| | At Brookfield Office Properties, we are in the
        business of creating places. Our real estate philosophy transcends owning and managing bricks and mortar; we aim to make lasting
        impressions on the cities and neighborhoods in which we do business. The architecture of our iconic office towers define skylines
        around the globe, and the commercial districts we create and operate become ingrained in the fabric of the great cities of the
        world.
        
        In 2012, we expanded the reach of our flagship
        property brand – Brookfield Place – with the opening of Brookfield Place Perth in Western Australia. The elements that
        make up a Brookfield Place include: a best-in-class real estate profile; destination dining, shopping and amenities on site; the
        highest standards in sustainability, connectivity and efficiency; and strong social, cultural and community involvement. We are
        setting a new benchmark for the modern urban work environment and experience, embracing the changing lifestyle of today’s
        urban professional.
        
        In 2013, we rebrand our leading property in
        New York City, historically known as the World Financial Center, as Brookfield Place New York. This redeveloped 8-millionsquare-foot
        commercial waterfront complex embodies all of the elements of a Brookfield Place, and is attracting a broader demographic of tenant
        than the traditional financial services firms of lower Manhattan. Brookfield Place New York is at the forefront of an evolving
        neighborhood.
        
        We thank our shareholders, tenants, neighbors
        and everyone we do business with in helping us create great places around the globe.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

















































Brookfield
Office Properties Annual Report 2012 03





Selected Financial
Highlights

Expressed
in U.S. millions, except per share information

Financial
Position		2012		2011		2010



Total Assets	$	27,479	$	25,144	$	20,420

Shareholders’
Equity		11,431		10,175		8,807

Market Capitalization		8,585		7,877		8,813

Per Diluted
Common Share		2012		2011		2010



Dividends
Paid	$	0.56	$	0.56	$	0.56

Closing Market
Price–NYSE		17.01		15.64		17.53

Total Return		2.93		3.50		3.18

Net Income
(Loss) Attributable to Common Shareholders		2.25		2.92		2.73

Results of
Operations		2012		2011		2010



Net Income
(Loss) Attributable to Common Shareholders	$	1,287	$	1,690	$	1,552

Commercial
Property Net Operating Income		1,345		1,014		729

Total Return		1,490		1,780		1,611







93% 91%	91%
91%	87% 91%	88% 80%	95% 95%	100% 96%	100% 94%	99% 92%	99% 92%

New York	Washington	Houston	Los
Angeles	Toronto	Calgary	Ottawa	Sydney	Melbourne

DC







Mark-To-Market				Net
Operating Income*

$64.69	10%

Opportunity



Average Market Net
Rent

Brookfield In-Place
Net Rent				United States

59%	Australia

$58.89			20%

$32.50				$31.98	19%

21%



Canada



$26.80				$26.80											21%



United States	Canada	Australia



US$	In-Place		Market		M-T-M	*Includes
unconsolidated joint ventures,

Total	$30.93	$36.52	18%

but
excludes discontinued operations























| | Our goal is to build the world’s premier office property
company for the long term, and the year 2012 brought unique opportunities to execute on this strategy across our global operating
platform. As 2012 began, we established key objectives focused on leasing, capital allocation, entering new markets, and advancing
our development initiatives.



We made great progress toward reaching these objectives during
the year. Importantly, we continued to grow our business, notwithstanding the headwinds of a U.S. presidential election, business
concerns over the U.S. fiscal situation, and the European debt crisis which unsettled global markets.



Financial and Operational Performance



We achieved funds from operations (“FFO”) of $650
million in 2012, up from $640 million in 2011. We signed 6.8 million square feet of leases during the year at average rents 34%
above expiring rents – the highest positive rental spread achieved in our recent history. In the process, 2013-2017 lease
rollover exposure was reduced by 2.0%. Portfolio occupancy ended the year at 92%, which remains high and reflects outperformance
relative to market levels in our core operating cities. Our occupancy level is down 120 basis points from a year ago as we acquired
a number of assets with lease-up opportunities consistent with our core-plus and value-add investment strategy. Consistent, proactive
leasing has always been the backbone of our business model. The highlight of 2012 was the 17-year lease with Morgan Stanley for
1.2 million square feet at One New York Plaza in Lower Manhattan. We also enjoyed healthy leasing velocity in our energy and natural
resources sector markets, which include Houston, Denver, Calgary and Perth. Our operations and property management teams continued
to make great strides in the greening of the portfolio and securing our place at the industry forefront in the sustainability realm.
We earned nine new LEE D certifications at our U.S. and Canadian properties, and these designations are critically important in
our efforts to attract and retain tenants. This hard work and forward-thinking was recognized by the National Association of Real
Estate Investments Trusts (NARE IT) when we were awarded “Leader in the Light” 2012 in the Large Cap Office category,
the top sustainability recognition in our industry.



Growth Initiatives



We were very active in redeploying capital in 2012, selling
mature and non-core assets and re-investing into higher growth opportunities. We completed four asset sales: Altius Centre in Calgary,
Defence Plaza in Melbourne, 33 South Sixth in Minneapolis and KBR Tower in Houston. These dispositions generated $220 million of
equity which contributed to our $510 million equity investment into new higher quality assets at attractive returns. This activity
will result in meaningful uplift in FFO once these acquired assets are stabilized.



We acquired a portfolio of four high-quality office assets and two well-located development sites in the
London financial district. We now have a platform of premier assets in the City
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





































| | of London, aligning with our strategy of providing front-office
        accommodations to the world’s most prestigious tenants by owning and operating best-in-class assets in the most dynamic global
        markets.
        
        We entered the Seattle market with the acquisition of the twobuilding
        Metropolitan Park complex. The region is a leading technology and science center with a highly skilled work force and Met Park
        presents an opportunity to add diversification to our tenant base in those sectors.
        
        The newest addition to our sizeable Washington, DC portfolio
        came with the acquisition of 799 9th St. NW, adjacent to our three other East End assets, creating a campus-like concentration
        of class A space in the burgeoning East End submarket, which has the District’s lowest office vacancy.
        
        Financings and Liquidity
        
        We ended the year with $1.2 billion of liquidity, attributable
        to asset sales, strong cash flow from operations, and receiving full payment on a C$480 million loan from the spin-off of our residential
        division in 2011. We enter 2013 with a liquidity position that is $350 million stronger than a year ago, which provides us with
        an enhanced balance sheet for our growth initiatives. The cost of borrowing is currently less than our projection for future inflation
        due to macro-economic policies designed to stimulate growth. This represents a tremendous opportunity to finance our assets at
        attractive rates on a long-term basis. We were very active in the debt and equity markets in 2012, capitalizing on the low-interest-rate
        environment. In addition to completing nearly $2.5 billion of financings, we further reduced our total cost of capital by issuing
        new equity in the form of perpetual preferred shares at lower interest rates than existing securities which we bought back over
        the course of the year.
        
        Development and Redevelopment
        
        Supply of modern, high-quality office space is constrained in
        many of our core markets as limited new stock was delivered in recent cycles. At the same time, tenant requirements are evolving,
        with space users increasingly demanding more efficient and technologically advanced premises. This forms our strategy that, at
        this point in the current cycle, our buildto- core development efforts can yield attractive risk-adjusted returns relative to the
        acquisition of older existing core assets. We commenced development of our five-million-square-foot Manhattan West development
        project in New York in January 2013 by launching a platform over the railroad tracks on top of which this mixed-use project will
        be built. We successfully secured $340 million of construction financing for the platform project, demonstrating the strength of
        our lending relationships. The neighborhood surrounding Manhattan West
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



















|is thriving, attracting new office users, residents and retailers
        each day. We will construct the first office tower within the project when we have secured a pre-leasing commitment from an anchor
        tenant. In addition, we are advancing our plans for a residential tower on the western portion of the site.
        
        We kicked off the development of the second tower of Bay Adelaide
        Centre in Toronto, anchored by lead tenant Deloitte, which pre-leased 43% of the 980,000-square-foot LEE D Platinum tower. We are
        pleased to report that pre-leasing now stands at 60%, three years prior to delivery.
        
        Our new flagship property in Perth, Brookfield Place, a 953,000-square-foot
        office and retail project, opened in the summer and is 100% leased to tenants BHP Billiton, Barrick Gold and PricewaterhouseCoopers.
        
        After three years of extensive exterior and interior renovation
        work, First Canadian Place, Canada’s tallest building, celebrated the completion of its large-scale rejuvenation project.
        We have transformed the 72-story, 2.8-million-squarefoot building, which is almost 40 years old, into a spectacular, modern center
        for business, commerce and leisure.
        
        We reached significant milestones on our major retail redevelopment
        in Los Angeles. The Fig@7th project is essentially complete, with anchor retailer City Target having opened their doors. This exciting
        new urban retail complex brings much needed amenities and a fresh vitality to our office tenants and downtown L.A.’s growing
        residential and tourist populations.
        
        2013 Outlook
        
        As we enter 2013, we expect the global economy to continue to
        strengthen, although likely at a moderate pace during the early part of the year. Recovery in the U.S. housing market, resilient
        consumer spending and low interest rates for the foreseeable future should provide the tailwinds for stronger fundamentals in 2013.
        The most important macroeconomic factor for our core office business, however, is the growing strength of corporate balance sheets.
        Healthy growth in corporate profits and record levels of balance sheet capital have placed businesses in a position to invest and
        increase hiring. |  | Although there is clearly a desire on the part of business executives
        for greater certainty in a number of areas, notably U.S. fiscal policy and stability within the Euro zone, we have witnessed a
        higher level of confidence or “comfort” from both prospective tenants and our existing tenant base. In addition, there
        is a level of pent-up leasing demand that has been building up in our core markets as many tenants were biding time during large
        parts of 2012. These two trends combined should create an acceleration of leasing velocity as we work our way through 2013.
        
        We operate in dynamic, high-growth global markets, particularly
        those driven by the energy, natural resources, technology and media sectors. Our exposure to markets such as New York, Houston,
        Denver, Seattle, Calgary and Perth, which ranked amongst the top markets in job and rental growth in 2012, is unique to the industry
        and positions us well for continued strong performance.
        
        We also reap the benefits of owning and operating best-in-class
        assets in our markets – properties that are efficient, sustainable and proximate to sought-after amenities and transit. This
        helps us attract and retain high-quality tenants, and creates occupancy synergies with multi-national organizations across different
        markets.
        
        Focus for 2013
        
        Our focus will continue to be on creating long-term value for
        shareholders and our priorities include:
        
        • Maintaining a high level of occupancy in our global portfolio,
        generating sustainable cash flow over the long term.
        
        • Reducing near-term lease rollover exposure. Our primary
        focus in this area will be directed to the pending space availability resulting from the Bank of America/Merrill L ynch lease expiration
        at the rebranded Brookfield Place in L ower Manhattan. Redevelopment of the retail and common areas of the complex is well underway
        and tangible change will be realized this fall when the new glass pavilion entrance opens, providing future access to the unprecedented
        new transportation infrastructure coming on-line in lower Manhattan. That will be followed next year
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



























| |  | by the opening of a new dining terrace, European-style marketplace
and luxury retail shops overlooking the Hudson R iver waterfront.



With our redevelopment scheduled for completion in 2014, on
the heels of the expiring office space becoming available, we will be creating the leading example of the modern urban work environment.
All of our public spaces will be amenityrich and WiFi-enabled, will offer stunning waterfront views as well as dynamic retail and
provide seamless connections between work, residence and recreation. The tenant spaces will offer similar accommodations, including
private roof terraces, dedicated lobby areas and flexible floorplates.



• Executing on financings and further sales of non-strategic
or mature assets to generate proceeds for redeployment into new accretive opportunities. Our goal is to complete new investments
with institutional partners, which will enhance our returns and broaden our reach of managed assets.



• Advancing our Bay Adelaide East and Manhattan West developments
and successfully increasing pre-leasing levels on these projects as well as our additional inventory of development-ready office
projects in London, Calgary, Houston and Perth.



In Closing



In closing, I am happy to pen my first shareholder’s letter
as Chief Executive Officer of Brookfield Office Properties. As many of you are aware, I assumed the position effective July 1,
2012. I would like to acknowledge the contributions and accomplishments of my predecessor, Ric Clark, who served as CEO for 10
years. Under Ric’s leadership, the firm successfully grew into the pre-eminent, global office platform we are today and we
are pleased that he remains on as our chairman. My goal is to ensure that our company continues to deliver increasing streams of
cash flow and above-average growth in shareholder value over the long term. On behalf of our employees and the Board of Directors,
we appreciate your continued interest and investment in Brookfield Office Properties.



Sincerely,













Dennis Friedrich

Chief Executive Officer



March 1, 2013
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





























Commercial Properties Portfolio

|                                    |                          |              | Assets Under management | proportionate(1) | proportionate
    net of Non-Controlling Interests(2)
|----------------------------------- | ------------------------ | ------------ | ----------------------- | ---------------- | -----------------------------------------------------
|(square
    feet in 000’s)          | number
    OF PROPERTIES | leased
    % | office                  | retail           | leasable                                             
|U.S.
    PROPERTIES                 |                          |              |                         |                  |                                                      
|New
    York Midtown                |                          |              |                         |                  |                                                      
|300
    Madison Avenue              | 1                        | 100.0        | 1,126                   | 14               | 1,140                                                
|245
    Park Avenue(3)              | 1                        | 95.9         | 1,719                   | 68               | 1,787                                                
|450
    West 33rdStreet(3)          | 1                        | 77.5         | 1,684                   | 108              | 1,792                                                
|The
    Grace Building(3,4)         | 1                        | 96.3         | 1,537                   | 20               | 1,557                                                
|                                    | 4                        | 91.5         | 6,066                   | 210              | 6,276                                                
|New
    York downtown               |                          |              |                         |                  |                                                      
|Brookfield
    Place, New York      |                          |              |                         |                  |                                                      
|200
    Liberty Street              | 1                        | 89.8         | 1,611                   | 52               | 1,663                                                
|225
    Liberty Street              | 1                        | 100.0        | 2,671                   | 35               | 2,706                                                
|200
    Vesey Street                | 1                        | 99.5         | 1,254                   | —                | 1,254                                                
|250
    Vesey Street                | 1                        | 99.8         | 1,861                   | 43               | 1,904                                                
|Retail
    and Winter Garden        |                          | 41.0         | —                       | 168              | 168                                                  
|One
    Liberty Plaza               | 1                        | 99.4         | 2,326                   | 20               | 2,346                                                
|One
    New York Plaza(4)           | 1                        | 82.5         | 2,556                   | 31               | 2,587                                                
|                                    | 6                        | 94.1         | 12,279                  | 349              | 12,628                                               
|Boston                              |                          |              |                         |                  |                                                      
|75
    State Street                 | 1                        | 74.6         | 771                     | 25               | 796                                                  
|                                    | 1                        | 74.6         | 771                     | 25               | 796                                                  
|Washington,
    D.C.                |                          |              |                         |                  |                                                      
|1625
    Eye Street                 | 1                        | 96.4         | 370                     | 16               | 386                                                  
|701
    9thStreet                   | 1                        | 100.0        | 340                     | 24               | 364                                                  
|799
    9thStreet                   | 1                        | 76.0         | 191                     | 11               | 202                                                  
|Potomac
    Tower                   | 1                        | 100.0        | 238                     | —                | 238                                                  
|601
    South 12thStreet            | 1                        | 100.0        | 309                     | —                | 309                                                  
|701
    South 12thStreet            | 1                        | 100.0        | 253                     | —                | 253                                                  
|77
    K Street                     | 1                        | 93.0         | 308                     | 19               | 327                                                  
|650
    Massachusetts Avenue        | 1                        | 97.4         | 230                     | 82               | 312                                                  
|Three
    Bethesda Metro Center     | 1                        | 89.4         | 348                     | 20               | 368                                                  
|Victor
    Building(3,4)            | 1                        | 92.8         | 294                     | 53               | 347                                                  
|1200
    K Street(4)                | 1                        | 99.9         | 366                     | 24               | 390                                                  
|1250
    Connecticut Avenue(4)      | 1                        | 99.1         | 163                     | 21               | 184                                                  
|1400
    K Street(4)                | 1                        | 99.9         | 178                     | 12               | 190                                                  
|2000
    L Street(4)                | 1                        | 96.4         | 308                     | 75               | 383                                                  
|2001
    M Street(4)                | 1                        | 10.7         | 190                     | 39               | 229                                                  
|2401
    Pennsylvania Avenue(4)     | 1                        | 83.5         | 58                      | 19               | 77                                                   
|Bethesda
    Crescent(4)            | 3                        | 89.6         | 241                     | 27               | 268                                                  
|One
    Reston Crescent(4)          | 1                        | 100.0        | 185                     | —                | 185                                                  
|Silver
    Spring Metro Plaza(4)    | 3                        | 83.3         | 640                     | 47               | 687                                                  
|Sunrise
    Tech Park(4)            | 4                        | 90.2         | 316                     | —                | 316                                                  
|Two
    Ballston Plaza(4)           | 1                        | 86.6         | 204                     | 19               | 223                                                  
|1550
    & 1560 Wilson Boulevard(4) | 2                        | 85.4         | 248                     | 35               | 283                                                  
|Two
    Reston Crescent(4)          | 1                        | 100.0        | 182                     | 3                | 185                                                  
|                                    | 31                       | 90.5         | 6,160                   | 546              | 6,706                                                
|los
    angeles                     |                          |              |                         |                  |                                                      
|601
    Figueroa(4)                 | 1                        | 90.4         | 1,037                   | 2                | 1,039                                                
|Bank
    of America Plaza(4)        | 1                        | 93.4         | 1,383                   | 39               | 1,422                                                
|Ernst
    & Young Tower(4)          | 1                        | 78.2         | 910                     | 335              | 1,245                                                
|Marina
    Towers(3,4)              | 2                        | 92.6         | 356                     | 25               | 381                                                  
|Landmark
    Square(4)              | 1                        | 89.2         | 420                     | 23               | 443                                                  
|                                    | 6                        | 88.1         | 4,106                   | 424              | 4,530                                                

| | (1) | Reflects Brookfield Office Properties interest before considering non-controlling interest in subsidiaries, including Brookfield
Financial Properties L.P. of 0.6%. U.S. Office Fund assets are presented net of non-controlling interests held by co-investors
in the fund. Brookfield Heritage Partners LLC and 1801 California Street are also presented net of non-controlling interests
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Reflects Brookfield Office Properties interest net of non-controlling interests described in note above
| | --- | -------------------------------------------------------------------------------------------------------

| | (3) | Represents jointly controlled interest
| | --- | --------------------------------------

| | (4) | Represents U.S. Office Fund asset
| | --- | ---------------------------------

