17.3 Amendment Requirements

 

  17.3.1. Notwithstanding the provisions of Sections 17.1 and 17.2, no provision of this Agreement that establishes a percentage of the voting power of the Outstanding Units required to take any action shall be amended, altered, changed, repealed or rescinded in any respect that would have the effect of reducing such voting requirement unless such amendment is approved by the written consent or the affirmative vote of the voting power of Outstanding Units whose aggregate Outstanding Units constitute voting power not less than the voting requirement sought to be reduced.


 

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  17.3.2. Notwithstanding the provisions of Sections 17.1 and 17.2, no amendment to this Agreement may (i) enlarge the obligations of any Limited Partner without its consent except if the same occurs as a result of any amendment approved pursuant to Section 17.3.3, or (ii) enlarge the obligations, restrict in any way any action by or rights of or reduce in any way the amounts distributable, reimbursable or otherwise payable by the Partnership to the General Partner or any of its Affiliates without the consent of the General Partner, which may be given or withheld in its sole discretion.

 

  17.3.3. Except as otherwise provided, and without limitation of the General Partner’s authority to adopt amendments to this Agreement as contemplated in Section 17.1, the General Partner may amend the Partnership Agreement without the approval of holders of Outstanding Units, except that any amendment that would have a material adverse effect on the rights or preferences of any class of Outstanding Partnership Interests in relation to other classes of Partnership Interests must be consented to or approved by the holders of at least a majority of the Outstanding Partnership Interests of the class affected.

 

  17.3.4. Notwithstanding any other provision of this Agreement, except for amendments pursuant to Section 17.1, no amendments shall become effective without the approval of at least 90% of the voting power of the Outstanding Units unless the Partnership obtains an Opinion of Counsel to the effect that (i) such amendment will not cause the Partnership to be treated as an association taxable as a corporation or otherwise taxable as an entity for tax purposes (provided that for U.S. tax purposes the General Partner has not made the election contemplated by Section 12.6), and (ii) such amendment will not affect the limited liability of any Limited Partner or any limited partner of BPY under applicable Law; provided, however, that no such opinion shall be required in connection with an election described in Section 12.6 made by the General Partner or in connection with a transfer following such election.

 

  17.3.5. This Section 17.3 shall only be amended with the approval of not less than 90% of the Outstanding Units.

 

17.4 Meetings

 

  17.4.1.

All acts of Limited Partners to be taken hereunder shall be taken in the manner provided in this Article 17. Special meetings of the Limited Partners may be called by the General Partner or by Limited Partners holding greater than 50% or more of the voting power of the Outstanding Partnership Interests of the class or classes for which a meeting is proposed, provided that, for this purpose, the Partnership Interests Outstanding shall not include Partnership Interests owned by the General Partner or any other member of the Brookfield Group. (For the avoidance of doubt, the Class A Units and the Redemption-Exchange Units shall not constitute separate classes for this purpose.) Limited Partners shall call a special meeting by delivering to the General Partner one or more requests in writing stating that the signing Limited Partners wish to call a special meeting and indicating the general or specific purposes for which the special meeting is to be called. Within 60 days after receipt of such a call from Limited Partners or within such greater time as may be reasonably necessary for the Partnership to comply with any Laws, governing the holding of


 

61

 

  a meeting or the solicitation of proxies for use at such a meeting, the General Partner shall send a notice of the meeting to the Limited Partners.

 

  17.4.2. A meeting shall be held at a time and place (outside of Canada) determined by the General Partner on a date not less than 10 days and not more than 60 days after the mailing of notice of the meeting. Limited Partners shall not vote on matters that would cause the Limited Partners to be deemed to be taking part in the management and control of the activities and affairs of the Partnership so as to jeopardize the Limited Partners’ limited liability under the Limited Partnership Act or the Law of any other jurisdiction in which the Partnership is qualified to conduct activities and affairs.

 

17.5 Notice of Meeting

Notice of a meeting called pursuant to Section 17.4 shall be given to the Record Holders of the class or classes of Partnership Interests in writing by mail or other means of written communication in accordance with Section 18.2 and shall include details of any proposal or other matter required by any provision of this Agreement or Law to be submitted for the consideration and approval of the Limited Partners. The notice shall be deemed to have been given at the time when deposited in the mail or sent by other means of written communication. In addition, notices of special meetings pursuant to Section 17.4 shall be delivered, announced and/or published to the extent required for the Partnership to comply with applicable Law.