9







|                                  |                          |              | Assets
    Under management | proportionate(1) | proportionate
    net of Non-Controlling Interests(2)
|--------------------------------- | ------------------------ | ------------ | --------------------------- | ---------------- | -----------------------------------------------------
|(square
    feet in 000’s)        | number
    OF PROPERTIES | leased
    % | office                      | retail           | leasable                                             
|U.S.
    PROPERTIES CONTINUED     |                          |              |                             |                  |                                                      
|Houston                           |                          |              |                             |                  |                                                      
|1201
    Louisiana Street         | 1                        | 86.7         | 836                         | 8                | 844                                                  
|Heritage
    Plaza                | 1                        | 94.7         | 1,150                       | —                | 1,150                                                
|One
    Allen Center(4)           | 1                        | 62.9         | 914                         | 79               | 993                                                  
|Two
    Allen Center(4)           | 1                        | 96.6         | 987                         | 9                | 996                                                  
|Three
    Allen Center(4)         | 1                        | 89.6         | 1,173                       | 22               | 1,195                                                
|1600
    Smith Street(4)          | 1                        | 80.4         | 1,048                       | 50               | 1,098                                                
|Continental
    Center II(4)      | 1                        | 93.8         | 428                         | 21               | 449                                                  
|500
    Jefferson Street(4)       | 1                        | 97.5         | 351                         | 39               | 390                                                  
|                                  | 8                        | 86.6         | 6,887                       | 228              | 7,115                                                
|Denver                            |                          |              |                             |                  |                                                      
|Republic
    Plaza                | 1                        | 95.2         | 1,281                       | 48               | 1,329                                                
|1801
    California Street        | 1                        | 37.8         | 1,316                       | —                | 1,316                                                
|                                  | 2                        | 66.6         | 2,597                       | 48               | 2,645                                                
|SEATTLE                           |                          |              |                             |                  |                                                      
|Metropolitan
    Park East & West | 2                        | 89.7         | 696                         | 3                | 699                                                  
|                                  | 2                        | 89.7         | 696                         | 3                | 699                                                  
|Minneapolis                       |                          |              |                             |                  |                                                      
|RBC
    Plaza                     | 2                        | 92.2         | 610                         | 442              | 1,052                                                
|                                  | 2                        | 92.2         | 610                         | 442              | 1,052                                                
|Total
    U.S. Properties         | 62                       | 89.0         | 40,172                      | 2,275            | 42,447                                               

| | (1) | Reflects Brookfield Office Properties interest before considering non-controlling interest in subsidiaries, including Brookfield
Financial Properties L.P. of 0.6%. U.S. Office Fund assets are presented net of non-controlling interests held by co-investors
in the fund. Brookfield Heritage Partners LLC and 1801 California Street are also presented net of non-controlling interests
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Reflects Brookfield Office Properties interest net of non-controlling interests described in note above
| | --- | -------------------------------------------------------------------------------------------------------

| | (3) | Represents jointly controlled interest
| | --- | --------------------------------------

| | (4) | Represents U.S. Office Fund asset
| | --- | ---------------------------------



|                              |                          |              | Assets
    under management | proportionate(1) | proportionate
    net of Non-Controlling Interests(2)
|----------------------------- | ------------------------ | ------------ | --------------------------- | ---------------- | -----------------------------------------------------
|(square
    feet in 000’s)    | number
    of properties | leased
    % | office                      | retail           | leasable                                             
|Canadian
    Properties       |                          |              |                             |                  |                                                      
|toronto                       |                          |              |                             |                  |                                                      
|Brookfield
    Place, Toronto |                          |              |                             |                  |                                                      
|Bay
    Wellington Tower      | 1                        | 98.1         | 1,297                       | 42               | 1,339                                                
|Retail
    and Parking        | 1                        | 97.6         | —                           | 52               | 52                                                   
|22
    Front Street           | 1                        | 100.0        | 136                         | 8                | 144                                                  
|Exchange
    Tower            | 1                        | 91.1         | 963                         | 66               | 1,029                                                
|105
    Adelaide              | 1                        | 100.0        | 177                         | 7                | 184                                                  
|Hudson’s
    Bay Centre       | 1                        | 99.9         | 536                         | 209              | 745                                                  
|Queen’s
    Quay Terminal     | 1                        | 98.3         | 427                         | 78               | 505                                                  
|HSBC
    Building             | 1                        | 98.9         | 188                         | 6                | 194                                                  
|First
    Canadian Place(3)   | 1                        | 90.3         | 2,379                       | 232              | 2,611                                                
|Bay
    Adelaide West         | 1                        | 95.4         | 1,155                       | 37               | 1,192                                                
|151
    Yonge Street(3)       | 1                        | 85.0         | 289                         | 11               | 300                                                  
|2
    Queen Street East(3)    | 1                        | 100.0        | 448                         | 16               | 464                                                  
|                              | 12                       | 94.5         | 7,995                       | 764              | 8,759                                                
|calgary                       |                          |              |                             |                  |                                                      
|Bankers
    Hall              | 3                        | 99.7         | 1,944                       | 224              | 2,168                                                
|Bankers
    Court             | 1                        | 98.8         | 256                         | 7                | 263                                                  
|Suncor
    Energy Centre      | 2                        | 99.6         | 1,710                       | 22               | 1,732                                                
|Fifth
    Avenue Place        | 2                        | 99.8         | 1,430                       | 46               | 1,476                                                
|                              | 8                        | 99.6         | 5,340                       | 299              | 5,639                                                
|ottawa                        |                          |              |                             |                  |                                                      
|Place
    de Ville I(3)       | 2                        | 99.9         | 570                         | 12               | 582                                                  
|Place
    de Ville II(3)      | 2                        | 99.2         | 597                         | 12               | 609                                                  
|Jean
    Edmonds Towers(3)    | 2                        | 100.0        | 541                         | 13               | 554                                                  
|                              | 6                        | 99.7         | 1,708                       | 37               | 1,745                                                
|VANCOUVER                     |                          |              |                             |                  |                                                      
|Royal
    Centre              | 1                        | 97.7         | 493                         | 96               | 589                                                  
|                              | 1                        | 97.7         | 493                         | 96               | 589                                                  
|OTHER                         |                          |              |                             |                  |                                                      
|Other                         | 1                        | 100.0        | —                           | 3                | 3                                                    
|                              | 1                        | 100.0        | —                           | 3                | 3                                                    
|Total
    Canadian Properties | 28                       | 96.9         | 15,536                      | 1,199            | 16,735                                               

| | (1) | Reflects Brookfield Office Properties interest before considering non-controlling interest in subsidiaries, including Brookfield
Canada Office Properties of 16.7%
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Reflects Brookfield Office Properties interest net of non-controlling interests described in note above
| | --- | -------------------------------------------------------------------------------------------------------

| | (3) | Represents Canadian Office Fund asset
| | --- | -------------------------------------

10







|                                 |                          |              | assets
    under management | proportionate(1) | proportionate
    net of Non-Controlling Interests(2)
|-------------------------------- | ------------------------ | ------------ | --------------------------- | ---------------- | -----------------------------------------------------
|(square
    feet in 000’s)       | number
    of properties | leased
    % | office                      | retail           | leasable                                             
|Australian
    Properties        |                          |              |                             |                  |                                                      
|sydney                           |                          |              |                             |                  |                                                      
|One
    Shelley Street           | 1                        | 100.0        | 330                         | 25               | 355                                                  
|KPMG
    Tower                   | 1                        | 100.0        | 299                         | 4                | 303                                                  
|NAB
    House(3)                 | 1                        | 99.1         | 424                         | 6                | 430                                                  
|IAG
    House(3)                 | 1                        | 100.0        | 382                         | 35               | 417                                                  
|E&Y
    Centre(3,4)              | 1                        | 94.7         | 731                         | 1                | 732                                                  
|Darling
    Park Complex(3)      | 3                        | 99.3         | 1,098                       | 105              | 1,203                                                
|American
    Express House(4)    | 1                        | 100.0        | 156                         | 5                | 161                                                  
|World
    Square Retail          | 2                        | 96.3         | —                           | 176              | 176                                                  
|52
    Goulburn Street           | 1                        | 100.0        | 247                         | 1                | 248                                                  
|King
    Street Wharf Retail     | 1                        | 95.4         | —                           | 61               | 61                                                   
|                                 | 13                       | 98.5         | 3,667                       | 419              | 4,086                                                
|melbourne                        |                          |              |                             |                  |                                                      
|Southern
    Cross East Tower(4) | 1                        | 100.0        | 839                         | 19               | 858                                                  
|Southern
    Cross West Tower(4) | 1                        | 100.0        | 496                         | 14               | 510                                                  
|Bourke
    Place Trust(3)        | 1                        | 95.6         | 670                         | 34               | 704                                                  
|                                 | 3                        | 98.5         | 2,005                       | 67               | 2,072                                                
|Perth                            |                          |              |                             |                  |                                                      
|235
    St Georges Terrace       | 1                        | 100.0        | 192                         | —                | 192                                                  
|108
    St Georges Terrace(4)    | 1                        | 99.6         | 405                         | 15               | 420                                                  
|Brookfield
    Place, Perth      | 1                        | 99.7         | 842                         | 81               | 923                                                  
|                                 | 3                        | 99.7         | 1,439                       | 96               | 1,535                                                
|Total
    Australian Properties  | 19                       | 98.8         | 7,111                       | 582              | 7,693                                                
|                                 |                          |              |                             |                  |                                                      

| | (1) | Reflects Brookfield Office Properties interest before considering non-controlling interest in subsidiaries, including Brookfield
Prime Property Fund (“Prime”) of 19.5%
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Reflects Brookfield Office Properties interest net of non-controlling interests described in note above
| | --- | -------------------------------------------------------------------------------------------------------

| | (3) | Represents jointly controlled interest
| | --- | --------------------------------------

| | (4) | Represents Prime asset
| | --- | ----------------------



|                           |                          |              | Assets
    Under management | proportionate(1) | proportionate
    net of Non-Controlling Interests(2)
|-------------------------- | ------------------------ | ------------ | --------------------------- | ---------------- | -----------------------------------------------------
|(square
    feet in 000’s) | number
    OF PROPERTIES | leased
    % | office                      | retail           | leasable                                             
|U.K.
    PROPERTIES        |                          |              |                             |                  |                                                      
|LONDON                     |                          |              |                             |                  |                                                      
|99
    Bishopsgate         | 1                        | 61.3         | 328                         | 6                | 334                                                  
|Shoreditch                 | 1                        | 71.9         | 14                          | 1                | 15                                                   
|                           | 2                        | 61.8         | 342                         | 7                | 349                                                  
|Total
    U.K. Properties  | 2                        | 61.8         | 342                         | 7                | 349                                                  
|                           |                          |              |                             |                  |                                                      
|TOTAL
    PROPERTIES       | 111                      | 92.0         | 63,161                      | 4,063            | 67,224                                               

| | (1) | Reflects Brookfield Office Properties interest before considering non-controlling interest in subsidiaries
| | --- | ----------------------------------------------------------------------------------------------------------

| | (2) | Reflects Brookfield Office Properties interest net of non-controlling interests described in note above
| | --- | -------------------------------------------------------------------------------------------------------

11







Contents



|Management’s Discussion and Analysis of Financial Results        |    
|---------------------------------------------------------------- | ---
|                                                                 |    
|PART I – OBJECTIVES AND FINANCIAL HIGHLIGHTS                     | 14 
|                                                                 |    
|PART II – FINANCIAL STATEMENT ANALYSIS                           | 22 
|                                                                 |    
|PART III – RISKS AND UNCERTAINTIES                               | 50 
|                                                                 |    
|PART IV – CRITICAL ACCOUNTING POLICIES AND ESTIMATES             | 56 
|                                                                 |    
|PART V – BUSINESS ENVIRONMENT AND OUTLOOK                        | 60 
|                                                                 |    
|Management’s Responsibility for the Financial Statements         | 63 
|                                                                 |    
|Report of Independent Registered Chartered Accountants           | 64 
|                                                                 |    
|Management’s Report on Internal Control over Financial Reporting | 65 
|                                                                 |    
|Report of Independent Registered Chartered Accountants           | 66 
|                                                                 |    
|CONSOLIDATED FINANCIAL STATEMENTS                                | 67 
|                                                                 |    
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                   | 72 
|                                                                 |    
|SELECTED FINANCIAL INFORMATION                                   | 105
|                                                                 |    
|CORPORATE RESPONSIBILITY                                         | 106
|                                                                 |    
|CORPORATE GOVERNANCE                                             | 117
|                                                                 |    
|BOARD OF DIRECTORS                                               | 118
|                                                                 |    
|OFFICERS                                                         | 120

12







FORWARD-LOOKING STATEMENTS

This annual report to shareholders contains
“forward-looking information” within the meaning of Canadian provincial securities laws and “forward-looking
statements” within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, Section 21E of the U.S. Securities
Exchange Act of 1934, as amended, “safe harbor” provisions of the United States Private Securities Litigation Reform
Act of 1995 and in any applicable Canadian securities regulations. Forward-looking statements include statements that are predictive
in nature, depend upon or refer to future events or conditions, include statements regarding the operations, business, financial
condition, expected financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies
and outlook of the company and its subsidiaries, as well as the outlook for North American and international economies for the
current fiscal year and subsequent periods, and include words such as “expects”, “anticipates”, “plans”,
“believes”, “estimates”, “seeks”, “intends”, “targets”, “projects”,
“forecasts” or negative versions thereof and other similar expressions, or future or conditional verbs such as “may”,
“will”, “should”, “would” and “could”.



Although we believe that our anticipated
future results, performance or achievements expressed or implied by the forward-looking statements and information are based upon
reasonable assumptions and expectations, the reader should not place undue reliance on forward-looking statements and information
because they involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, which may
cause the actual results, performance or achievements of the company to differ materially from anticipated future results, performance
or achievement expressed or implied by such forward-looking statements and information.



Factors that could cause actual results
to differ materially from those contemplated or implied by forward-looking statements include, but are not limited to: risks incidental
to the ownership and operation of real estate properties including local real estate conditions, the ability to enter into new
leases or renew leases on favorable terms, dependence on tenants’ financial condition, uncertainties of real estate development,
acquisition and disposition activity; the impact or unanticipated impact of general economic, political and market factors in the
countries in which we do business; the behavior of financial markets, including fluctuations in interest and foreign exchanges
rates; global equity and capital markets and the availability of equity and debt financing and refinancing within these markets;
the ability to complete and effectively integrate acquisitions into existing operations and the ability to attain expected benefits
therefrom; changes in accounting policies and methods used to report financial condition (including uncertainties associated with
critical accounting assumptions and estimates); the effect of applying future accounting changes; business competition; operational
and reputational risks; changes in government regulation and legislation within the countries in which we operate; changes in tax
laws, catastrophic events, such as earthquakes and hurricanes; the possible impact of international conflicts and other developments
including terrorist acts; and other risks and factors detailed from time to time in our documents filed with the securities regulators
in Canada and the United States.



We caution that the foregoing list of important
factors that may affect future results is not exhaustive. When relying on our forward-looking statements, investors and others
should carefully consider the foregoing factors and other uncertainties and potential events. Except as required by law, the company
undertakes no obligation to publicly update or revise any forward-looking statements or information, whether written or oral, that
may be as a result of new information, future events or otherwise.

13







Management’s Discussion and Analysis
of Financial Results

March 1, 2013



PART I – OBJECTIVES AND FINANCIAL
HIGHLIGHTS



BASIS OF PRESENTATION

Financial data included in Management’s
Discussion and Analysis (“MD&A”) for the year ended December 31, 2012, includes material information up to March
1, 2013. Financial data provided has been prepared using accounting policies in accordance with International Financial Reporting
Standards as issued by the International Accounting Standards Board (“IFRS”). All dollar references, unless otherwise
stated, are in millions of U.S. dollars, except per share amounts. Amounts in Canadian dollars and Australian dollars are identified
as “C$” and “A$,” respectively. Amounts in British pounds are identified as “GBP” or “£.”



The following discussion and analysis is
intended to provide readers with an assessment of the performance of Brookfield Office Properties Inc. (“Brookfield Office
Properties”) over the past two years as well as our financial position and future prospects. It should be read in conjunction
with the consolidated financial statements and appended notes, which begin on page 67 of this report. In Part II – Financial
Statement Analysis of this MD&A, which begins on page 22, we review our operating performance and financial position as presented
in our financial statements prepared in accordance with IFRS.



In our discussion of operating performance,
we refer to commercial property net operating income, funds from operations (on a total and per share basis), total return (on
a total and per share basis) and common equity per share. Commercial property net operating income, funds from operations, total
return and common equity per share do not have any standardized meaning prescribed by IFRS and therefore may not be comparable
to similar measures presented by other companies. We define commercial property net operating income as revenue from commercial
property operations less direct commercial property expense. Our definition of funds from operations includes all of the adjustments
that are outlined in the National Association of Real Estate Investment Trusts (“NAREIT”) definition of FFO such as
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 to reflect our interest in unconsolidated partnerships and joint ventures. In addition
to the adjustments prescribed by NAREIT, we also make adjustments to exclude any unrealized fair value gains (or losses) that arise
as a result of reporting under IFRS, and income taxes that arise as a result of our structure as a corporation as opposed to a
real estate investment trust (“REIT”). Total return represents the amount by which we increase the value of our common
equity through funds from operations and the increase or decrease in value of our investment properties over a period of time.
Common equity per share represents the book value of our common equity, adjusted for proceeds from the assumed exercise of all
options outstanding, divided by total common shares outstanding, including potential common shares from the exercise of all options.
In calculating common equity per share on a pre-tax basis, we adjust the book value of our common equity by adding back our net
deferred tax liabilities.



Commercial property net operating income
is an important measure that we use to assess operating performance and funds from operations is a widely used measure in analyzing
the performance of real estate. We provide the components of commercial property net operating income on page 41 and a reconciliation
of net income attributable to shareholders to funds from operations on page 47. We reconcile funds from operations to net income
rather than cash flow from operating activities as we believe net income is the most comparable measure. We provide a reconciliation
of funds from operations to total return on page 47 and a reconciliation of shareholders’ equity to common equity per share
on page 35. When calculating diluted funds from operations, total return and common equity per share in this MD&A, we exclude
the effects of settling our capital securities through the issuance of common shares as our past practice has been to redeem our
capital securities for cash rather than convert to common shares and our intention is to continue with this practice. This diluted
calculation is not in accordance with IFRS. Diluted net income per share is calculated in accordance with IFRS. We have included
a reconciliation of diluted funds from operations and total return on page 47 and common equity per share on page 35 which shows
the impact of excluding the effects of settling capital securities through the issuance of common shares on those measures.



Additional information, including our Annual
Information Form, is available on our Web site at www.brookfieldofficeproperties.com, or on www.sedar.com or www.sec.gov.



OVERVIEW OF THE BUSINESS

Brookfield Office Properties is a publicly
traded, global commercial real estate company listed on the New York and Toronto stock exchanges under the symbol BPO. We operate
in the principal business segment of ownership, development and management of premier commercial office properties in select cities
in the United States, Canada, Australia and the United Kingdom. The portfolio consists of 111 properties totaling 77 million square
feet that are either wholly owned, owned through property-level joint ventures or through two, fully invested, core office funds
that were established since 2005 for the purpose of enhancing our position as a leading real estate asset manager.



At December 31, 2012, the carrying value
of Brookfield Office Properties’ assets was $27.5 billion up from $25.1 billion at the end of 2011. During 2012, we generated
$1,287 million of net income attributable to shareholders ($2.25 per diluted common share) and $650 million of funds from operations
($1.14 per diluted common share). In addition, during 2012, we increased our common equity per share, on a pre-tax basis, to $21.19
from $18.94 and generated a total return for each Brookfield Office Properties share of $2.93 or 15%.