 

17.6 Record Date

For purposes of determining the Limited Partners entitled to notice of and participation in or to vote at a meeting of the Limited Partners or to provide consents or give approvals to any action by the Partnership as provided in Section 17.11 without a meeting as provided in Section 17.10, the General Partner may set a Record Date, which shall not be less than 10 nor more than 60 days before (a) the date of the meeting (unless such requirement conflicts with any applicable Law, in which case the applicable Law shall govern) or (b) in the event that consents or approvals to any action by the Partnership are sought without a meeting, the date by which Limited Partners are requested in writing by the General Partner to provide such consents or approvals.

 

17.7 Adjournment

When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting and a new Record Date need not be fixed if the time and place thereof are announced at the meeting at which the adjournment is taken, unless such adjournment shall be for more than 45 days. At the adjourned meeting, the Partnership may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 45 days or if a new Record Date is fixed for the adjourned meeting, a notice of the adjourned meeting and/or the new Record Date, as applicable, shall be given in accordance with this Article 17.


 

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17.8 Quorum

A majority of the Outstanding Units of the class or classes for which a meeting has been called (including Units held by the General Partner) represented in person or by proxy shall constitute a quorum at a meeting of Limited Partners of such class or classes unless any such action by the Limited Partners requires approval by Limited Partners holding a greater percentage of the voting power of such Units, in which case the quorum shall be such greater percentage. At any meeting of the Limited Partners duly called and held in accordance with this Agreement at which a quorum is present, the act of Limited Partners holding Outstanding Units that in the aggregate represent a majority of the Outstanding Units entitled to vote and be present in person or by proxy at such meeting shall be deemed to constitute the act of all Limited Partners, unless a greater or different percentage is required with respect to such action under the provisions of this Agreement, in which case the act of the Limited Partners holding Outstanding Units that in the aggregate represent at least such greater or different percentage shall be required. The Limited Partners present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough Limited Partners to leave less than a quorum, if any action taken (other than adjournment) is approved by the required percentage of the voting power of Outstanding Units specified in this Agreement (including Outstanding Units deemed owned by the General Partner). In the absence of a quorum, any meeting of Limited Partners may be adjourned from time to time by the affirmative vote of Units holding at least a majority of the voting power of the Outstanding Units entitled to vote at such meeting (including Outstanding Units deemed owned by the General Partner) represented either in person or by proxy, but no other business may be transacted, except as provided in Section 17.7.

 

17.9 Conduct of Meeting

The General Partner shall have full power and authority concerning the manner of conducting any meeting of the Limited Partners or solicitation of consents or approvals in writing, including the determination of Persons entitled to vote, the existence of a quorum, the satisfaction of the requirements of Section 17.4, the conduct of voting, the validity and effect of any proxies and the determination of any controversies, votes or challenges arising in connection with or during the meeting or voting. The General Partner shall designate a Person to serve as chairman of any meeting and shall further designate a Person to take the minutes of any meeting, in either case including a Partner or a director or officer of the General Partner. All minutes shall be kept with the records of the Partnership maintained by the General Partner. The General Partner may make such other regulations consistent with applicable Law and this Agreement as it may deem advisable concerning the conduct of any meeting of the Limited Partners or solicitation of approvals in writing, including regulations in regard to the appointment of proxies, the appointment and duties of inspectors of votes and approvals, the submission and examination of proxies and other evidence of the right to vote, and the revocation of consents or approvals in writing.

 

17.10 Action Without a Meeting

If authorized by the General Partner, any action that may be taken at a meeting of the Limited Partners may be taken without a meeting if (i) written consent to such action is


 

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solicited by or on behalf of the General Partner, and (ii) an approval in writing setting forth the action to be taken is signed by Limited Partners owning not less than the minimum percentage of the Outstanding Units that would be necessary to authorize or take such action at a meeting at which all the Limited Partners were present and voted. Prompt notice of the taking of action by written consent or without a meeting shall be given to the Limited Partners who have not approved in writing. The General Partner may specify that any written ballot from Limited Partners for the purpose of taking any action without a meeting shall be returned to the Partnership within the time period, which shall be not less than 20 days, specified by the General Partner. If a ballot returned to the Partnership does not vote all of the Units held by the Limited Partner, the Partnership shall be deemed to have failed to receive a ballot for the Units that were not voted.

 

17.11 Voting and Other Rights

 

  17.11.1. Only those Record Holders of Units on the Record Date set pursuant to Section 17.6 (and also subject to the limitations contained in the definition of “Outstanding”) shall be entitled to notice of, and to vote at, a meeting of Partners or to act with respect to matters as to which the holders of the Outstanding Units have the right to vote or to act. All references in this Agreement to votes, consents or approvals of, or other acts that may be taken by, the Outstanding Units shall be deemed to be references to the votes, consents, approvals or acts of the Record Holders of such Outstanding Units.