14







FINANCIAL HIGHLIGHTS

Brookfield Office Properties’ financial
results are as follows:



|(Millions, except per share information)                                                      |  |  |               | 2012          |               | 2011   |   | 2010  
|--------------------------------------------------------------------------------------------- |  |  | ------------- | ------------- | ------------- | ------ | - | ------
|Results of operations                                                                         |  |  |               |               |               |        |   |       
|Commercial property revenue                                                                   |  |  | $             | 2,195         | $             | 1,677  | $ | 1,224 
|Net income from continuing operations attributable to shareholders                            |  |  |               | 1,275         |               | 1,641  |   | 1,443 
|Net income attributable to shareholders                                                       |  |  |               | 1,287         |               | 1,690  |   | 1,552 
|Commercial property net operating income(1)                                                   |  |  |               | 1,345         |               | 1,014  |   | 729   
|Funds from operations(1)                                                                      |  |  |               | 650           |               | 640    |   | 727   
|Total return(1,2)                                                                             |  |  |               | 1,490         |               | 1,780  |   | 1,611 
|Net income from continuing operations per share attributable to common shareholders – basic   |  |  |               | 2.39          |               | 3.15   |   | 2.80  
|Net income from continuing operations per share attributable to common shareholders – diluted |  |  |               | 2.23          |               | 2.83   |   | 2.53  
|Net income per share attributable to common shareholders – basic                              |  |  |               | 2.42          |               | 3.24   |   | 3.02  
|Net income per share attributable to common shareholders – diluted                            |  |  |               | 2.25          |               | 2.92   |   | 2.73  
|Funds from operations per share – diluted(1,3)                                                |  |  |               | 1.14          |               | 1.14   |   | 1.37  
|Total return per share – diluted(1,2,3)                                                       |  |  |               | 2.93          |               | 3.50   |   | 3.18  
|Common share dividends paid per share                                                         |  |  |               | 0.56          |               | 0.56   |   | 0.56  
|                                                                                              |  |  | Dec. 31, 2012 | Dec. 31, 2011 | Dec. 31, 2010
|Balance sheet                                                                                 |  |  |               |               |               |        |   |       
|Total assets                                                                                  |  |  | $             | 27,479        | $             | 25,144 | $ | 20,420
|Commercial properties(4)                                                                      |  |  |               | 22,579        |               | 19,681 |   | 13,058
|Commercial property debt(4)                                                                   |  |  |               | 11,512        |               | 10,845 |   | 7,426 
|Total non-current financial liabilities                                                       |  |  |               | 10,631        |               | 10,929 |   | 6,482 
|Total shareholders’ equity                                                                    |  |  |               | 11,431        |               | 10,175 |   | 8,807 
|Common equity per share – diluted (pre-tax) (adjusted)(1,3,5)                                 |  |  |               | 21.19         |               | 18.94  |   | 16.46 
|Common equity per share – diluted (adjusted)(1,3)                                             |  |  |               | 19.80         |               | 17.90  |   | 15.75 

| | (1) | Non-IFRS measure. Refer to page 20 for description of non-IFRS measures and reference to reconciliation
to comparable IFRS measures
| | --- | -----------------------------------------------------------------------------------------------------------------------------------

| | (2) | Net of non-controlling interests
| | --- | --------------------------------

| | (3) | Calculation includes potential common shares at December 31, 2012, and December 31, 2011, from the exercise of options as
well as restricted stock but excludes the effects of settling our capital securities in common shares as we intend to redeem our
capital securities for cash prior to conversion. Refer to page 14
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Includes commercial properties held for sale and associated liabilities
| | --- | -----------------------------------------------------------------------

| | (5) | Excludes deferred tax liability
| | --- | -------------------------------



COMMERCIAL PROPERTY OPERATIONS

Our commercial property portfolio consists
of interests in 111 properties totaling 77 million square feet, including 10 million square feet of parking. Our development portfolio
comprises interests in 17 sites totaling 17 million square feet. Our primary markets are the financial, energy and government center
cities of New York, Washington, D.C., Houston, Los Angeles, Toronto, Calgary and Ottawa in North America as well as Sydney, Melbourne
and Perth in Australia and London in the United Kingdom. Landmark assets include Brookfield Places in New York, Toronto and Perth,
Bank of America Plaza in Los Angeles, Bankers Hall in Calgary and Darling Park in Sydney.



We remain focused on the following strategic
priorities:



| | • | Realizing value from our properties through proactive leasing and select redevelopment initiatives;
| | - | ---------------------------------------------------------------------------------------------------



| | • | Prudent capital management including refinancing mature properties and disposition of select mature or non-core assets; and
| | - | ---------------------------------------------------------------------------------------------------------------------------



| | • | Advancing development assets as the economy rebounds and supply constraints create opportunities.
| | - | -------------------------------------------------------------------------------------------------



Our commercial property investments are
held through wholly or partially owned subsidiaries, which are fully consolidated on our balance sheet, and through entities that
we jointly control with our partners, for which we recognize our interests in the net assets of such entities following the equity
method of accounting. We also recognize our investments in certain assets in Australia in the form of participating loan interests.



We have historically explored property-level
joint venture opportunities with strategic institutional partners. Although we plan to continue with these endeavors, we also consider
opportunities to pursue the acquisition of individual assets and portfolios through joint venture fund vehicles. In 2005 we formed
our Canadian Office Fund to acquire the Olympia & York portfolio. In 2006 we formed our U.S. Office Fund to consummate the
acquisition of the Trizec portfolio. In 2009 we co-sponsored with our parent company, Brookfield Asset Management Inc. (“BAM”),
the Real Estate Turnaround Fund dedicated to investing in under-performing real estate and in 2012, we participated in an investment
made by the BAM sponsored, Brookfield Strategic Real Estate Partners Fund. Our participation in these funds is focused only on
investments in the office sector. Of our 111 commercial office properties, 37 are wholly owned; 23 are held in property-level joint
ventures, co-tenancies or through participating loan interests; and 51 are held in our funds.





15







We believe that investing our liquidity
with partners through joint ventures or funds enables us to enhance returns. The funds and associated asset management fees represent
an important area of growth as we expand our assets under management. Purchasing properties or portfolios of properties in a fund
format allows us to earn the following categories of fees:



•	Asset Management 	Stable
base fee for providing regular, ongoing services.



•	Transaction	Development,
redevelopment and leasing activities conducted on behalf of these funds.



•	Performance	Earned
when certain predetermined benchmarks are exceeded. Performance fees, which can add 	considerably to fee revenue, typically
arise later in a fund’s life cycle and are therefore not fully 	reflected in current results.





An important characteristic of our portfolio
is the strong credit quality of our tenants. We direct special attention to credit quality, particularly in the current economic
environment, in order to ensure the long-term sustainability of rental revenues through economic cycles. Major tenants with over
1,000,000 square feet of space in the portfolio include government and government agencies, Bank of America/Merrill Lynch, CIBC
World Markets, Suncor Energy, RBC, Morgan Stanley, and Bank of Montreal. A detailed list of major tenants is included in Part III
– Risks and Uncertainties of this MD&A, which begins on page 50.



Our strategy is to sign long-term leases
in order to mitigate risk and reduce our overall retenanting costs. We typically commence discussions with tenants regarding their
space requirements well in advance of the contractual expiration, and although each market is different, the majority of our leases,
when signed, extend between 10- and 20-year terms. As a result of this strategy, only 7% of our leases, on average, mature annually
over the next five years.

16







Our average remaining lease term is seven years. The following
is a breakdown of lease maturities in our portfolio, including jointly controlled assets, entities and interests in assets held
through participating loan interests, by region with associated in-place rental rates as of December 31, 2012:



|                      |         | 2013                | 2014         | 2015                | 2016        
|--------------------- | ------- | ------------------- | ------------ | ------------------- | ------------
|                      | Current | (000’s
    Sq. Ft.) | Net
    Rent | (000’s
    Sq. Ft.) | Net
    Rent
|U.S. Properties       |         |                     |              |                     |             
|Midtown New
    York  | 535     | 398                 | $34          | 79                  | $59         
|Downtown New
    York | 745     | 3,442               | 35           | 347                 | 30          
|Washington,
    D.C.  | 637     | 498                 | 27           | 1,521               | 26          
|Los Angeles           | 540     | 195                 | 25           | 325                 | 22          
|Houston               | 953     | 273                 | 18           | 334                 | 17          
|Boston                | 203     | —                   | —            | 13                  | 37          
|Denver                | 883     | 135                 | 15           | 140                 | 22          
|Seattle               | 72      | 28                  | 21           | 36                  | 23          
|Minneapolis           | 81      | 180                 | 8            | 112                 | 15          
|                      | 4,649   | 5,149               | $31          | 2,907               | $25         
|Canadian Properties   |         |                     |              |                     |             
|Toronto               | 484     | 405                 | $30          | 249                 | $32         
|Calgary               | 21      | 37                  | 34           | 52                  | 37          
|Ottawa                | 4       | 1,154               | 20           | 9                   | 26          
|Other                 | 14      | 101                 | 16           | 11                  | 27          
|                      | 523     | 1,697               | $24          | 321                 | $33         
|Australian Properties |         |                     |              |                     |             
|Sydney                | 61      | 115                 | $81          | 102                 | $76         
|Melbourne             | 31      | 32                  | 57           | 86                  | 51          
|Perth                 | 4       | —                   | —            | 272                 | 63          
|                      | 96      | 147                 | $76          | 460                 | $64         
|U.K. Properties       |         |                     |              |                     |             
|London                | 133     | 4                   | $24          | 1                   | $32         
|                      | 133     | 4                   | $24          | 1                   | $32         
|Total                 | 5,401   | 6,997               | $30          | 3,689               | $31         
|Total
    % expiring  | 8.0%    | 10.4%               |              | 5.5%                |             
|Beginning of year     | 12.1%   | 11.4%               |              | 6.0%                |             
|Difference            | -4.1%   | -1.0%               |              | -0.5%               |             
|                      |         |                     |              |                     |             



|                      | 2017                | 2018         | 2019                | Beyond       | Total              
|--------------------- | ------------------- | ------------ | ------------------- | ------------ | -------------------
|                      | (000’s
    Sq. Ft.) | Net
    Rent | (000’s
    Sq. Ft.) | Net
    Rent | (000’s
    Sq. Ft.)
|U.S.
    Properties   |                     |              |                     |              |                    
|Midtown New
    York  | 54                  | $54          | 272                 | $29          | 803                
|Downtown New
    York | 648                 | 29           | 9                   | 74           | 3                  
|Washington,
    D.C.  | 216                 | 29           | 968                 | 40           | 291                
|Los Angeles           | 286                 | 28           | 669                 | 26           | 326                
|Houston               | 675                 | 22           | 379                 | 18           | 339                
|Boston                | 16                  | 20           | 254                 | 23           | 23                 
|Denver                | 217                 | 17           | 90                  | 22           | 514                
|Seattle               | 167                 | 24           | 80                  | 24           | —                  
|Minneapolis           | 25                  | 16           | 11                  | 17           | 87                 
|                      | 2,304               | $26          | 2,732               | $30          | 2,386              
|Canadian Properties   |                     |              |                     |              |                    
|Toronto               | 553                 | $30          | 431                 | $30          | 596                
|Calgary               | 65                  | 28           | 225                 | 37           | 89                 
|Ottawa                | 8                   | 18           | —                   | —            | —                  
|Other                 | 19                  | 29           | 23                  | 38           | 37                 
|                      | 645                 | $30          | 679                 | $32          | 722                
|Australian Properties |                     |              |                     |              |                    
|Sydney                | 120                 | $83          | 703                 | $73          | 73                 
|Melbourne             | 153                 | 55           | 30                  | 49           | 512                
|Perth                 | 88                  | 62           | 14                  | 96           | 219                
|                      | 361                 | $66          | 747                 | $72          | 804                
|U.K.
    Properties   |                     |              |                     |              |                    
|London                | —                   | —            | —                   | —            | 1                  
|                      | —                   | —            | —                   | —            | 1                  
|Total                 | 3,310               | $31          | 4,158               | $38          | 3,913              
|Total
    % expiring  | 4.9%                |              | 6.2%                |              | 5.8%               
|Beginning of year     | 4.0%                |              | 5.4%                |              | 5.3%               
|Difference            | 0.9%                |              | 0.8%                |              | 0.5%               





17







Our Canadian Office Fund, which consists
of 10 properties in Toronto and Ottawa, is a consortium of institutional investors, led and managed by us. Affiliates of the consortium
members own direct interests in property-level joint ventures and have entered into several agreements relating to property management,
fees, transfer rights and other material issues associated with the operation of the properties. We proportionately consolidate
our interest in this fund.



Our U.S. Office Fund, which consists of
36 properties in New York, Washington, D.C., Houston and Los Angeles, and 2.9 million square feet of development sites, which we
lead and manage, invests through direct and indirect investment vehicles that have also entered into several agreements relating
to property management, fees, transfer rights and other material issues associated with the operation of the properties. Our 84.3%
interest in the U.S. Office Fund is held through an indirect interest in TRZ Holdings LLC (“TRZ Holdings”) which is
reflected as a consolidated subsidiary in our consolidated financial statements.



In the third quarter of 2010, we acquired
an interest in a portfolio of properties in Australia (the “Australian portfolio”) through an investment of A$1.6 billion
in exchange for participating loan interests that provide us with an interest in the results of operations and changes in fair
values of the properties. These participating loan interests are convertible by us at any time into direct ownership interests
in either the properties in the Australian portfolio or the entities that have direct ownership of the properties (the “property
subsidiaries”). Certain of these participating loan interests provide us with control over the property subsidiaries and,
accordingly, we consolidate the assets, liabilities and results of operations of those property subsidiaries. Where the participating
loan interests do not provide us with control over a property subsidiary, they are presented as participating loan interests. As
a result of this arrangement, we also hold an 80.5% controlling interest in Brookfield Prime Property Fund (“Prime”),
an entity that holds direct ownership interest in certain of the properties in the Australian portfolio, and we have recognized
the non-controlling interests in the net assets of Prime in equity. Our subsidiary, BOPA Investments Ltd. (“BOPA”)
also holds a 90% interest in Brookfield Properties Management Pty Ltd., which manages the properties in the Australian portfolio
and certain other properties owned by subsidiaries of BAM, with the remaining 10% held by BAM. We have an option to acquire BAM’s
interest in Brookfield Properties Management Pty Ltd. for nominal consideration at any time prior to September 30, 2020.



In 2012, we agreed to acquire a portfolio
of assets in the United Kingdom from Hammerson plc. The portfolio consists of three major operating assets as well as two commercial
developments and certain additional smaller assets, all located in the City of London. The operating property located at 99 Bishopsgate
and a group of smaller assets closed on September 28, 2012. The remaining assets, including 125 Old Broad Street and Leadenhall
Court, are expected to close in June 2013.

18







COMMERCIAL DEVELOPMENT

We hold interests in 17 million square
feet of high-quality, centrally-located development sites. With the exception of Manhattan West in New York and Bay Adelaide East
in Toronto, these development sites are in planning stages. We will seek to monetize these sites through development only when
we meet our risk-adjusted return hurdles and when we achieve pre-leasing targets.



The following table summarizes our commercial
developments at December 31, 2012:



|                                        |            |                                                                                                    |              |             |              |                  | Proportionate
|--------------------------------------- | ---------- | -------------------------------------------------------------------------------------------------- | ------------ | ----------- | ------------ | ---------------- | -------------
|                                        |            |                                                                                                    |              |             |              |                  | net of Non-  
|                                        |            |                                                                                                    | Number       |             | Assets Under |                  | Controlling  
|(Square
    feet in 000’s)              | Region     | Location                                                                                           | of
    Sites | Owned
    % | Management   | Proportionate(1) | Interests(2) 
|Active
    Developments                 |            |                                                                                                    |              |             |              |                 
|Bay Adelaide East                       | Toronto    | Bay
    and Adelaide Streets                                                                       | 1            | 100%        | 980          | 980              | 980          
|Manhattan West                          | New York   | Between 31st
    and 33rd Street across from Moynihan train station                                | 1            | 100%        | 5,000        | 5,000            | 5,000        
|Total
    active developments           |            | 2                                                                                                  |              | 5,980       | 5,980        | 5,980           
|                                        |            |                                                                                                    |              |             |              |                 
|U.S.
    Developments in Planning       |            |                                                                                                    |              |             |              |                 
|1501
    Tremont Place                  | Denver     | One block from Republic
    Plaza                                                                  | 1            | 100%        | 733          | 733              | 733          
|Block
    173                           | Denver     | One block from Republic
    Plaza                                                                  | 1            | 100%        | 600          | 600              | 600          
|Reston
    Crescent(3)                  | Washington | 36-acre
    landscaped campus adjacent to Reston, Virginia                                         | 1            | 84%         | 724          | 610              | 610          
|1500
    Smith Street(3)                | Houston    | Between
    1600 and 1400 Smith Street                                                             | 1            | 84%         | 500          | 421              | 421          
|Five Allen Center(3)                    | Houston    | A sky bridge connection
    to the Allen Center                                                    | 1            | 84%         | 1,100        | 927              | 927          
|Allen
    Center Clay Street(3)         | Houston    | Located
    in the heart of the Allen Center/Cullen Center complex                                 | 1            | 84%         | 600          | 506              | 506          
|                                        |            |                                                                                                    | 6            |             | 4,257        | 3,797            | 3,797        
|Canadian
    Developments in Planning   |            |                                                                                                    |              |             |              |                 
|Bay Adelaide North                      | Toronto    | Bay
    and Adelaide Streets                                                                       | 1            | 100%        | 420          | 420              | 420          
|Brookfield Place III                    | Toronto    | Third
    tower of current project                                                                 | 1            | 54%         | 800          | 432              | 432          
|Bankers
    West Parkade                | Calgary    | West
    parkade adjacent to Bankers Hall                                                          | 1            | 50%         | 250          | 125              | 125          
|225 Sixth                               | Calgary    | Within
    one block of Fifth Avenue Place, Bankers Hall and Suncor Energy Centre                  | 1            | 100%        | 2,400        | 2,400            | 2,400        
|300
    Queen Street(4)                 | Ottawa     | Third
    phase of Place de Ville project                                                          | 1            | 25%         | 577          | 144              | 144          
|                                        |            |                                                                                                    | 5            |             | 4,447        | 3,521            | 3,521        
|Australian
    Developments in Planning |            |                                                                                                    |              |             |             
|Brookfield
    Place Tower 2            | Perth      | 14-story tower block
    adjacent to Brookfield Place in Perth                                     | 1            | 100%        | 345          | 345              | 345          
|                                        |            | 1                                                                                                  |              | 345         | 345          | 345             
|U.K.
    Developments in Planning       |            |                                                                                                    |              |             |              |                 
|100 Bishopsgate                         | London     | Located in the central
    core of the City of London                                              | 1            | 88%         | 950          | 831              | 831          
|London Wall Place(5)                    | London     | Located in the heart
    of the City of London financial district and close to the Bank of England | 1            | 50%         | 500          | 250              | 250          
|Principal Place(6)                      | London     | Located on the City of
    London/Shoreditch border                                                | 1            | 100%        | 625          | 625              | 625          
|                                        |            | 3                                                                                                  |              | 2,075       | 1,706        | 1,706           
|Total
    developments in planning      |            | 15                                                                                                 |              | 11,124      | 9,369        | 9,369           
|                                        |            |                                                                                                    |              |             |              |                 
|Total
    commercial developments       |            | 17                                                                                                 |              | 17,104      | 15,349       | 15,349          

| | (1) | Reflects Brookfield Office Properties interest before considering non-controlling interest in
subsidiaries including, Brookfield Financial Properties L.P. (“BFP”) of 0.6% and Brookfield Canada Office Properties
(“BOX”) of 16.7%. U.S. Office Fund assets are presented net of non-controlling interests held by co-investors in the
fund
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Reflects Brookfield Office Properties interest net of non-controlling interests described in
note above
| | --- | -------------------------------------------------------------------------------------------------------

| | (3) | Represents U.S. Office Fund assets
| | --- | ----------------------------------

| | (4) | Represents Canadian Office Fund asset
| | --- | -------------------------------------

| | (5) | Represents jointly controlled interest
| | --- | --------------------------------------

| | (6) | Represents a contribution which is included in other assets
| | --- | -----------------------------------------------------------

19







PERFORMANCE MEASUREMENT

The key indicators by which we measure
our performance are:



| | • | Net income attributable to shareholders;
| | - | ----------------------------------------



| | • | Commercial property net operating income;
| | - | -----------------------------------------



| | • | Funds from operations;
| | - | ----------------------



| | • | Total return;
| | - | -------------



| | • | Common equity per share;
| | - | ------------------------



| | • | Overall indebtedness level;
| | - | ---------------------------



| | • | Weighted average cost of debt; and
| | - | ----------------------------------



| | • | Occupancy levels.
| | - | -----------------



Although we monitor and analyze our financial
performance using a number of indicators, our primary business objective of generating reliable and growing cashflow is monitored
and analyzed using net income attributable to shareholders, commercial property net operating income, funds from operations and
total return. Although net income attributable to shareholders is calculated in accordance with IFRS, IFRS does not prescribe standardized
meanings for commercial property net operating income, funds from operations and total return; therefore, they are unlikely to
be comparable to similar measures presented by other companies. We provide the components of commercial property net operating
income on page 41, a reconciliation of net income attributable to shareholders to funds from operations as well as total return
on page 47 and a reconciliation of shareholders’ equity to common equity per share on page 35 of this MD&A.



Net Income Attributable to Shareholders

Net income attributable to shareholders
is calculated in accordance with IFRS. Net income attributable to shareholders is used as a key indicator in assessing the profitability
of the company.



Commercial Property Net Operating Income

We define commercial property net operating
income as revenue from commercial property operations less direct commercial property expense. Commercial property net operating
income is a key indicator of performance as it represents a measure over which management of the commercial property operations
has control. We evaluate the performance of management by comparing the performance of the commercial property portfolio on a same
property basis. Same property commercial property net operating income is defined as properties included in our consolidated results
that we own and operate throughout both the current and prior year. Accordingly, same property results exclude properties acquired,
sold, or reclassified from commercial development to commercial properties during each year and fees earned from management and
other services provided to co-investors in our funds and commercial properties. We may also exclude from our same property results
any property that is undergoing a redevelopment that may impact the comparability of the results between the current and prior
year.



Funds from Operations

Our definition of funds from operations
or “FFO” includes all of the adjustments that are outlined in the NAREIT definition of FFO such as 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 to reflect our interest in unconsolidated partnerships and joint ventures. In addition to the adjustments
prescribed by NAREIT, we also make adjustments to exclude any unrealized fair value gains (or losses) that arise as a result of
reporting under IFRS, and income taxes that arise as a result of our structure as a corporation as opposed to a REIT. These additional
adjustments result in an FFO measure that is similar to that which would result if the company was organized as a REIT that determined
net income in accordance with U.S. GAAP, which is the type of organization on which the NAREIT definition is premised. Our FFO
measure will differ from other organizations applying the NAREIT definition to the extent of certain differences between the IFRS
and U.S. GAAP reporting frameworks, principally related to the recognition of lease termination income, which do not have a significant
impact on the FFO measure reported.



Although funds from operations is a widely
used measure to analyze real estate, we believe that net income attributable to shareholders, commercial property net operating
income and funds from operations are all relevant measures. Funds from operations does not represent or approximate cash generated
from operating activities determined in accordance with IFRS. We provide a reconciliation of funds from operations to net income
attributable to shareholders as we believe net income attributable to shareholders is the most comparable measure.



Total Return

Total return represents the amount by which
we increase the value of our common equity through funds from operations and the increase or decrease in value of our investment
properties over a period of time. We believe that our performance is best assessed by considering these two components in aggregate,
and over the long term, because that is the basis on which we make investment decisions and operate the business. In fact, if we
were solely focused on short-term financial results, it is quite likely that we would operate the business very differently and,
in our opinion, in a manner that would produce lower long-term returns.





20







Common Equity per Share

Common equity per share represents the
book value of our common equity, adjusted for proceeds from the assumed exercise of all options outstanding, divided by common
shares outstanding, including potential common shares from the exercise of all options. We believe that common equity per share
is the best indicator of our current financial position because it reflects our common equity adjusted for all inflows and outflows,
including funds from operations and changes in the value of our investment properties. We also use common equity per share (pre-tax)
in order to determine common equity per share excluding our deferred tax liabilities which we believe provides a measure comparable
to organizations in our industry that are organized as REITs.



KEY PERFORMANCE DRIVERS

In addition to monitoring and analyzing
performance in terms of net income attributable to shareholders, commercial property net operating income, funds from operations
and total return, we consider the following items to be important drivers of our current and anticipated financial performance:



| | • | Increases in occupancies by leasing vacant space;
| | - | -------------------------------------------------



| | • | Increases in rental rates through maintaining or enhancing the quality of our assets and as market conditions permit; and
| | - | -------------------------------------------------------------------------------------------------------------------------



| | • | Reduction in occupancy costs through achieving economies of scale and diligently managing contracts.
| | - | ----------------------------------------------------------------------------------------------------



We also believe that the key external performance
drivers include the availability of:



| | • | Debt capital at a cost and on terms conducive to our goals;
| | - | -----------------------------------------------------------



| | • | Equity capital at a reasonable cost;
| | - | ------------------------------------



| | • | New property acquisitions that fit into our strategic plan; and
| | - | ---------------------------------------------------------------

| | • | Investors for dispositions of peak value or non-core assets.
| | - | ------------------------------------------------------------

21





PART II – FINANCIAL STATEMENT
ANALYSIS



ASSET PROFILE

Our total asset carrying value was $27.5
billion at December 31, 2012, an increase from $25.1 billion at December 31, 2011.



The following is a summary of our assets:



|(Millions)                                                    |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|------------------------------------------------------------- |  |  |  |  | ------------- | -------------
|Assets                                                        |  |  |  |  |               |              
|Non-current assets                                            |  |  |  |  |               |              
|Investment properties                                         |  |  |  |  |               |              
|Commercial properties                                         |  |  |  |  | $             | 22,442       
|Commercial developments                                       |  |  |  |  |               | 1,138        
|Equity accounted investments and participating loan interests |  |  |  |  |               |              
|Investments in jointly controlled entities                    |  |  |  |  |               | 1,778        
|Investments in associates                                     |  |  |  |  |               | 156          
|Participating loan interests                                  |  |  |  |  |               | 628          
|Other non-current financial assets                            |  |  |  |  |               | 209          
|                                                              |  |  |  |  |               | 26,351       
|Current assets                                                |  |  |  |  |               |              
|Receivables and other assets                                  |  |  |  |  |               | 525          
|Restricted cash and deposits                                  |  |  |  |  |               | 103          
|Cash and cash equivalents                                     |  |  |  |  |               | 362          
|                                                              |  |  |  |  |               | 990          
|Assets held for sale                                          |  |  |  |  |               | 138          
|Total assets                                                  |  |  |  |  | $             | 27,479       



COMMERCIAL PROPERTIES

Commercial properties comprise our direct
and indirect interests in wholly owned properties, as well as our proportionate share in jointly controlled assets.



The total fair value of our commercial
properties was $22.4 billion as at December 31, 2012, an increase of $3.2 billion from the balance at December 31, 2011. The increase
is primarily attributable to the reclassification of Brookfield Place in Perth from commercial developments to commercial properties
and the acquisitions of 99 Bishopsgate in London, Metropolitan Park East & West in Seattle and 799 9th Street in
Washington, D.C. Also contributing to the increase is the recognition of fair value gains and the impact of the strengthening of
Canadian and Australian currencies relative to the U.S. Dollar. Offsetting these increases is the sale of our 25% interest in Altius
Centre in Calgary. The consolidated fair value of our commercial properties in North America, Australia and the United Kingdom
at December 31, 2012, is approximately $405 per square foot.



A breakdown of our consolidated commercial
properties is as follows:



|                                   | Dec. 31, 2012 | Dec. 31, 2011
|---------------------------------- | ------------- | -------------
|(Millions, except per square feet) |               | Value        
|United States(2)                   | $             | 13,636       
|Canada                             |               | 5,130        
|Australia(3)                       |               | 3,249        
|United Kingdom                     |               | 427          
|Total                              | $             | 22,442       

| | (1) | Restated for re-measurements performed during the first quarter of 2012
| | --- | -----------------------------------------------------------------------

| | (2) | Excludes value associated with assets held for sale of $137 million or $110 per square foot
at December 31, 2012 (December 31, 2011 - $344 million or $113 per square foot)
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Excludes value associated with asset held for sale of nil at December 31, 2012 (December 31,
2011 - $79 million or $369 per square foot)
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------

22







The key valuation metrics for commercial
properties, including properties accounted for under the equity method, are set out in the following table:



|                         | Dec. 31, 2012 | Dec. 31, 2011
|------------------------ | ------------- | -------------
|                         | Maximum       | Minimum      
|United States            |               |              
|Discount rate            | 10.75%        | 6.25%        
|Terminal cap rate        | 9.00%         | 5.75%        
|Investment horizon (yrs) | 21            | 4            
|Canada                   |               |              
|Discount rate            | 7.50%         | 6.00%        
|Terminal cap rate        | 7.00%         | 5.25%        
|Investment horizon (yrs) | 14            | 10           
|Australia                |               |              
|Discount rate            | 9.75%         | 8.50%        
|Terminal cap rate        | 9.00%         | 7.00%        
|Investment horizon (yrs) | 10            | 10           
|United Kingdom           |               |              
|Discount rate            | 7.20%         | 4.50%        
|Terminal cap rate        | 5.80%         | 2.00%        
|Investment horizon (yrs) | 10            | 10           



Values are most sensitive to changes in
discount rates and timing or variability of cashflows.









The
aggregate fair value of $22.4 billion at December 31, 2012 (December 31, 2011 – $19.3 billion) implies a going-in capitalization
rate of 5.6% (December 31, 2011 – 5.8%) based on 2012 commercial property net operating income, adjusted to exclude certain
recurring fees and other income, such as lease termination income, that are commonly excluded in valuing properties using a direct
capitalization rate.



Upon the signing of the majority of our
leases, we provide a capital allowance for tenant improvements for leased space in order to accommodate the specific space requirements
of the tenant. In addition to this capital allowance, leasing commissions are paid to third-party brokers representing tenants
in lease negotiations. Capital expenditures for tenant improvements that enhance the value of our properties and leasing commissions
are capitalized in the period incurred. For the year ended December 31, 2012, expenditures for these tenant installation costs
totaled $156 million, compared with $126 million expended in 2011.



We also invest in on-going maintenance
and capital improvement projects to sustain the high quality of the infrastructure and tenant service amenities in our properties.
Capital expenditures for the year ended December 31, 2012, totaled $141 million, compared with $84 million during 2011. These expenditures
exclude repairs and maintenance costs, a portion of which are recovered through contractual tenant cost recovery payments. Fluctuations
in our capital expenditures vary by period based on required and planned expenditures on our properties. In the current year, we
incurred costs related to exterior maintenance, elevator modifications, lobby and retail renovations and restroom upgrades at various
properties. Capital expenditures include revenue-enhancing capital expenditures, which represent improvements to an asset or reconfiguration
of space to increase rentable area or increase current rental rates, and non-revenue-enhancing expenditures, which are those required
to extend the service life of an asset. During 2012, $35 million of our total capital expenditures were recoverable, compared with
$18 million in the prior year.



The following table summarizes the changes
in the carrying value of our commercial properties for the year ended December 31, 2012:



|(Millions)                                     |  |  |  |  |  | Dec. 31, 2012
|---------------------------------------------- |  |  |  |  |  | -------------
|Commercial properties, beginning of period     |  |  |  |  |  |              
|Fair value gains (losses)                      |  |  |  |  |  |              
|Acquisitions                                   |  |  |  |  |  |              
|Reclassifications from commercial developments |  |  |  |  |  |              
|Dispositions                                   |  |  |  |  |  |              
|Expenditures and other                         |  |  |  |  |  |              
|Foreign currency translation                   |  |  |  |  |  |              
|Commercial properties, end of period           |  |  |  |  |  |              

23







COMMERCIAL DEVELOPMENTS

Commercial developments consist of commercial
property development sites, density rights and related infrastructure. The total fair value of development land and infrastructure
was $1.1 billion at December 31, 2012, a decrease of $274 million from $1.4 billion at December 31, 2011. The decrease is primarily
attributable to the reclassification of Brookfield Place in Perth from commercial developments to commercial properties offset
by the acquisition of 225 Sixth - Bow Parkade in Calgary and the consolidation of 100 Bishopsgate in London due to the acquisition
of an additional 37.5% interest. Also offsetting the decrease were capital expenditures and the recognition of fair value gains.
Based on 17 million square feet of commercial developments at our owned interest, the value at December 31, 2012, adjusted to reflect
our contribution in relation to Principal Place, a commercial development site in London, included in other assets, represents
approximately $73 per square foot.



Although we are generally not a speculative
developer, we are a full-service real estate company with in-house development expertise. With 17 million square feet of high-quality,
centrally-located development properties in New York, Denver, Washington, D.C., Houston, Toronto, Calgary, Ottawa, Perth and London,
we will undertake developments when we achieve our risk-adjusted returns and pre-leasing targets.



Expenditures for development of commercial
properties totaled $258 million in 2012 as compared with $312 million in 2011. The decrease is primarily attributable to construction
costs at Brookfield Place in Perth, which was under construction throughout 2011 and completed in the first half of 2012, as well
as a decrease in the associated borrowing costs, offset by construction costs associated with our active development sites, Manhattan
West in New York and Bay Adelaide East in Toronto.



The details of development and redevelopment
expenditures are as follows:



|(Millions)                                       |  |  |  |  |   | 2012 |   | 2011
|------------------------------------------------ |  |  |  |  | - | ---- | - | ----
|Construction costs                               |  |  |  |  | $ | 169  | $ | 211 
|Capitalized borrowing costs                      |  |  |  |  |   | 64   |   | 87  
|Property taxes and other                         |  |  |  |  |   | 25   |   | 14  
|Total development and redevelopment expenditures |  |  |  |  | $ | 258  | $ | 312 



The following table summarizes the changes
in value of our commercial developments for the year ended December 31, 2012:



|(Millions)                                   |  |  |  |  |  | Dec. 31, 2012
|-------------------------------------------- |  |  |  |  |  | -------------
|Commercial developments, beginning of period |  |  |  |  |  |              
|Fair value gains (losses)                    |  |  |  |  |  |              
|Acquisitions                                 |  |  |  |  |  |              
|Reclassifications to commercial properties   |  |  |  |  |  |              
|Expenditures and other                       |  |  |  |  |  |              
|Foreign currency translation                 |  |  |  |  |  |              
|Commercial developments, end of period       |  |  |  |  |  |              



INVESTMENTS IN JOINTLY CONTROLLED ENTITIES

We have investments in joint ventures that
are jointly controlled entities. These joint ventures hold individual commercial properties or developments that we own together
with co-owners.



During the fourth quarter of 2012, we acquired
an additional 37.5% interest in The 100 Bishopsgate Partnership resulting in the acquisition of control of the entity and the inclusion
of the related investment property in commercial developments. In addition, on November 15, 2012, we sold our interest in the Dresser-Cullen
Venture, which owns KBR Tower in Houston, for $76 million.



During the third quarter of 2012, we acquired
a 50% interest in London Wall Place LP, a jointly controlled entity that owns London Wall Place, a commercial development in London,
for £13 million.



At December 31, 2012, we had interests
in a number of jointly controlled entities which were accounted for following the equity method. These jointly controlled entities
own interests in the following assets:



|                         |                   |  |  |  |  | Ownership Interest
|------------------------ | ----------------- |  |  |  |  | ------------------
|                         | Location          |  |  |  |  | Dec. 31, 2012     
|Commercial properties:   |                   |  |  |  |  |                   
|The Grace Building       | Midtown, New York |  |  |  |  |                   
|Victor Building          | Washington, D.C.  |  |  |  |  |                   
|Marina Towers            | Los Angeles       |  |  |  |  |                   
|KBR Tower                | Houston           |  |  |  |  |                   
|245 Park Avenue          | Midtown, New York |  |  |  |  |                   
|450 West 33rd Street     | Midtown, New York |  |  |  |  |                   
|E&Y Centre               | Sydney            |  |  |  |  |                   
|Commercial developments: |                   |  |  |  |  |                   
|100 Bishopsgate          | London            |  |  |  |  |                   
|London Wall Place        | London            |  |  |  |  |                   



24







Summarized financial information in respect
of our investment in these jointly controlled entities is set out below:



|(Millions)                  |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|--------------------------- |  |  |  |  | ------------- | -------------
|Non-current assets          |  |  |  |  |               |              
|Commercial properties       |  |  |  |  | $             | 5,080        
|Commercial developments     |  |  |  |  |               | 43           
|Current assets              |  |  |  |  |               | 130          
|Total assets                |  |  |  |  |               | 5,253        
|Non-current liabilities     |  |  |  |  |               |              
|Commercial property debt(1) |  |  |  |  |               | 1,747        
|Current liabilities         |  |  |  |  |               | 49           
|Total liabilities           |  |  |  |  |               | 1,796        
|Net assets                  |  |  |  |  | $             | 3,457        
|Our share of net assets     |  |  |  |  | $             | 1,778        

| | (1) | Refer to page 31 for details of commercial property debt of our equity accounted investments
| | --- | --------------------------------------------------------------------------------------------



|(Millions)                                |  |  |  |  |   | 2012  |   | 2011 
|----------------------------------------- |  |  |  |  | - | ----- | - | -----
|Revenue                                   |  |  |  |  | $ | 393   | $ | 549  
|Expense                                   |  |  |  |  |   | (205) |   | (299)
|Earnings before fair value gains (losses) |  |  |  |  |   | 188   |   | 250  
|Fair value gains (losses)                 |  |  |  |  |   | 30    |   | 159  
|Net earnings                              |  |  |  |  | $ | 218   | $ | 409  
|Our share of net earnings                 |  |  |  |  | $ | 123   | $ | 209  



Our share of net earnings from jointly
controlled entities for the year ended December 31, 2011, includes the following earnings of TRZ Holdings which was a jointly controlled
entity prior to our acquisition of control in the third quarter of 2011:



|(Millions)                                |  |  |  |  |  |  |   | 2011 
|----------------------------------------- |  |  |  |  |  |  | - | -----
|Revenue                                   |  |  |  |  |  |  | $ | 476  
|Expenses                                  |  |  |  |  |  |  |   | (345)
|Earnings before fair value gains (losses) |  |  |  |  |  |  |   | 131  
|Fair value gains (losses)                 |  |  |  |  |  |  |   | 585  
|Net earnings                              |  |  |  |  |  |  | $ | 716  
|Our share of net earnings(1)              |  |  |  |  |  |  | $ | 383  

| | (1) | Net of $63 million for the year ended December 31, 2011 representing the amortization of the
excess of our carrying amount over our share of the net assets of the venture
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



INVESTMENTS IN ASSOCIATES

We exercise significant influence over
the following investments, which have been accounted for using the equity method:



|(Millions)                         |                         | Ownership Interest |              
|---------------------------------- | ----------------------- | ------------------ | -------------
|Name of Investment                 | Principal activity      | Dec. 31, 2012      | Dec. 31, 2011
|BSREP Australia Trust              | Investment properties   | 41.22%             | —            
|Brookfield LePage Johnson Controls | Facilities management   | 40%                | 40%          
|Oakridges                          | Residential development | 23.75%             | 23.75%       
|Our net investment                 |                         |                    |              



In the fourth quarter of 2012, we acquired
an indirect 41.22% equity interest in BSREP Australia Trust, an entity that acquired the outstanding shares of the Wynyard Properties
Holding Group (formerly known as Thakral Holdings Group) on October 10, 2012. The remaining equity of BSREP Australia Trust was
acquired by a fund that is controlled by a subsidiary of BAM. We have accounted for our interest in BSREP Australia Trust as an
associate as we have the ability to exercise significant influence over the financial and operating policy decisions of the trust.



Included in investments in associates is
our interest in Brookfield LePage Johnson Controls, one of the largest facilities management operations in Canada, which is owned
40% by us in partnership with Johnson Controls. This joint venture currently delivers services to clients with portfolios in excess
of 134 million square feet of space.



Investments in associates also includes
our 23.75% investment in Oakridges, which is a residential development project in Toronto.





25







PARTICIPATING LOAN INTERESTS

Participating loan interests represent
interests in certain properties in Australia that do not provide us with control over the entity that owns the underlying property.
They are accounted for as loans and receivables and presented as participating loan interests on our consolidated balance sheets.
The instruments, which are receivable from a wholly-owned subsidiary of BAM, have a contractual maturity date of September 26,
2020, subject to our prior right to convert into direct ownership interest in the underlying commercial properties, and have a
contractual interest rate that varies with the results of operations of those properties. The contractual maturity date was extended
from 2015 to 2020 in the second quarter of 2012 through an agreement with BAM.



The outstanding principal of the participating
loan interests relates to the following commercial properties:



|(Millions)                         |                        |  |  |  |  |               |              
|---------------------------------- | ---------------------- |  |  |  |  | ------------- | -------------
|Name of Property                   | Participation Interest |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|Darling Park Complex, Sydney       | 30%                    |  |  |  |  | $             | 178          
|IAG House, Sydney                  | 50%                    |  |  |  |  |               | 111          
|NAB House, Sydney                  | 25%                    |  |  |  |  |               | 122          
|Bourke Place Trust, Melbourne      | 43%                    |  |  |  |  |               | 217          
|Total participating loan interests |                        |  |  |  |  | $             | 628          



Participating loan interests were $628
million at December 31, 2012, an increase of $189 million from the balance at December 31, 2011. The increase is primarily attributable
to repayments on commercial property debt associated with the underlying properties, which in turn increased our interest in the
participating loan interests.