 

  17.11.2. Each Outstanding Unit shall entitle the holder thereof to one vote for the purposes of any approval at a meeting of Limited Partners or by written consent, provided that Redemption Exchange Unitholders will only be entitled to a maximum number of votes in respect of the Redemption-Exchange Units equal to 49% of the total voting power of all Outstanding Units.

 

  17.11.3. With respect to Units that are held for a Person’s account by another Person, in whose name such Units are registered, such other Person shall, in exercising the voting or consent rights in respect of such Units on any matter, and unless the arrangement between such Persons provides otherwise, vote such Units in favor of, and at the direction of, the Person who is the beneficial owner, and the Partnership shall be entitled to assume it is so acting without further inquiry. The provisions of this Section 17.11.3 (as well as all other provisions of this Agreement) are subject to the provisions of Section 13.3.

ARTICLE 18

GENERAL PROVISIONS

 

18.1 Enurement

This Agreement will enure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns.

 

18.2 Notices

 

  18.2.1. To the Partnership and General Partner


 

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Any notice, payment demand, request, report or other document required or permitted to be given or made under this Agreement (“Notice”) by a Limited Partner to the Partnership or General Partner shall be given or sent by fax or letter post or by other means of written communication to the address of the General Partner specified below, or at such other address as the General Partner may notify to the Record Holders, in compliance with applicable Laws:

Brookfield Property GP L.P.

73 Front Street

Hamilton HM 12

Bermuda

Attention:                  Secretary

Telecopier number:  441-296-4475

 

  18.2.2. To BPY

Any Notice by a Limited Partner to BPY shall be given or sent by fax or letter post or by other means of written communication to the address of the general partner of BPY specified below, or at such other address as the General Partner may notify to the Record Holders, in compliance with applicable Laws and regulations:

Brookfield Property Partners L.P.

73 Front Street

Hamilton HM 12

Bermuda

Attention:                  Secretary

Telecopier number:  441-296-4475

 

  18.2.3. To the Limited Partners

 

  18.2.3.1 Any Notice by the General Partner or Partnership to a Limited Partner shall, unless otherwise required by applicable Laws, be deemed given or made to the Limited Partner when delivered in person or when sent to the relevant Record Holder by fax, letter post or by other means of written communication at the address described in Section 18.2.3.2 or when provided as set forth in Section 18.2.3.3.

 

  18.2.3.2

Any Notice to be given or made to a Limited Partner hereunder shall be deemed conclusively to have been given or made, and the obligation to give any Notice shall, unless otherwise required by applicable Laws, be deemed conclusively to have been fully satisfied, upon sending of such Notice to the Record Holder of the Partnership Interests, at such Person’s address as shown on the records of the Partnership, or as otherwise shown on the records of the Partnership, regardless of any claim of any Person who may have an interest in


 

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  such Partnership Interests by reason of any transfer or otherwise. An affidavit or certificate of making of any Notice in Section 18.2 executed by the General Partner, Partnership or the mailing organization shall be prima facie evidence of the giving or making of such Notice. If any Notice addressed to a Record Holder at the address of such Record Holder appearing on the books and records of the Partnership or the Partnership is returned by letter post marked to indicate that the relevant postal service is unable to deliver it, such Notice and any subsequent Notices shall be deemed to have been duly given or made without further mailing (until such time as such Record Holder or another Person notifies the Partnership of a change in his address) if they are available for the Limited Partner at the principal office of the Partnership for a period of one year from the date of the giving or making of such Notice to the other Limited Partners.

 

  18.2.3.3 Any Notice to be given or made to a Limited Partner hereunder shall be deemed conclusively to have been given or made, and the obligation to give any Notice shall, unless otherwise required by applicable Laws, be deemed conclusively to have been fully satisfied, upon issuing a press release complying with applicable Laws, if deemed by the General Partner in its sole discretion to be a reasonable or appropriate means of providing such Notice.

 

18.3 Further Assurances

Each of the parties hereto will promptly do, make, execute or deliver, or cause to be done, made, executed or delivered, all such further acts, documents and things as the other party hereto may reasonably require from time to time for the purpose of giving effect to this Agreement and will use reasonable efforts and take all such steps as may be reasonably within its power to implement to their full extent the provisions of this Agreement.

 

18.4 Counterparts

This Agreement may be signed in counterparts and each of such counterparts will constitute an original document and such counterparts, taken together, will constitute one and the same instrument.