Included in the balance of participating
loan interests is an embedded derivative representing our right to participate in the changes in the fair value of the referenced
properties. The embedded derivative is measured at fair value with changes in fair value reported in earnings as fair value gains.
The carrying value of the embedded derivative at December 31, 2012 is $48 million (December 31, 2011 – $49 million).



Summarized financial information in respect
of the properties underlying our investment in participating loan interests is set out below:



|(Millions)              |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|----------------------- |  |  |  |  | ------------- | -------------
|Non-current assets      |  |  |  |  | $             | 2,570        
|Current assets          |  |  |  |  |               | 106          
|Total assets            |  |  |  |  |               | 2,676        
|Non-current liabilities |  |  |  |  |               | 673          
|Current liabilities     |  |  |  |  |               | 274          
|Total liabilities       |  |  |  |  |               | 947          
|Net assets              |  |  |  |  | $             | 1,729        



|(Millions)                                |  |  |  |  |   | 2012  |   | 2011 
|----------------------------------------- |  |  |  |  | - | ----- | - | -----
|Revenue                                   |  |  |  |  | $ | 219   | $ | 211  
|Expense                                   |  |  |  |  |   | (126) |   | (160)
|Earnings before fair value gains (losses) |  |  |  |  |   | 93    |   | 51   
|Fair value gains (losses)                 |  |  |  |  |   | 15    |   | 87   
|Net earnings                              |  |  |  |  | $ | 108   | $ | 138  



OTHER NON-CURRENT FINANCIAL ASSETS

The components of other non-current financial
assets are as follows:



|(Millions)                                                                  |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|--------------------------------------------------------------------------- |  |  |  |  | ------------- | -------------
|Equity securities designated as available-for-sale (“AFS”)                  |  |  |  |  | $             | 105          
|Brookfield Residential Properties Inc. (“BRPI”) promissory notes            |  |  |  |  |               | —            
|Loans receivable designated as fair value through profit and loss (“FVTPL”) |  |  |  |  |               | —            
|Other loans receivable                                                      |  |  |  |  |               | 104          
|Total other non-current financial assets                                    |  |  |  |  | $             | 209          



Equity securities designated as AFS

Equity securities designated as AFS include
$105 million (December 31, 2011 – $107 million) representing our 10% common equity interest and $92 million preferred equity
interest in 1625 Eye Street in Washington, D.C. The preferred equity securities, bearing a fixed dividend of 6.50%, are redeemable
by the issuer at par in 2016 and are pledged as security for a loan payable to the issuer in the amount of $92 million (December
31, 2011 – $92 million) recognized in other non-current financial liabilities.



26







BRPI promissory notes

At December 31, 2011, BRPI promissory notes
included unsecured promissory notes of C$480 million received on March 31, 2011 as partial proceeds for the disposition of our
residential development segment to BRPI, a subsidiary of BAM. The loans receivable consisted of an unsecured senior promissory
note of C$265 million which bore interest at 6.5% on the first C$115 million and 7.5% on the remainder due December 31, 2015, and
an unsecured subordinated promissory note of C$215 million which bore interest at 8.5% due December 31, 2020. The principal of
the subordinated promissory note was subject to mandatory prepayments of up to $100 million semi-annually, out of excess cash flows
of BRPI following the maturity of the senior promissory note, and of up to 50% of the proceeds of any issuance of equity interests
in BRPI to third parties, subject first to the mandatory prepayment of the senior promissory note resulting from such equity issuance.



We entered into an agreement with BAM under
which we had the right to put the BRPI subordinated promissory note to BAM for cash proceeds equal to the outstanding principal
amount on March 31, 2016, and annually on each March 31 thereafter until the maturity of the note or, at any time, upon occurrence
of an event of default by BRPI. In exchange for this put option, we agreed to pay to BAM an annual fee of 2% of the outstanding
principal of the note. We also entered into a put agreement in respect of the senior notes whereby we could put $50 million of
the outstanding principal of the note to BAM on each of December 31, 2012, 2013 and 2014 or, at any time, upon occurrence of an
event of default. In connection with this option, we paid BAM an annual fee of 1% of the outstanding principal subject to the put.
These agreements were derivative financial instruments measured at fair value with changes in value recorded in fair value gains
(losses), net in the period in which they occur. At December 31, 2011, the fair value of these derivatives was nil.



In the fourth quarter of 2012, BRPI repaid
the unsecured promissory notes of C$480 million. All principal and interest were repaid in full and the put agreement with BAM
was terminated.



For the year ended December 31, 2012 we
received $29 million of income related to the promissory notes (2011 – $23 million).



Loans receivable designated as FVTPL

At December 31, 2011, loans receivable
designated as FVTPL included A$135 million senior unsecured note receivable from a subsidiary of BAM that had a scheduled maturity
of December 19, 2014. The principal and interest payments on the note receivable were based on the returns of a referenced debenture
which was, in turn, secured by an equity interest in a publicly traded real estate entity in Australia. In the third quarter of
2012, the participating loan agreement was settled in exchange for an interest in the underlying debenture and 59% of our interest
in the debenture was concurrently transferred to a group of funds controlled by BAM for proceeds equal to our cost plus a fee equal
to an annual return of 9% thereon to compensate us for the acquisition and maintenance of the investment. In the fourth quarter
of 2012, the debenture was repaid and we received proceeds approximating our carrying value.



In the year ended December 31, 2012, we
recognized fair value gains of $23 million (2011 – nil), representing the increase in value of our interest in the debenture.
We also recognized $8 million in interest and other income (2011 – nil), $6 million of which was to compensate us for the
acquisition and maintenance of the investment through to its transfer in the third quarter of 2012.



Other loans receivable

Other loans receivable includes a $104
million (December 31, 2011 – $102 million) receivable from BAM upon the earlier of the exercise of our option to convert
our participating loan interests into direct ownership of the Australian portfolio or the maturity of the participating loan notes.



RECEIVABLES AND OTHER ASSETS

Receivables and other assets was $525 million
at December 31, 2012, an increase of $52 million from the balance at December 31, 2011. The increase is primarily attributable
to a £61 million contribution in relation to Principal Place, a commercial development site in London, offset by the repayment
of a loan receivable from a subsidiary of BAM.



The components of receivables and other
assets are as follows:



|(Millions)                          |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|----------------------------------- |  |  |  |  | ------------- | -------------
|Accounts receivable                 |  |  |  |  | $             | 195          
|Loan receivable from affiliate(1,2) |  |  |  |  |               | 75           
|Prepaid expenses and other assets   |  |  |  |  |               | 255          
|Total receivables and other assets  |  |  |  |  | $             | 525          

| | (1) | At December 31, 2012, included a $75 million receivable from BAM that was due on demand (December
31, 2011 – $73 million)
| | --- | -------------------------------------------------------------------------------------------------------------------------

| | (2) | At December 31, 2011, included a $49 million secured loan receivable from a subsidiary of BAM
that was repaid March 15, 2012
| | --- | ----------------------------------------------------------------------------------------------------------------------------



RESTRICTED CASH AND DEPOSITS

Cash and deposits are considered restricted
when third parties impose limits that prevent the assets’ use for current purposes. Restricted cash and deposits was $103
million at December 31, 2012, an increase of $34 million from the balance at December 31, 2011. The increase is primarily attributable
to the timing of restricted cash and deposits.





27







CASH AND CASH EQUIVALENTS

We endeavor to maintain liquidity to ensure
that we can react quickly to potential investment opportunities. This liquidity consists of cash, which contributes investment
returns, as well as committed lines of credit. To ensure we maximize our returns, cash balances are generally carried at a modest
level and excess cash is used to repay revolving credit lines.



Cash and cash equivalents was $362 million
at December 31, 2012, a decrease of $72 million from the balance at December 31, 2011. The decrease is primarily attributable to
the redemption of capital securities Class AAA, Series I during the first quarter of 2012 and the acquisition of a portfolio of
assets in London in the third quarter of 2012, offset by the disposition of 33 South Sixth Street in Minneapolis and KBR Tower
in Houston as well as repayment of the BRPI promissory notes in the fourth quarter of 2012.



ASSETS AND ASSOCIATED LIABILITIES HELD
FOR SALE

On November 20, 2012, we sold 33 South
Sixth Street in Minneapolis for $106 million. On March 30, 2012, we sold our interest in Defence Plaza in Melbourne for proceeds
of A$87 million. Both 33 South Sixth Street and Defence Plaza were presented in assets held for sale at December 31, 2011.



At December 31, 2012, and December 31,
2011, the properties that comprise our Minneapolis portfolio are presented in held for sale. As the portfolio represents a specific
geographic market that we intend to exit, the corresponding revenues and expenses have been presented as discontinued operations
in the statement of income. We still intend to exit this market through the sale of these properties and continue to make adjustments
to our marketing efforts in response to current market conditions.



|(Millions)                                       |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|------------------------------------------------ |  |  |  |  | ------------- | -------------
|Assets                                           |  |  |  |  |               |              
|Commercial properties                            |  |  |  |  | $             | 137          
|Receivables and other assets                     |  |  |  |  |               | 1            
|Assets held for sale                             |  |  |  |  | $             | 138          
|Liabilities                                      |  |  |  |  |               |              
|Commercial property debt                         |  |  |  |  | $             | 64           
|Accounts payable and accrued liabilities         |  |  |  |  |               | 6            
|Liabilities associated with assets held for sale |  |  |  |  | $             | 70           

28







LIABILITIES AND EQUITY

Our asset base of $27.5 billion at December
31, 2012 is financed with a combination of debt, capital securities and preferred and common equity.



The following is a summary of our liabilities
and shareholders’ equity:



|(Millions)                                       |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|------------------------------------------------ |  |  |  |  | ------------- | -------------
|Liabilities                                      |  |  |  |  |               |              
|Non-current liabilities                          |  |  |  |  |               |              
|Commercial property debt                         |  |  |  |  | $             | 9,716        
|Capital securities                               |  |  |  |  |               | 664          
|Other non-current financial liabilities          |  |  |  |  |               | 251          
|Deferred tax liabilities                         |  |  |  |  |               | 732          
|                                                 |  |  |  |  |               | 11,363       
|Current liabilities                              |  |  |  |  |               |              
|Commercial property debt                         |  |  |  |  |               | 1,732        
|Capital securities                               |  |  |  |  |               | 202          
|Accounts payable and accrued liabilities         |  |  |  |  |               | 1,148        
|                                                 |  |  |  |  |               | 3,082        
|Liabilities associated with assets held for sale |  |  |  |  |               | 70           
|Total liabilities                                |  |  |  |  | $             | 14,515       
|                                                 |  |  |  |  |               |              
|Equity                                           |  |  |  |  |               |              
|Preferred equity – corporate                     |  |  |  |  | $             | 1,345        
|Common equity                                    |  |  |  |  |               | 10,086       
|Total shareholder’s equity                       |  |  |  |  |               | 11,431       
|Preferred equity – subsidiaries                  |  |  |  |  |               | 385          
|Other non-controlling interests                  |  |  |  |  |               | 1,148        
|Total equity                                     |  |  |  |  | $             | 12,964       
|Total liabilities and equity                     |  |  |  |  | $             | 27,479       



COMMERCIAL PROPERTY DEBT

Total commercial property debt was $11.4
billion at December 31, 2012, an increase of $813 million from the balance at December 31, 2011. The increase is primarily attributable
to financings related to the acquisitions of 99 Bishopsgate in London, Metropolitan Park East & West in Seattle, 799 9th
Street in Washington, D.C., and 225 Sixth – Bow Parkade in Calgary, draws on the Brookfield Place, Perth construction loan
and various refinancings. Offsetting these increases is the disposition of Altius Centre in Calgary, repayment of our corporate
revolving credit facility and principal amortization payments. Additionally, on April 12, 2012, we issued C$150 million of senior
unsecured notes at 4.00% due in 2018. We previously issued C$200 million of senior unsecured notes at 4.30% due in 2017 on January
17, 2012. These funds were used to repay Australian commercial property debt at a higher cost of capital of approximately 7.62%.
Commercial property debt at December 31, 2012 had a weighted average interest rate of 5.31% (December 31, 2011 – 5.70%).



We attempt to match the maturity of our
commercial property debt portfolio with the lease terms of our properties. At December 31, 2012, the average remaining term to
maturity of our commercial property debt was five years, compared to the average remaining lease term of our properties of seven
years.



We have $897 million of committed corporate
credit facilities consisting of a $695 million revolving credit facility from a syndicate of banks and C$200 million revolving
credit facility in the form of bilateral agreements between Brookfield Canada Office Properties (“BOX”), our 83.3%
owned subsidiary, and a number of Canadian chartered banks. At December 31, 2012, the balance drawn on these facilities was $68
million (December 31, 2011 – $381 million). We incurred $16 million in interest expense related to the balance on the corporate
credit facilities for the year ended December 31, 2012 (2011 – $12 million).



As at December 31, 2012, we also had $30
million (December 31, 2011 – $30 million) of indebtedness outstanding to a subsidiary of BAM. Interest expense related to
this indebtedness totaled $4 million for the year ended December 31, 2012, consistent with 2011.

29







The details of commercial property debt
at December 31, 2012, are as follows:



|($ in Millions)                            | Location         | Rate  | Maturity Date | Dec. 31, 2012(1,2) | Mortgage Details(3)
|------------------------------------------ | ---------------- | ----- | ------------- | ------------------ | -------------------
|Commercial property debt                   |                  |       |               |                    |                    
|West 31st Street(4)                        | New York         | 6.00% | January       | 2013               |                    
|105 Adelaide                               | Toronto          | 5.32% | February      | 2013               |                    
|Bay Wellington Tower                       | Toronto          | 6.49% | April         | 2013               |                    
|Hudson's Bay Centre(5)                     | Toronto          | 5.20% | May           | 2013               |                    
|KPMG Tower(6,7)                            | Sydney           | 8.48% | May           | 2013               |                    
|75 State Street                            | Boston           | 5.50% | June          | 2013               |                    
|Three Bethesda Metro Center                | Washington, D.C. | 6.60% | June          | 2013               |                    
|225 Liberty Street                         | New York         | 6.91% | September     | 2013               |                    
|601 South 12th Street                      | Washington, D.C. | 5.42% | October       | 2013               |                    
|701 South 12th Street                      | Washington, D.C. | 5.42% | October       | 2013               |                    
|Bankers Hall                               | Calgary          | 7.17% | November      | 2013               |                    
|250 Vesey Street                           | New York         | 3.48% | November      | 2013               |                    
|1550 & 1560 Wilson Boulevard(8)            | Washington, D.C. | 2.81% | January       | 2014               |                    
|Ernst & Young Tower                        | Los Angeles      | 5.07% | February      | 2014               |                    
|650 Massachusetts Avenue                   | Washington, D.C. | 2.96% | March         | 2014               |                    
|2401 Pennsylvania Avenue(8)                | Washington, D.C. | 2.41% | May           | 2014               |                    
|500 Jefferson Street(7,8)                  | Houston          | 4.39% | May           | 2014               |                    
|601 Figueroa(7,8)                          | Los Angeles      | 4.39% | May           | 2014               |                    
|1600 Smith Street(7,8)                     | Houston          | 4.39% | May           | 2014               |                    
|Continental Center II(7,8)                 | Houston          | 4.39% | May           | 2014               |                    
|Landmark Square(7,8)                       | Los Angeles      | 4.39% | May           | 2014               |                    
|One Allen Center(7,8)                      | Houston          | 4.39% | May           | 2014               |                    
|Sunrise Tech Park(7,8)                     | Washington, D.C. | 4.39% | May           | 2014               |                    
|Two Ballston Plaza(7,8)                    | Washington, D.C. | 4.39% | May           | 2014               |                    
|Suncor Energy Centre(9)                    | Calgary          | 6.38% | June          | 2014               |                    
|Brookfield Place, Perth                    | Perth            | 5.70% | June          | 2014               |                    
|Brookfield Prime Property Fund pool debt   | Various          | 5.30% | June          | 2014               |                    
|151 Yonge Street(10)                       | Toronto          | 2.92% | July          | 2014               |                    
|2000 L Street                              | Washington, D.C. | 2.12% | August        | 2014               |                    
|Bank of America Plaza(8)                   | Los Angeles      | 5.31% | September     | 2014               |                    
|Silver Spring Metro Plaza(8)               | Washington, D.C. | 2.36% | September     | 2014               |                    
|235 St Georges Terrace(7)                  | Perth            | 6.40% | September     | 2014               |                    
|225 Liberty Street                         | New York         | 9.00% | October       | 2014               |                    
|First Canadian Place(10)                   | Toronto          | 5.37% | December      | 2014               |                    
|2001 M Street(8)                           | Washington, D.C. | 5.25% | December      | 2014               |                    
|200 Vesey Street                           | New York         | 3.00% | December      | 2014               |                    
|Mezzanine Loan                             | Various          | 5.71% | January       | 2015               |                    
|Southern Cross East Tower(6)               | Melbourne        | 5.03% | June          | 2015               |                    
|Royal Centre                               | Vancouver        | 3.33% | June          | 2015               |                    
|799 9th Street                             | Washington, D.C. | 2.89% | December      | 2015               |                    
|One & Two Reston Crescent(8)               | Washington, D.C. | 1.96% | December      | 2015               |                    
|1250 Connecticut Avenue(8)                 | Washington, D.C. | 5.86% | January       | 2016               |                    
|One Shelley Street(7)                      | Sydney           | 7.13% | January       | 2016               |                    
|One New York Plaza(8)                      | New York         | 5.50% | March         | 2016               |                    
|225 Sixth(4)                               | Calgary          | 3.07% | May           | 2016               |                    
|Three Allen Center(8)                      | Houston          | 6.12% | May           | 2016               |                    
|Metropolitan Park East & West              | Seattle          | 3.75% | June          | 2016               |                    
|U.S. Office Fund acquisition financing(11) | Various          | 8.50% | October       | 2016               |                    
|1801 California Street                     | Denver           | 3.46% | December      | 2016               |                    
|200 Liberty Street                         | New York         | 5.83% | February      | 2017               |                    
|52 Goulburn Street(7)                      | Sydney           | 5.63% | July          | 2017               |                    
|99 Bishopsgate                             | London           | 4.27% | September     | 2017               |                    
|One Liberty Plaza                          | New York         | 6.14% | September     | 2017               |                    
|Southern Cross West Tower                  | Melbourne        | 5.45% | November      | 2017               |                    
|2 Queen Street East(10)                    | Toronto          | 5.64% | December      | 2017               |                    
|1400 K Street(8)                           | Washington, D.C. | 5.30% | February      | 2018               |                    
|West 33rd Street(4)                        | New York         | 5.90% | April         | 2018               |                    
|Two Allen Center(8)                        | Houston          | 6.45% | May           | 2018               |                    
|1201 Louisiana Street                      | Houston          | 4.65% | October       | 2018               |                    
|Potomac Tower                              | Washington, D.C. | 4.50% | January       | 2019               |                    
|22 Front Street                            | Toronto          | 6.24% | October       | 2020               |                    
|Bankers Court                              | Calgary          | 4.96% | November      | 2020               |                    
|1200 K Street(8)                           | Washington, D.C. | 5.88% | February      | 2021               |                    
|Bethesda Crescent(8)                       | Washington, D.C. | 5.58% | February      | 2021               |                    

30







|($ in Millions)                                               | Location         | Rate  | Maturity Date | Dec. 31, 2012(1,2) | Mortgage Details(3)
|------------------------------------------------------------- | ---------------- | ----- | ------------- | ------------------ | -------------------
|Commercial property debt continued                            |                  |       |               |                    |                    
|Queen's Quay Terminal                                         | Toronto          | 5.40% | April         | 2021               |                    
|Fifth Avenue Place                                            | Calgary          | 4.71% | August        | 2021               |                    
|Bay Adelaide West                                             | Toronto          | 4.43% | December      | 2021               |                    
|Exchange Tower                                                | Toronto          | 4.03% | April         | 2022               |                    
|77 K Street                                                   | Washington, D.C. | 4.58% | June          | 2022               |                    
|Republic Plaza                                                | Denver           | 4.24% | December      | 2022               |                    
|HSBC Building                                                 | Toronto          | 4.06% | January       | 2023               |                    
|Heritage Plaza                                                | Houston          | 4.97% | January       | 2023               |                    
|Jean Edmonds Towers(10)                                       | Ottawa           | 6.79% | January       | 2024               |                    
|701 9th Street                                                | Washington, D.C. | 6.73% | December      | 2028               |                    
|300 Madison Avenue                                            | New York         | 7.26% | April         | 2032               |                    
|Total commercial property debt                                | 5.38%            |       |               |                    |                    
|Corporate debt                                                |                  |       |               |                    |                    
|C$200M BOX Corporate Revolver                                 | —                | 3.22% | June          | 2014               |                    
|Senior Notes                                                  | —                | 4.30% | January       | 2017               |                    
|Senior Notes                                                  | —                | 4.00% | April         | 2018               |                    
|Total corporate debt                                          | 4.02%            |       |               |                    |                    
|Total commercial property debt                                | 5.33%            |       |               |                    |                    
|Commercial property debt associated with assets held for sale |                  |       |               |                    |                    
|RBC Plaza                                                     | Minneapolis      | 2.25% | April         | 2013               |                    
|Total                                                         | 5.31%            |       |               |                    |                    

| | (1) | Represents our consolidated interest before non-controlling interests
| | --- | ---------------------------------------------------------------------

| | (2) | Net of $61 million of transaction costs
| | --- | ---------------------------------------

| | (3) | Non-recourse to Brookfield Office Properties
| | --- | --------------------------------------------

| | (4) | Development debt
| | --- | ----------------

| | (5) | A two-year extension option that extends the maturity to May 2015 is available to us provided
that certain debt service and loan-to-value thresholds are met
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Represents liability payable to a subsidiary of BAM
| | --- | ---------------------------------------------------

| | (7) | These debt balances are floating, but a portion of each balance has interest rate swaps in place
to fix the interest rate through maturity
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------

| | (8) | U.S. Office Fund debt
| | --- | ---------------------

| | (9) | This loan consists of $174 million 1st mortgage bonds that are non-recourse to Brookfield Office
Properties and a $33 million unsecured loan from an affiliate
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (10) | Canadian Office Fund debt
| | ---- | -------------------------

| | (11) | Represents financing provided by seller of an approximate 20% interest in the U.S. Office Fund,
which is secured by a limited partnership interest in the U.S. Office Fund
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Commercial property debt maturities for
the next five years and thereafter are as follows:



|                    |   |                   |   |            |   |          | Weighted-       
|------------------- | - | ----------------- | - | ---------- | - | -------- | ----------------
|                    |   |                   |   |            |   |          | Average         
|                    |   | Scheduled         |   |            |   |          | Interest Rate at
|(Millions)          |   | Amortization(1,2) |   | Maturities |   | Total(3) | Dec. 31, 2012   
|2013                | $ | 80                | $ | 1,716      | $ | 1,796    | 5.58%           
|2014                |   | 77                |   | 3,151      |   | 3,228    | 5.00%           
|2015                |   | 80                |   | 608        |   | 688      | 4.42%           
|2016                |   | 73                |   | 1,349      |   | 1,422    | 5.93%           
|2017                |   | 63                |   | 1,680      |   | 1,743    | 5.58%           
|2018 and thereafter |   | 494               |   | 2,141      |   | 2,635    | 5.24%           
|Total               | $ | 867               | $ | 10,645     | $ | 11,512   | 5.31%           

| | (1) | Paid through our annual cash flows
| | --- | ----------------------------------

| | (2) | Net of $61 million of transaction costs
| | --- | ---------------------------------------

| | (3) | Includes commercial property debt associated with assets held for sale at December 31, 2012
| | --- | -------------------------------------------------------------------------------------------



Commercial property debt – equity
accounted investments

The details of commercial property debt
of our equity accounted investments at December 31, 2012, are as follows:



|                                                                   |                  | Dec. 31, 2012
|------------------------------------------------------------------ | ---------------- | -------------
|($ in Millions)                                                    | Location         | Rate         
|450 West 33rd Street                                               | New York         | 5.29%        
|The Grace Building(3)                                              | New York         | 5.54%        
|Victor Building(3)                                                 | Washington, D.C. | 5.39%        
|Marina Towers(3)                                                   | Los Angeles      | 5.84%        
|245 Park Avenue                                                    | New York         | 3.88%        
|Total commercial property debt of our equity accounted investments | 4.73%            |              

| | (1) | Net of $14 million of transaction costs
| | --- | ---------------------------------------

| | (2) | Non-recourse to Brookfield Office Properties
| | --- | --------------------------------------------

| | (3) | U.S. Office Fund debt
| | --- | ---------------------





31







Commercial property debt maturities of
our equity accounted investments for the next five years and thereafter are as follows:



|                                                                   |   |                 |   |            |   |       | Weighted-       
|------------------------------------------------------------------ | - | --------------- | - | ---------- | - | ----- | ----------------
|                                                                   |   |                 |   |            |   |       | Average         
|                                                                   |   | Scheduled       |   |            |   |       | Interest Rate at
|(Millions)                                                         |   | Amortization(1) |   | Maturities |   | Total | Dec. 31, 2012   
|2013                                                               | $ | ―               | $ | ―          | $ | ―     | ―               
|2014                                                               |   | ―               |   | 817        |   | 817   | 5.38%           
|2015                                                               |   | ―               |   | ―          |   | ―     | ―               
|2016                                                               |   | ―               |   | 136        |   | 136   | 5.55%           
|2017                                                               |   | 3               |   | 791        |   | 794   | 3.88%           
|2018 and thereafter                                                |   | ―               |   | ―          |   | ―     | ―               
|Total commercial property debt of our equity accounted investments | $ | 3               | $ | 1,744      | $ | 1,747 | 4.73%           

| | (1) | Paid through our annual cash flows
| | --- | ----------------------------------



CONTRACTUAL
OBLIGATIONS

The following table presents our contractual
obligations over the next five years and thereafter:



|                                          |   |        | Payments Due by Period
|----------------------------------------- | - | ------ | ----------------------
|(Millions)                                |   | Total  |                       
|Commercial property debt(1)               | $ | 11,512 | $                     
|Capital securities                        |   | 866    |                       
|Interest expense(2)                       |   |        |                       
|Commercial property debt                  |   | 2,597  |                       
|Capital securities                        |   | 106    |                       
|Minimum rental payments– ground leases(3) |   | 1,539  |                       
|Other non-current financial liabilities   |   | 251    |                       
|Accounts payable and accrued liabilities  |   | 603    |                       
|Derivative liabilities                    |   | 235    |                       

| | (1) | Net of $61 million of transaction costs and includes commercial property debt associated with
assets held for sale at December 31, 2012
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Represents aggregate interest expense expected to be paid over the term of the debt, on an undiscounted
basis, based on current interest and foreign exchange rates
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Represents payments on properties situated on land held under leases or other agreements
| | --- | ----------------------------------------------------------------------------------------



Refer to page 37 for our liquidity analysis.



Credit Ratings

Our access to financing depends on, among
other things, suitable market conditions and the maintenance of suitable long-term credit ratings. Our credit ratings may be adversely
affected by various factors, including increased debt levels, decreased earnings, declines in our tenant demand, increased competition,
a further deterioration in general economic and business conditions and adverse publicity. Any downgrades in our credit rating
may impede our access to capital markets or raise our borrowing rates.



We are currently rated by two credit rating
agencies, Dominion Bond Rating Service Inc. (“DBRS”) and Standard & Poor’s (“S&P”). We are
committed to arranging our affairs to maintain these ratings and improve them further over time. Both S&P and DBRS adjusted
the outlook on our credit rating to negative from stable in the year ended December 31, 2012 to reflect their concerns that due
to pace of leasing in lower Manhattan previously expected, improvements to coverage ratios will take longer to occur. To date this
has not had any material impact on our ability to access capital markets or our borrowing rates.



Our credit ratings at December 31, 2012
and at the date of this report were as follows:



|                 |  |  | DBRS        | S&P      
|---------------- |  |  | ----------- | ---------
|Corporate rating |  |  | BBB(high)   | BBB      
|Preferred shares |  |  | Pfd-3(high) | P-3(high)
|Trend/Outlook    |  |  | Negative    | Negative 



Credit ratings are intended to provide
investors with an independent measure of the credit quality of an issue of securities. The credit ratings presented are not recommendations
to purchase, hold or sell our common or preferred shares, as such ratings do not comment as to market price or suitability for
a particular investor. There is no assurance that any rating will remain in effect for any given period or that any rating will
not be revised or withdrawn entirely by the rating agency in the future if, in its judgment, circumstances so warrant.





32







Corporate Guarantees and Contingent
Obligations

We conduct our operations through entities
that are either fully or proportionately consolidated in our financial statements, except for our investment in certain commercial
properties held through jointly controlled entities or participating loan notes, and our investments in BSREP Australia Trust,
Brookfield LePage Johnson Controls and Oakridges.



We and our 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 our 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 us is uncertain but could be up to
C$65 million (A$63 million) in the event we are completely unsuccessful in defending the claims. During the year ended December
31, 2012, the amount of the contingent cash outflow increased by C$20 million (A$19 million) due to a change in the methodology
of determining the amount of the claim that was adopted by the courts.



We, through our 50% interest in London
Wall Place LP, have a £14 million commitment to the City of London related to the acquisition of London Wall Place at December
31, 2012. In addition, we have commitments totaling £27 million to third parties for the development of 100 Bishopsgate in
London.



At December 31, 2012, we have commitments
totaling C$6 million to third parties for the development of 225 Sixth in Calgary and Bay Adelaide East in Toronto.



In addition, we may execute agreements
that provide for indemnifications and guarantees to third parties. Disclosure of guarantees, contingencies and commitments can
be found in Note 24, Guarantees, Commitments and Contingencies, to our consolidated financial statements.



CAPITAL SECURITIES

Certain of our Class AAA preferred shares
are classified as liabilities under the caption “Capital securities.” We have the following capital securities outstanding:



|                                     | Shares      | Cumulative        |                  |                 
|------------------------------------ | ----------- | ----------------- | ---------------- | ----------------
|(Millions, except share information) | Outstanding | Dividend Rate     | Dec. 31, 2012(1) | Dec. 31, 2011(1)
|Class AAA Series E(2)                | 8,000,000   | 70% of bank prime | $                | ―               
|Class AAA Series F                   | 8,000,000   | 6.00%             |                  | 202             
|Class AAA Series G                   | 4,400,000   | 5.25%             |                  | 110             
|Class AAA Series H                   | 8,000,000   | 5.75%             |                  | 202             
|Class AAA Series I                   | ―           | 5.20%             |                  | ―               
|Class AAA Series J                   | 8,000,000   | 5.00%             |                  | 202             
|Class AAA Series K                   | 6,000,000   | 5.20%             |                  | 150             
|Total capital securities             |             |                   | $                | 866             

For
details regarding the terms on our Class AAA preferred shares, refer to our Annual Information Form



| | (1) | Net of transaction costs of nil at December 31, 2012 (December 31, 2011 – $1 million)
| | --- | -------------------------------------------------------------------------------------

| | (2) | Class AAA, Series E capital securities are owned by BAM, our parent. We have an offsetting loan
receivable against these securities earning interest at 108% of bank prime
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On March 30, 2012, we redeemed all of our
outstanding Class AAA Series I shares for cash of C$25.00 per share. On December 21, 2012, we announced our intention to redeem
all of our outstanding Class AAA Series F shares for cash of C$25.00 per share plus accrued and unpaid dividends thereon of C$0.1233,
representing a total redemption price of C$25.1233 per share, subsequent to December 31, 2012.



OTHER NON-CURRENT FINANCIAL LIABILITIES

Other non-current financial liabilities
were $251 million at December 31, 2012, an increase of $159 million from the balance at December 31, 2011. The increase is primarily
attributable to a note payable to the non-controlling shareholders of the U.S. Office Fund as well as a liability that represents
the present value of the non-controlling shareholders’ interest in The 100 Bishopsgate Partnership, which we could be required
to settle in cash in the fourth quarter of 2014, as well as other balances attributable to the consolidation of The 100 Bishopsgate
Partnership due to the acquisition of an additional 37.5% interest.



The components of other non-current financial
liabilities are as follows:



|(Millions)                                    |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|--------------------------------------------- |  |  |  |  | ------------- | -------------
|Loan payable                                  |  |  |  |  | $             | 92           
|Note payable                                  |  |  |  |  |               | 90           
|Other loans payable                           |  |  |  |  |               | 69           
|Total other non-current financial liabilities |  |  |  |  | $             | 251          



Included in other non-current financial
liabilities is a loan payable of $92 million (December 31, 2011 – $92 million) maturing in 2019, bearing interest at 7% and
secured by our preferred equity interest in 1625 Eye Street in Washington, D.C.







33







DEFERRED INCOME TAXES

At December 31, 2012, we had a net deferred
tax liability of $732 million (December 31, 2011 – $547 million). The sources and movements of deferred income tax balances
are as follows:



|(Millions)                          |  | Dec. 31, 2012 | Dec. 31, 2011
|----------------------------------- |  | ------------- | -------------
|Deferred income tax assets          |  |               |              
|Loss carry forwards                 |  |               | $            
|Deferred financing costs            |  |               |              
|Foreign currency                    |  |               |              
|Deferred revenue                    |  |               |              
|Other                               |  |               |              
|                                    |  |               |              
|Deferred income tax liabilities     |  |               |              
|Properties                          |  |               |              
|Net deferred income tax liabilities |  |               | $            



|(Millions)                                                                 | Dec. 31, 2011 | Recognized in |              | Dec. 31, 2012
|-------------------------------------------------------------------------- | ------------- | ------------- | ------------ | -------------
|Income                                                                     | Equity        | OCI           | Reclassified
|Deferred tax assets related to non-capital losses and capital losses       | $             | 220           | $            | 34           
|Deferred tax liabilities related to differences in tax and book basis, net |               | (767)         |              | (250)        
|Net deferred tax liabilities                                               | $             | (547)         | $            | (216)        
|                                                                           |               |               |              |              



|(Millions)                                                                 | Dec. 31, 2010 | Recognized in |                 | Dec. 31, 2011
|-------------------------------------------------------------------------- | ------------- | ------------- | --------------- | -------------
|Income(1)                                                                  | Equity        | OCI           | Reclassified(2)
|Deferred tax assets related to non-capital losses and capital losses       | $             | 204           | $               | 4            
|Deferred tax liabilities related to differences in tax and book basis, net |               | (570)         |                 | (218)        
|Net deferred tax liabilities                                               | $             | (366)         | $               | (214)        
|                                                                           |               |               |                 |              

| | (1) | Deferred tax liabilities recognized in income is net of a $10 million reversal in connection
with the change in ownership in the U.S. Office Fund in 2011 that was included in gains (losses), net
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Reclassification of deferred tax liability from equity accounted investment in connection with
the reorganization of ownership in First Canadian Place in 2011
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



Together with our Canadian subsidiaries,
we have deferred tax assets of $115 million (December 31, 2011 – $73 million) related to non-capital losses that expire over
the next 20 years, and $127 million (December 31, 2011 – $121 million) related to capital losses that have no expiry. Our
U.S. subsidiaries have deferred tax assets of $38 million (December 31, 2011 – $26 million) related to net operating losses
that expire over the next 20 years. Income earned in our Canadian and U.S. operations conducted outside of REIT structures, as
well as distributions from our REIT structures, are subject to corporate tax. Our tax loss pools are available to reduce cash tax
obligations.



ACCOUNTS PAYABLE AND OTHER LIABILITIES

Accounts payable and other liabilities
was $1,148 million at December 31, 2012, an increase of $168 million from the balance at December 31, 2011. The increase is primarily
attributable to deferred consideration on the acquisition of an additional 37.5% interest in The 100 Bishopsgate Partnership. Included
in accounts payable and accrued liabilities are derivative liabilities with a carrying amount of $235 million (December 31, 2011
– $228 million).



PREFERRED EQUITY – CORPORATE

At December 31, 2012, we had $1,345 million
of preferred equity outstanding. These preferred shares represent low-cost capital to us without dilution to our common equity
base. Dividends paid on these preferred shares are accounted for as equity distributions. We have the following preferred shares
authorized and outstanding included in equity:



|                                     | Shares      | Cumulative        |               |              
|------------------------------------ | ----------- | ----------------- | ------------- | -------------
|(Millions, except share information) | Outstanding | Dividend Rate     | Dec. 31, 2012 | Dec. 31, 2011
|Class A redeemable voting            | 14,201,980  | 7.50%             | $             | 11           
|Class AA Series E                    | 2,000,000   | 70% of bank prime |               | 34           
|Class AAA Series L                   | 11,500,000  | 6.75%             |               | 259          
|Class AAA Series N                   | 11,000,000  | 6.15%             |               | 257          
|Class AAA Series P                   | 12,000,000  | 5.15%             |               | 287          
|Class AAA Series R                   | 10,000,000  | 5.10%             |               | 247          
|Class AAA Series T                   | 10,000,000  | 4.60%             |               | 250          
|Total preferred equity               |             |                   | $             | 1,345        

For
details regarding the terms on our Class A, Class AA and Class AAA preferred shares, refer to our Annual Information Form







34







On September 13, 2012, we issued 10 million
Class AAA Series T preferred shares at a price of C$25.00 per share with a December 31, 2018 maturity and a yield of 4.60%. The
proceeds from the share issuance were approximately $250 million, net of share issuance costs of $7 million. Holders of Series
T shares receive fixed rate cumulative preferred cash dividends and will have the rights, subject to certain conditions, to convert
into Class AAA Series U preferred shares receiving floating rate cumulative preferred cash dividends on December 31, 2018 and on
December 31 every five years thereafter.



For the year ended December 31, 2012, we
paid preferred dividends of $70 million compared with $58 million in 2011. The increase is attributable to the issuance of Class
AAA Series T preferred shares and a full year of preferred dividends on Class AAA Series R preferred shares which were issued in
the third quarter of 2011.



COMMON EQUITY

As at December 31, 2012, we had 504,720,629
issued and outstanding common shares. On a diluted basis, we had 581,619,406 common shares outstanding, calculated as follows:



|                                                           |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|---------------------------------------------------------- |  |  |  |  | ------------- | -------------
|Common shares issued and outstanding                       |  |  |  |  | 504,720,629   | 503,667,579  
|Unexercised options and restricted stock                   |  |  |  |  | 20,149,403    | 17,715,060   
|Conversion of capital securities                           |  |  |  |  | 56,749,374    | 71,380,345   
|Diluted common shares issued and outstanding               |  |  |  |  | 581,619,406   | 592,762,984  
|Diluted common shares issued and outstanding (adjusted)(1) |  |  |  |  | 524,870,032   | 521,382,639  

| | (1) | Includes potential common shares at December 31, 2012, and December 31, 2011, from the exercise
of options and restricted stock but excludes the effects of settling our capital securities in common shares as we intend to redeem
our capital securities for cash prior to conversion. Refer to page 14
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our capital securities may be converted
by the holder into common shares, however, such conversion right is subject to our prior right to redeem for cash or find substitute
purchasers. In accordance with IAS 33, “Earnings per Share,” we are required to presume the capital securities will
be settled in common shares when calculating our diluted earnings per share where the effect is dilutive. In calculating adjusted
diluted per share measures, we consider this presumption to be overcome where past experience or a stated policy provides a reasonable
basis to believe that the capital securities will be settled partially or wholly in cash. Our past practice has been to redeem
our capital securities for cash rather than convert to common shares and our intention is to continue with this practice.



During 2012, we repurchased 73,000 shares
at an average price of $16.00 per share pursuant to our normal course issuer bid in addition to shares repurchased in connection
with our restricted stock plan. Since the inception of our normal course issuer bid in 1999, we have repurchased approximately
39 million shares at an average price of $12.04 per share on a post-split adjusted basis.