[NEXT PAGE IS SIGNATURE PAGE]


 

66

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth above.

 

GENERAL PARTNER:

 

BROOKFIELD PROPERTY GP L.P., by its

general partner, 1648285 ALBERTA ULC

By:    
  Name:
  Title

LIMITED PARTNER:

 

BROOKFIELD PROPERTY PARTNERS L.P.,

by its general partner,

1648285 ALBERTA ULC

By:    
  Name:
  Title

LIMITED PARTNER:

 

BPY I L.P.,

by its general partner,

BPY GP Inc.

By:    
  Name:
  Title


 

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LIMITED PARTNER:

 

BPY II L.P.,

by its general partner,

BPY GP Inc.

By:    
  Name:
  Title


 

 

SCHEDULE A

Capital Contributions

EX-15.1.A 5 d384817dex151a.htm EX-15.1(A) EX-15.1(a)

Exhibit 15.1(a)

Consent of Independent Registered Chartered Accountants

We consent to the use in this Amendment No. 2 to Registration Statement No. 001-35505 of Brookfield Property Partners L.P. on Form 20-F of (1) our report dated April 9, 2012 relating to the carve-out financial statements and financial statement schedule of the Commercial Property Operations of Brookfield Asset Management Inc. as at December 31, 2011 and December 31, 2010 and for each of the years in the three-year period ended December 31, 2011, (2) our report dated June 11, 2012 relating to the balance sheet of Brookfield Property Partners Limited as at May 31, 2012, (3) our report dated June 11, 2012 relating to the balance sheet of Brookfield Property Partners L.P. as at May 31, 2012, and (4) our report dated April 9, 2010, except as to Note 8, for the year ended December 31, 2009 for which the date is March 29, 2012, relating to the consolidated statements of operations, comprehensive income and cash flows of TRZ Holdings LLC and Subsidiaries for the year ended December 31, 2009, appearing in this Registration Statement.

We also consent to the reference to us under the heading “Statement by Experts” in such Registration Statement.

/s/ Deloitte & Touche LLP

Independent Registered Chartered Accountants

Licensed Public Accountants

Toronto, Canada

August 3, 2012

EX-15.1.B 6 d384817dex151b.htm EX-15.1(B) EX-15.1(b)

Exhibit 15.1(b)

 

Consent of Independent Registered Public Accounting Firm

We consent to the use in this Amendment No. 2 to Registration Statement No. 001-35505 of Brookfield Property Partners L.P. on Form 20-F of our reports dated February 29, 2012 (June 27, 2012 as to the effects of the 2012 discontinued operations described in Note 5) relating to (1) the consolidated financial statements of General Growth Properties, Inc. and subsidiaries (the “Company”) (which report expresses an unqualified opinion on those consolidated financial statements and includes an explanatory paragraph regarding the Company’s financial statements including assets, liabilities, and a capital structure with carrying values not comparable with prior periods) and (2) the 2011 consolidated financial statement schedule of the Company, appearing in this Registration Statement.

We also consent to the reference to us under the heading “Statement By Experts” in such Registration Statement.

/s/ Deloitte & Touche LLP

Chicago, Illinois

August 3, 2012

EX-15.1.C 7 d384817dex151c.htm EX-15.1(C) EX-15.1(c)

Exhibit 15.1(c)

Consent of Independent Registered Public Accounting Firm

The Members:

GGP-TRS L.L.C.:

We consent to the inclusion in the registration statement on Form 20 F/A of Brookfield Property Partners L.P. of our report dated February 27, 2012, with respect to the consolidated balance sheets of GGP-TRS L.L.C. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, changes in members’ capital, and cash flows for each of the years in the three-year period ended December 31, 2011, not included herein, and to the reference to our firm under the heading “Statement By Experts” in the registration statement.

/s/ KPMG LLP

Chicago, Illinois

August 3, 2012

EX-15.1.D 8 d384817dex151d.htm EX-15.1(D) EX-15.1(d)

Exhibit 15.1(d)

Consent of Independent Registered Public Accounting Firm

The Members:

GGP/Homart II L.L.C.:

We consent to the inclusion in the registration statement on Form 20-F/A of Brookfield Property Partners L.P. of our report dated February 27, 2012, with respect to the consolidated balance sheets of GGP/Homart II L.L.C. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, changes in capital, and cash flows for each of the years in the three-year period ended December 31, 2011, not included herein, and to the reference to our firm under the heading “Statement By Experts” in the registration statement.

/s/ KPMG LLP

Chicago, Illinois

August 3, 2012

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