At December 31, 2012, the book value of
our common equity was $10.1 billion, compared with a market equity capitalization of approximately $8.6 billion, calculated as
total common shares outstanding multiplied by $17.01, the closing price per common share on the New York Stock Exchange on December
31, 2012.



Our common equity per share is calculated
as follows:



|(Millions, except per share information)        |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|----------------------------------------------- |  |  |  |  | ------------- | -------------
|Shareholders’ equity                            |  |  |  |  | $             | 11,431       
|Less: preferred equity                          |  |  |  |  |               | (1,345)      
|                                                |  |  |  |  |               | 10,086       
|Add: option proceeds(1)                         |  |  |  |  |               | 305          
|Fully diluted common shareholders’ equity       |  |  |  |  |               | 10,391       
|Diluted common shares outstanding               |  |  |  |  |               | 581.6        
|Common equity per share – diluted               |  |  |  |  | $             | 17.87        
|Common equity per share – diluted (adjusted)(2) |  |  |  |  | $             | 19.80        

| | (1) | Calculated as options outstanding multiplied by the weighted average exercise price of options
outstanding at year end
| | --- | ----------------------------------------------------------------------------------------------------------------------

| | (2) | Includes potential common shares at December 31, 2012, and December 31, 2011, from the exercise
of options as well as restricted stock but excludes the effects of settling our capital securities in common shares as we intend
to redeem our capital securities for cash prior to conversion. Refer to page 14
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





35







PREFERRED EQUITY – SUBSIDIARIES

In addition to the preferred equity –
corporate and preferred equity classified as capital securities, we had $385 million of preferred equity outstanding at December
31, 2012, issued by our subsidiary BPO Properties Ltd. (“BPO Properties”). These preferred shares represent low-cost
capital to us without dilution to our common equity base. Dividends paid on these preferred shares are a component of the non-controlling
interest in our net income. The increase over December 31, 2011 is entirely attributable to the impact of foreign currency translation.



The following table details the preferred
shares issued by BPO Properties:



|(Millions, except share information)  | Shares Outstanding | Preferred Shares Series | Cumulative Dividend Rate | Dec. 31, 2012 | Dec. 31, 2011
|------------------------------------- | ------------------ | ----------------------- | ------------------------ | ------------- | -------------
|BPO Properties                        | 1,805,489          | Series G                | 70% of bank prime        | $             | 46           
|                                      | 3,816,527          | Series J                | 70% of bank prime        |               | 96           
|                                      | 300                | Series K                | 30-day BA + 0.4%         |               | 151          
|                                      | 2,847,711          | Series M                | 70% of bank prime        |               | 72           
|                                      | 800,000            | Series N                | 30-day BA + 0.4%         |               | 20           
|Total preferred equity – subsidiaries |                    |                         |                          | $             | 385          



During 2012, dividends of $7 million were
paid on preferred shares issued by BPO Properties, consistent with $7 million in 2011.



OTHER NON-CONTROLLING INTERESTS

Other non-controlling interests include
the amounts of common equity related to other non-controlling shareholders’ interests in our subsidiaries. The balances are
as follows:



|(Millions)                                                                |      | Others’ Equity Ownership | Dec. 31, 2012 | Dec. 31, 2011
|------------------------------------------------------------------------- | ---- | ------------------------ | ------------- | -------------
|Units of BOX(1)                                                           |      | 16.7%                    | $             | 512          
|Limited partnership units of Brookfield Financial Properties L.P. (“BFP") | 0.6% |                          | 38            |              
|Units of Prime(2,3)                                                       |      | 19.5%                    |               | 45           
|Partnership units of The 100 Bishopsgate Partnership(4)                   |      | 12.5%                    |               | 2            
|Members interest in Brookfield Heritage Partners LLC                      |      | 49.0%                    |               | 105          
|Interest in 1801 California Street                                        |      | 49.0%                    |               | 33           
|U.S. Office Fund                                                          |      | 15.7%                    |               | 413          
|Total other non-controlling interests                                     |      |                          |               | $            

| | (1) | Canadian dollar denominated
| | --- | ---------------------------

| | (2) | Australian dollar denominated
| | --- | -----------------------------

| | (3) | During the fourth quarter, we acquired additional units of Prime which decreased the others'
equity ownership from 26.2% at December 31, 2011 to 19.5% at December 31, 2012
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | British pound denominated
| | --- | -------------------------

36







CAPITAL RESOURCES AND LIQUIDITY

We employ a broad range of financing strategies
to facilitate growth and manage financial risk, with particular emphasis on the overall reduction of the weighted average cost
of capital, in order to enhance returns for common shareholders. Our 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:
| | - | -----------------------------------------------



| | o | discretionary capital expenditures;
| | - | -----------------------------------



| | o | property acquisitions;
| | - | ----------------------



| | o | future developments; and
| | - | ------------------------



| | o | repurchase of our stock.
| | - | ------------------------





We believe that our liquidity needs will
be satisfied using cash on hand, cashflows generated from operating and financing activities, as well as proceeds from asset sales.
Rental revenue, recoveries from tenants, interest and other income, available cash balances, draws on our corporate credit facilities
and refinancing of maturing indebtedness are our principal sources of capital used to pay operating expenses, dividends, debt service
and recurring capital and leasing costs in our commercial property portfolio. 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 and related retenanting costs, and by controlling operating expenses. Another source of cashflow includes
third-party fees generated by our asset management, leasing and development businesses. In addition, our tax status and tax loss
pools allow us to retain and reinvest cash generated by our operations without incurring significant cash taxes. 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 cashflows.



Our principal liquidity needs for periods
beyond the next year are for scheduled debt maturities, recurring and non-recurring capital expenditures, development costs and
potential property acquisitions. We plan to meet these needs with one or more of the following:



| | • | cashflows from operating activities;
| | - | ------------------------------------



| | • | construction loans;
| | - | -------------------



| | • | proceeds from sales of assets;
| | - | ------------------------------



| | • | proceeds from sales of non-controlling interests in subsidiaries; and
| | - | ---------------------------------------------------------------------



| | • | credit facilities and refinancing opportunities.
| | - | ------------------------------------------------



Our commercial property debt is primarily
fixed-rate and non-recourse to us. These investment-grade financings are typically structured on a loan-to-appraised value basis
of between 55% and 65% as market conditions permit. 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 reduces our equity requirements to finance commercial property
and enhances equity returns.



Most of our borrowings are in the form
of long term property-specific financings with recourse only to the specific assets. Limiting recourse to specific assets ensures
that poor performance within one area does not compromise our ability to finance the balance of our operations. Our maturity schedule
is fairly diversified so that financing requirements in any given year are manageable.



Our focus on structuring financings with
investment grade characteristics ensures that we can typically maintain debt levels on any particular asset throughout a business
cycle, thus enabling us to limit covenants and other performance requirements. In turn, this reduces the risk of early payment
requirements or restrictions on the distribution of cash from the assets being financed.



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. In addition, we structure our affairs to facilitate monetization of longer-duration
assets through financings, co-investor participations or refinancings.



37







Commercial property debt maturities, with
corresponding loan-to-value, at December 31, 2012, for the next five years and thereafter are as follows:



|                    |  |  |  |  |   | Commercial Property Debt Maturities(1,2) |  | Loan-to-Value
|------------------- |  |  |  |  | - | ---------------------------------------- |  | -------------
|                    |  |  |  |  |   |                                         
|(Millions)          |  |  |  |  |   |                                         
|2013                |  |  |  |  | $ | 1,716                                    |  | 41%          
|2014                |  |  |  |  |   | 3,091                                    |  | 43%          
|2015                |  |  |  |  |   | 413                                      |  | 43%          
|2016                |  |  |  |  |   | 1,111                                    |  | 46%          
|2017                |  |  |  |  |   | 1,527                                    |  | 52%          
|2018 and thereafter |  |  |  |  |   | 2,769                                    |  | 52%          

| | (1) | Includes $64 million of commercial property debt related to assets held for sale at December
31, 2012
| | --- | -----------------------------------------------------------------------------------------------------

| | (2) | Excludes corporate debt, Mezzanine Loan and U.S. Office Fund acquisition financing
| | --- | ----------------------------------------------------------------------------------



At December 31, 2012, we had approximately
$1,191 million of liquidity consisting of $362 million of cash and $829 million of undrawn capacity on our corporate credit facilities.



Cashflow from operating activities represents
a source of liquidity to service debt, to fund capital expenditures and leasing costs and to fund distributions on shares. Cashflow
from commercial operating activities depends on occupancy levels, rental rates and the timing of receivables and payables. For
the year ended December 31, 2012, cashflow from operating activities exceeded common share dividends paid by $100 million.



As of December 31, 2012, current liabilities
exceed current assets, however, we will meet the obligations of our current liabilities through refinancing current debt upon maturity,
cash flow from operations, as well as disposition of assets.



Cost of Capital

We continually strive to reduce our weighted
average cost of capital and improve common shareholders’ equity returns through value-enhancement initiatives and the consistent
monitoring of the balance between debt and equity financing.



At December 31, 2012, our weighted average
cost of capital, assuming a target long-term 12% return on common equity, was 7.13% (December 31, 2011 – 7.23%). Our cost
of capital is lower than many of our peers because of the amount of investment-grade financing that can be placed on our assets,
which is a function of the high-quality nature of both the assets and the tenant base that compose our portfolio.



The following schedule details our capitalization
at December 31, 2012 and December 31, 2011 and the related costs thereof:



|                                   | Cost of Capital(1) | Underlying Value(2)
|---------------------------------- | ------------------ | -------------------
|(Millions)                         | Dec. 31, 2012      | Dec. 31, 2011      
|Liabilities                        |                    |                    
|Commercial property debt           |                    | 5.31%              
|Capital securities                 |                    | 5.47%              
|Shareholders’ equity               |                    |                    
|Preferred equity – corporate       |                    | 5.68%              
|Common equity(2)                   |                    | 12.00%             
|Non-controlling interests          |                    |                    
|Preferred equity – subsidiaries    |                    | 1.87%              
|Other non-controlling interests(3) |                    | 12.00%             
|Total(4)                           |                    | 7.13%              

| | (1) | As a percentage of average book value unless otherwise noted
| | --- | ------------------------------------------------------------

| | (2) | Underlying value of liabilities represents carrying value or the cost to retire at maturity.
Underlying value of common equity is based on the closing stock price of Brookfield Office Properties’ common shares and
underlying value of other equity interests is based on carrying value
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Assuming a target long-term 12% return on co-invested capital
| | --- | -------------------------------------------------------------

| | (4) | In calculating the weighted average cost of capital, the cost of debt has been tax-effected
| | --- | -------------------------------------------------------------------------------------------

38





OPERATING RESULTS



NET INCOME ATTRIBUTABLE TO SHAREHOLDERS

Our net income attributable to shareholders
for the year ended December 31, 2012, was $1,287 million ($2.25 per diluted common share), compared with $1,690 million ($2.92
per diluted common share) in 2011. The decrease in net income attributable to shareholders year over year is largely the result
of:





| | • | a decrease of $150 million ($0.26 per diluted common share) in gains due to the recognition of a deferred gain upon exercise
of the U.S. Office Fund option in the third quarter of 2011;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | an increase of $142 million ($0.25 per diluted common share) in interest expense on commercial property debt due to the consolidation
of the U.S. Office Fund assets subsequent to the exercise of the U.S. Office Fund option in the third quarter of 2011, interest
expense recognized from Brookfield Place in Perth, which was reclassified from commercial developments to commercial properties
during the second quarter of 2012, as well as new debt from acquisitions and refinancings, offset by repayments and property dispositions;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | a decrease of $43 million ($0.07 per diluted common share) in interest and other income primarily due to the settlement of
loans receivable from BAM and the recognition of one-time items including a condemnation award of $11 million, both in the prior
year;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | a decrease of $37 million ($0.06 per diluted common share) in income from discontinued operations largely due to the disposition
of our residential development segment in the first quarter of 2011, fair value adjustments on our Minneapolis portfolio as well
as the disposition of 33 South Sixth Street in Minneapolis during the fourth quarter of 2012;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | an increase of $19 million ($0.03 per diluted common share) in administrative costs as a result of inflation and increased
company initiatives during the year, transaction costs associated with the acquisition of a portfolio of assets in London and depreciation
as a result of increased capital expenditures associated with company initiatives;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | a decrease of $472 million ($0.81 per diluted common share) in our share of net earnings from equity accounted investments
as a result of the consolidation of the U.S. Office Fund assets subsequent to the exercise of the U.S. Office Fund option in the
third quarter of 2011, consolidation of 250 Vesey Street in New York subsequent to acquiring the remaining 49% interest in the
fourth quarter of 2011 and consolidation of First Canadian Place in Toronto subsequent to its sale to BOX in the fourth quarter
of 2011; offset by,
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | o | an increase of $518 million ($0.91 per diluted common share) in commercial property revenue offset by an increase of $187 million
($0.32 per diluted common share) in direct commercial property expense due to:
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the consolidation of the U.S. Office Fund assets subsequent to the exercise of the U.S. Office Fund option in the third quarter
of 2011 and 250 Vesey Street in New York subsequent to acquiring the remaining 49% interest in the fourth quarter of 2011;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the reclassification of Brookfield Place in Perth from commercial developments to commercial properties in the second quarter
of 2012;
| | - | --------------------------------------------------------------------------------------------------------------------------------------



| | · | single property acquisitions completed in 2011 and 2012 including a 50% interest in 108 St Georges Terrace in Perth, the remaining
50% interest in Southern Cross West Tower in Melbourne, Three Bethesda Metro Center in Washington D.C., an interest in 1801 California
Street in Denver, Metropolitan Park East & West in Seattle, 799 9th Street in Washington, D.C. and 99 Bishopsgate
in London; as well as,
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | same property growth; partially offset by,
| | - | ------------------------------------------



| | o | the disposition of Newport Tower in Jersey City and 53 State Street in Boston during the fourth quarter of 2011 and Altius
Centre in Calgary and Defence Plaza in Melbourne during the first quarter of 2012
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | o | a decrease of $50 million ($0.09 per diluted common share) in income taxes as a result of a decrease in net income from continuing
operations before income taxes and a larger release of tax reserves in the current year. This decrease is offset by a change in
tax rates recognized as well as a tax asset derecognized in the current year;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | o | an increase of $47 million ($0.08 per diluted common share) in fair value gains mostly attributable to changes in certain assumptions
and rent curves reflected in the expected cash flows of our investment properties as well as changes to our valuation metrics;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | o | a decrease of $25 million ($0.04 per diluted common share) in net income attributable to non-controlling interests as a result
of decreased earnings in subsidiaries that are not wholly-owned driven by fair value adjustments in the U.S. Office Fund; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | o | a decrease of $7 million ($0.01 per diluted common share) in capital securities interest expense due to the redemption of our
Class AAA, Series I shares on March 30, 2012 and the impact of foreign currency translation.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



39









Included on the following pages is a discussion
of the various components of our net income attributable to shareholders followed by a reconciliation of funds from operations
and total return to comparable IFRS measures.



|(Millions)                                                                                                                                                          |  |  |  |  |   | 2012  |   | 2011 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  | - | ----- | - | -----
|Commercial property revenue                                                                                                                                         |  |  |  |  | $ | 2,195 | $ | 1,677
|Direct commercial property expense                                                                                                                                  |  |  |  |  |   | 850   |   | 663  
|                                                                                                                                                                    |  |  |  |  |   |       |   |      
|Interest and other income                                                                                                                                           |  |  |  |  |   | 87    |   | 130  
|                                                                                                                                                                    |  |  |  |  |   |       |   |      
|Interest expense                                                                                                                                                    |  |  |  |  |   |       |   |      
|Commercial property debt                                                                                                                                            |  |  |  |  |   | 625   |   | 483  
|Capital securities                                                                                                                                                  |  |  |  |  |   | 50    |   | 57   
|Administrative expense                                                                                                                                              |  |  |  |  |   | 168   |   | 149  
|Income (loss) from continuing operations before gains (losses), fair value gains (losses), share of net earnings from equity accounted investments and income taxes |  |  |  |  |   | 589   |   | 455  
|Gains (losses), net                                                                                                                                                 |  |  |  |  |   | ―     |   | 150  
|Fair value gains (losses), net                                                                                                                                      |  |  |  |  |   | 1,004 |   | 957  
|Share of net earnings from equity accounted investments                                                                                                             |  |  |  |  |   | 127   |   | 599  
|Income (loss) from continuing operations before income taxes                                                                                                        |  |  |  |  |   | 1,720 |   | 2,161
|Income taxes                                                                                                                                                        |  |  |  |  |   | 264   |   | 314  
|Income (loss) from continuing operations                                                                                                                            |  |  |  |  |   | 1,456 |   | 1,847
|Income (loss) from discontinued operations                                                                                                                          |  |  |  |  |   | 12    |   | 49   
|Net income (loss)                                                                                                                                                   |  |  |  |  |   | 1,468 |   | 1,896
|Net income (loss) attributable to non-controlling interests                                                                                                         |  |  |  |  |   | 181   |   | 206  
|Net income (loss) attributable to shareholders                                                                                                                      |  |  |  |  | $ | 1,287 | $ | 1,690



Our net income per common share and weighted
average common shares outstanding are calculated as follows:



|(Millions, except per share information)                                  |  |  |  |  |   | 2012  |   | 2011 
|------------------------------------------------------------------------- |  |  |  |  | - | ----- | - | -----
|Net income (loss) attributable to shareholders                            |  |  |  |  | $ | 1,287 | $ | 1,690
|Preferred share dividends                                                 |  |  |  |  |   | (70)  |   | (58) 
|Net income (loss) attributable to common shareholders–basic               |  |  |  |  |   | 1,217 |   | 1,632
|Dilutive effect of conversion of capital securities                       |  |  |  |  |   | 50    |   | 57   
|Net income (loss) attributable to common shareholders – diluted           |  |  |  |  | $ | 1,267 | $ | 1,689
|                                                                          |  |  |  |  |   |       |   |      
|Weighted average common shares outstanding – basic                        |  |  |  |  |   | 503.8 |   | 503.2
|Unexercised options and restricted stock                                  |  |  |  |  |   | 3.1   |   | 4.7  
|                                                                          |  |  |  |  |   | 506.9 |   | 507.9
|Conversion of capital securities                                          |  |  |  |  |   | 56.7  |   | 71.4 
|Weighted average common shares outstanding – diluted                      |  |  |  |  |   | 563.6 |   | 579.3
|                                                                          |  |  |  |  |   |       |   |      
|Net income (loss) per share attributable to common shareholders – basic   |  |  |  |  | $ | 2.42  | $ | 3.24 
|                                                                          |  |  |  |  |   |       |   |      
|Net income (loss) per share attributable to common shareholders – diluted |  |  |  |  | $ | 2.25  | $ | 2.92 



The decrease in net income per share attributable to common
shareholders is analyzed on the previous page.



40







COMMERCIAL PROPERTY OPERATIONS

Commercial property net operating income
is commercial property revenue less direct commercial property expense and is a key indicator of performance as it represents a
measure over which management of the commercial property operations has control. Commercial property net operating income totaled
$1,345 million for the year ended December 31, 2012 compared with $1,014 million during 2011.



|(Millions)                               |  |  |  |  |   | 2012  |   | 2011 
|---------------------------------------- |  |  |  |  | - | ----- | - | -----
|Commercial property revenue              |  |  |  |  |   |       |   |      
|Rental revenue                           |  |  |  |  | $ | 2,046 | $ | 1,587
|Straight-line rental income              |  |  |  |  |   | 79    |   | 25   
|Recurring fee income                     |  |  |  |  |   | 53    |   | 59   
|Lease termination, fee and other income  |  |  |  |  |   | 17    |   | 6    
|Total commercial property revenue        |  |  |  |  |   | 2,195 |   | 1,677
|Direct commercial property expense       |  |  |  |  |   | (850) |   | (663)
|Commercial property net operating income |  |  |  |  | $ | 1,345 | $ | 1,014



Commercial property revenue includes rental
revenues earned from tenant leases, straight-line rent, percentage rent and additional rent from the recovery of operating costs
and property taxes, as well as recurring fee income, lease terminations and other income. Commercial property revenue totaled $2,195
million during the year ended December 31, 2012 compared with $1,677 million in 2011.







Rental
revenue

The increase in rental revenue year over
year is attributable to the consolidation of the U.S. Office Fund assets subsequent to the exercise of the U.S. Office Fund option,
the acquisition of an interest in 108 St Georges Terrance in Perth, the remaining 50% interest in Southern Cross West Tower in
Melbourne, and Three Bethesda Metro Center in Washington D.C. all in the third quarter of 2011; the acquisition of the remaining
49% interest in 250 Vesey Street in New York and a 51% interest in 1801 California Street in Denver in the fourth quarter of 2011;
the acquisition of 225 Sixth – Bow Parkade in Calgary, Metropolitan Park East & West in Seattle and 799 9th
Avenue in Washington, D.C. in the second quarter of 2012; and the acquisition of a portfolio of assets in London in the third quarter
of 2012. In addition, net operating income was recognized for Brookfield Place in Perth, which was reclassified from commercial
developments to commercial properties, and lease termination income was recognized in Downtown, New York, all during the second
quarter of 2012. These increases were partially offset by the disposition of Newport Tower in Jersey City and 53 State Street in
Boston during the fourth quarter of 2011 as well as Altius Centre in Calgary and Defence Plaza in Melbourne during the first quarter
of 2012.



Our leases generally have clauses that
provide for the collection of rental revenues in amounts that increase every few years, with these increases negotiated at the
signing of the lease. These increases vary among our regions but are usually standard practice within each region. During the year
ended December 31, 2012, approximately 73% of our new leases have rent escalation clauses. In the U.S., approximately 77% of our
leases executed in 2012 had rent escalation clauses that provide for periodic increases in base rent. Of these leases, 46% provided
for annual increases and 54% provided for increases at various times during the lease, generally periods ranging from 3 to 6 years
after commencement. On average, these escalations will increase rent annually by 4.5% over the terms of the respective leases.
In Canada, approximately 48% of our leases executed during the year had rent escalation clauses that typically include a fixed
rent increase every 4 years. On average, these escalations will increase rent by $0.73 per square foot on an annual basis over
the term of the lease. In Australia, all of our leases executed during the year had rent escalation clauses that typically include
a fixed rent increase annually, ranging from 4% to 5% over the term of the lease. The large number of high-credit quality tenants
in our portfolio lowers the risk of not realizing these increases. IFRS requires that these increases be recorded on a straight-line
basis over the life of the lease. For the year ended December 31, 2012, we recognized straight-line rental revenue of $79 million,
compared with $25 million in 2011. This increase is primarily due to the straight-line rental revenue recognized on the U.S. Office
Fund that was consolidated in the third quarter of 2011.



Recurring fee income

Recurring fee income includes property
management fees, leasing fees and project management fees relating to certain co-owned properties. Fee income serves to enhance
returns from co-owned assets. We also earn fees through Brookfield Residential Services Ltd., the largest condominium property
management company in Ontario, Canada, which manages approximately 65,000 condominium units. The expenses associated with Brookfield
Residential Services Ltd. of $24 million (2011 – $23 million) are included in administrative expense.



The details of our recurring fee income
are as follows:



|(Millions)                                                       |  |  |  |  |   | 2012 |   | 2011
|---------------------------------------------------------------- |  |  |  |  | - | ---- | - | ----
|Property management, leasing, project management, and other fees |  |  |  |  | $ | 27   | $ | 34  
|Brookfield Residential Services Ltd. fees                        |  |  |  |  |   | 26   |   | 25  
|Total recurring fee income                                       |  |  |  |  | $ | 53   | $ | 59  



41







The generation of fee income is not viewed
as a separate business segment; however, with the establishment of our office funds, the associated fees represent a potential
area of growth for us and are expected to increase as we expand our assets under management. These fees typically include a stable
base fee for providing regular ongoing services as well as performance fees that are earned when the performance of the fund exceeds
certain predetermined benchmarks. We will also earn transaction fees for investment and leasing activities conducted on behalf
of these funds.



Direct commercial property expense

Direct commercial property expense, which
includes real estate taxes, utilities, insurance, repairs and maintenance, cleaning and other property-related expenses, was $850
million for the year ended December 31, 2012, compared with $663 million in 2011. The increase is primarily attributable to acquisitions
during the year and the consolidation of the U.S. Office Fund offset by dispositions as noted above.



Commercial property net operating income

One of the ways in which we evaluate the
performance of management is by comparing the performance of the commercial property portfolio on a same property basis. Same property
commercial property net operating income is defined as properties included in our consolidated results that we own and operate
throughout both the current and prior year. Accordingly, same property results exclude properties acquired, sold, or reclassified
from commercial development to commercial properties during each year and fees earned from management and other services provided
to co-investors in our funds and commercial properties. We may also exclude from our same property results any property that is
undergoing a redevelopment that may impact the comparability of the results between the current and prior year. For the years ended
December 31, 2012 and 2011, we have not excluded any properties that are undergoing a redevelopment.



The following is a reconciliation from
same property commercial property net operating income to total commercial property net operating income for the years ended December
31, 2012 and 2011:



|(Millions)                                                             |  |  |  |  |               | 2012          |   | 2011 
|---------------------------------------------------------------------- |  |  |  |  | ------------- | ------------- | - | -----
|Same property commercial property net operating income                 |  |  |  |  | $             | 800           | $ | 751  
|Lease terminations, fee and other income                               |  |  |  |  |               | 17            |   | 6    
|Recurring fee income                                                   |  |  |  |  |               | 53            |   | 59   
|Properties reclassified from commercial developments during the period |  |  |  |  |               | 46            |   | ―    
|Properties acquired during the period                                  |  |  |  |  |               | 426           |   | 158  
|Properties sold during the period                                      |  |  |  |  |               | 3             |   | 40   
|Commercial property net operating income                               |  |  |  |  | $             | 1,345         | $ | 1,014
|                                                                       |  |  |  |  |               |              
|                                                                       |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|Same property average in-place net rent                                |  |  |  |  | $             | 27.41         | $ | 26.09
|Same property occupancy                                                |  |  |  |  |               | 93.3%         |   | 92.5%



Same property commercial property net operating
income increased by $49 million year over year as a result of higher same property average in-place net rents and higher same property
occupancy due to lease-ups offset by lease expiries.



As a result of our strategy of owning,
proactively managing and developing premier properties in high-growth, and in many instances supply-constrained, markets with high
barriers to entry, along with our focus on executing long-term leases with strong credit rated tenants, we have been able to reduce
the exposure of our commercial property revenues to the cyclical nature of the real estate business and ensure stability of cash
flows associated with our properties. In addition, we continue to reduce our lease expiry profile for the upcoming years, and with
in-place net rents below market rents across most of our portfolio, we should continue to produce stable results going forward.



We have relatively strong occupancy levels
across our portfolio, outperforming market occupancy levels in all of our markets with the exception of Boston, Washington D.C.,
Houston, Denver, and Toronto. Additionally, our average in-place net rents of $30.93 allow for positive mark-to-market growth when
compared to blended market net rents of $37.00.



The majority of our leases are net leases
in which the lessee is required to pay its proportionate share of property operating expenses such as utilities, repairs, insurance
and taxes. Consequently, leasing activity, which affects both occupancy and in-place rental rates, is the principal contributor
to the change in same property commercial property net operating income.





42







Average in-place net rent represents the
annualized cash amount on a per square foot basis collected from tenants plus tenant expense reimbursements less the operating
expenses being incurred for that space, excluding the impact of straight-lining rent escalations or amortizing free rent periods
provided on in-place leases. The following table shows the average in-place rents and estimated current market rents for similar
space in each of our markets as at December 31, 2012, and includes our equity accounted investments:



|                   | Avg. Remaining | Avg. In-Place   | Avg. Market    
|------------------ | -------------- | --------------- | ---------------
|Leasable Area(1,2) | Lease Term     | Net Rent        | Net Rent       
|(000's Sq. Ft.)    | (Years)        | ($ per Sq. Ft.) | ($ per Sq. Ft.)
|New York           |                |                 |                
|Midtown(3)         |                | 6,276           |                
|Downtown           |                | 12,628          |                
|Boston             |                | 796             |                
|Washington, D.C.   |                | 6,706           |                
|Los Angeles        |                | 4,530           |                
|Houston            |                | 7,115           |                
|Denver             |                | 2,645           |                
|Seattle            |                | 699             |                
|Minneapolis        |                | 1,052           |                
|Toronto            |                | 8,759           |                
|Calgary            |                | 5,639           |                
|Ottawa             |                | 1,745           |                
|Sydney             |                | 4,086           |                
|Melbourne          |                | 2,072           |                
|Perth              |                | 1,535           |                
|London             |                | 349             |                
|Other              |                | 592             |                
|Total              |                | 67,224          |                

| | (1) | Leasing data presented based on 100% of leasable area
| | --- | -----------------------------------------------------

| | (2) | Excludes developments
| | --- | ---------------------

| | (3) | Midtown New York includes 450 West 33rd Street. Excluding this commercial property, Midtown
in-place rent would be $46.90
| | --- | -------------------------------------------------------------------------------------------------------------------------



Our portfolio occupancy decreased to 92.0%
at December 31, 2012 compared with 93.2% at December 31, 2011. Our occupancy decreased primarily due to opportunistic acquisitions
of certain assets at lower occupancy rates in addition to large expiries. At December 31, 2012, average in-place net rent throughout
our portfolio was $30.93 per square foot compared with $27.95 per square foot at December 31, 2011. Our average in-place net rent
increased due to renewals at higher net rents as well as strengthening of Canadian and Australian currencies relative to the U.S.
Dollar.



A summary of our occupancy levels for the
past two years, including our equity accounted investments and property investments through participating loan interests, is as
follows:



|                 | Dec. 31, 2012 | Dec. 31, 2011
|---------------- | ------------- | -------------
|                 | Leasable(1,2) | Percent      
|                 | Sq. Ft.       | Leased       
|New York         |               |              
|Midtown          |               | 6,276        
|Downtown         |               | 12,628       
|Total New York   |               | 18,904       
|Boston           |               | 796          
|Washington, D.C. |               | 6,706        
|Los Angeles      |               | 4,530        
|Houston          |               | 7,115        
|Denver           |               | 2,645        
|Seattle          |               | 699          
|Minneapolis      |               | 1,052        
|Toronto          |               | 8,759        
|Calgary          |               | 5,639        
|Ottawa           |               | 1,745        
|Sydney           |               | 4,086        
|Melbourne        |               | 2,072        
|Perth            |               | 1,535        
|London           |               | 349          
|Other            |               | 592          
|Total            |               | 67,224       

| | (1) | Leasing data presented based on 100% of leasable area
| | --- | -----------------------------------------------------

| | (2) | Excludes developments
| | --- | ---------------------

| | (3) | Restated for re-measurements performed during the first quarter of 2012
| | --- | -----------------------------------------------------------------------

43







During 2012, we leased 6.8 million square
feet of our space at an average leasing net rent of $30.74 per square foot. This included 3.2 million square feet of new leases,
2.0 million square feet of renewals and 1.6 million square feet of early renewals. Expiring net rent for our portfolio averaged
$22.91 per square foot. Additionally, since the beginning of the year, we have managed to reduce our rollover exposure, which is
the percentage of our total managed space currently scheduled to expire, for the period 2014 through 2016 by 190 basis points.



The details of our leasing activity for
the year ended December 31, 2012, including our equity accounted investments and property investments through participating loan
interests, are as follows:



|                        |               |                |              | Average         |              | Year One        | Average         |               |              |             
|----------------------- | ------------- | -------------- | ------------ | --------------- | ------------ | --------------- | --------------- | ------------- | ------------ | ------------
|                        | Dec. 31, 2011 |                | Expiring     |                 | Leasing      | Leasing         | Acq. /          | Dec. 31, 2012
|                        | Leasable      | Leased         | Expiries     | Net Rent        | Leasing      | Net Rent        | Net Rent        | (Disp.)       | Leasable     | Leased      
|(Square feet in 000’s)  | Sq. Ft(1,2,3) | Sq. Ft.(1,2,3) | Sq. Ft.(1,2) | ($ per Sq. Ft.) | Sq. Ft.(1,2) | ($ per Sq. Ft.) | ($ per Sq. Ft.) | Sq. Ft.(1,2)  | Sq. Ft.(1,2) | Sq. Ft.(1,2)
|New York, New York      |               |                |              |                 |              |                 |                 |               |              |             
|Midtown                 | 6,276         | 5,788          | (351)        | $               | 27.33        | 304             | $               | 50.66         | $            | 52.67       
|Downtown                | 12,628        | 11,749         | (1,678)      |                 | 19.97        | 1,812           |                 | 25.13         |              | 29.10       
|Boston, Massachusetts   | 796           | 505            | (9)          |                 | 5.63         | 97              |                 | 23.06         |              | 25.88       
|Washington, D.C.        | 6,504         | 6,037          | (836)        |                 | 25.68        | 672             |                 | 25.33         |              | 26.96       
|Los Angeles, California | 4,530         | 3,816          | (454)        |                 | 22.35        | 628             |                 | 21.02         |              | 24.28       
|Houston, Texas          | 8,163         | 7,343          | (1,195)      |                 | 14.10        | 1,060           |                 | 21.24         |              | 22.65       
|Denver, Colorado        | 2,645         | 2,604          | (1,179)      |                 | 17.69        | 337             |                 | 18.58         |              | 20.84       
|Seattle, Washington     | ―             | ―              | (55)         |                 | 23.60        | 103             |                 | 20.04         |              | 21.94       
|Minneapolis, Minnesota  | 2,530         | 2,379          | (74)         |                 | 13.16        | 64              |                 | 12.22         |              | 13.31       
|Toronto, Ontario        | 8,759         | 8,191          | (712)        |                 | 26.81        | 796             |                 | 29.71         |              | 30.35       
|Calgary, Alberta        | 5,946         | 5,896          | (333)        |                 | 36.17        | 348             |                 | 38.86         |              | 40.16       
|Ottawa, Ontario         | 1,745         | 1,741          | (17)         |                 | 20.89        | 17              |                 | 23.49         |              | 23.86       
|Sydney, Australia       | 4,086         | 3,994          | (112)        |                 | 91.52        | 143             |                 | 71.83         |              | 77.88       
|Melbourne, Australia    | 2,277         | 2,237          | (118)        |                 | 38.38        | 127             |                 | 41.01         |              | 46.96       
|Perth, Australia        | 612           | 579            | (63)         |                 | 54.75        | 121             |                 | 67.14         |              | 77.36       
|London, U.K.            | ―             | ―              | ―            |                 | ―            | ―               |                 | ―             |              | ―           
|Other                   | 661           | 640            | (174)        |                 | 23.82        | 182             |                 | 30.22         |              | 30.91       
|Total                   | 68,158        | 63,499         | (7,360)      | $               | 22.91        | 6,811           | $               | 28.14         | $            | 30.74       

| | (1) | Leasing data presented based on 100% of leasable area
| | --- | -----------------------------------------------------

| | (2) | Excludes developments
| | --- | ---------------------

| | (3) | Restated for re-measurements performed during the first quarter of 2012
| | --- | -----------------------------------------------------------------------



Additionally, during the year ended December
31, 2012, tenant improvements and leasing costs related to leasing activity that occurred averaged $42.90 per square foot, compared
to $31.90 per square foot during 2011.



INTEREST AND OTHER INCOME

Interest and other income includes interest
charged on real estate mortgages, residential notes receivable and other loans receivable, interest earned on cash balances and
transactional gains.



The components of interest and other income
are as follows:



|(Millions)                                                               |  |  |  |  |   | 2012 |   | 2011
|------------------------------------------------------------------------ |  |  |  |  | - | ---- | - | ----
|Interest income on loans receivable from BAM                             |  |  |  |  | $ | 3    | $ | 50  
|Interest income on residential note receivable from BRPI                 |  |  |  |  |   | 29   |   | 23  
|Interest income on participating loan interests with subsidiaries of BAM |  |  |  |  |   | 32   |   | 18  
|Interest and other income on loans receivable designated as FVTPL        |  |  |  |  |   | 8    |   | (1) 
|Other interest income                                                    |  |  |  |  |   | 2    |   | 12  
|Other income                                                             |  |  |  |  |   | 13   |   | 28  
|Total interest and other income                                          |  |  |  |  | $ | 87   | $ | 130 



The decrease in interest and other income
year over year is primarily attributable to the settlement of loans receivable from BAM in the third quarter of 2011, a condemnation
award of $11 million, partnership settlement income of $6 million and a gain on repurchase of debt of $5 million all in the prior
year, offset by an increase in interest income on participating loan interests, loans receivable designated as FVTPL and interest
income on a residential note receivable from BRPI relating to the disposition of our residential development segment on March 31,
2011.



INTEREST EXPENSE

Commercial Property Debt

Interest expense relating to commercial
property debt increased to $625 million for the year ended 2012, from $483 million in 2011. The increase is primarily attributable
to the consolidation of the U.S. Office Fund assets subsequent to the exercise of the U.S. Office Fund option in the third quarter
of 2011, interest expense recognized from Brookfield Place in Perth, which was reclassified from commercial developments to commercial
properties during the second quarter of 2012, as well as new debt from acquisitions and refinancings, offset by repayments and
property dispositions.



44







Capital Securities

Interest expense relating to capital securities
decreased to $50 million for the year ended December 31, 2012, from $57 million in 2011. The decrease is primarily attributable
to the redemption of our Class AAA Series I shares on March 30, 2012, and the impact of foreign currency translation. Interest
expense recorded in capital securities relates to preferred share dividends recorded as interest expense under IFRS.



ADMINISTRATIVE EXPENSE

Administrative expense increased to $168
million for the year ended December 31, 2012, from $149 million in 2011. The increase is attributable to inflation and increased
company initiatives during the year, transaction costs associated with the acquisition of a portfolio of assets in London and depreciation
as a result of increased capital expenditures associated with company initiatives. Included in administrative expenses is $24 million
(2011 – $23 million) of expenses related to the operations of our subsidiary, Brookfield Residential Services Ltd.



The components of administrative expense
are as follows:



|(Millions)                         |  |  | 2012 | 2011
|---------------------------------- |  |  | ---- | ----
|General and administrative expense |  |  |      |     
|Transaction costs                  |  |  |      |     
|Depreciation                       |  |  |      |     
|Total administrative expense       |  |  |      |     



GAINS (LOSSES), NET

In the prior year, gains (losses), net
included $150 million recognized in connection with the exercise of the U.S. Office Fund option.



FAIR VALUE GAINS (LOSSES), NET

During the year ended December 31, 2012,
we recognized fair value gains of $1,004 million (2011 –$957 million). Fair value adjustments related to our commercial properties
and developments are determined based on the movement of various parameters on a quarterly basis, including changes in projected
cash flows as a result of leasing activity and timing, discount rates and terminal capitalization rates. The increase in fair value
gains recognized compared to the prior year is attributable to the Canadian segment as a result of compression in capitalization
rates seen in comparable market capitalization rates. We also recognized gains of $23 million for the year ended December 31, 2012
on other financial instruments designated as FVTPL as a result of the increase in value of our interest in a debenture (2011–
loss of $10 million).



|(Millions)                                      |  |  |  |  |   | 2012  |   | 2011 
|----------------------------------------------- |  |  |  |  | - | ----- | - | -----
|Investment properties                           |  |  |  |  |   |       |   |      
|Commercial properties                           |  |  |  |  | $ | 897   | $ | 1,012
|Development properties                          |  |  |  |  |   | 82    |   | (16) 
|                                                |  |  |  |  |   | 979   |   | 996  
|Financial instruments                           |  |  |  |  |   |       |   |      
|Participating loan interests                    |  |  |  |  |   | 2     |   | 30   
|U.S. Office Fund option and true-up liability   |  |  |  |  |   | ―     |   | (59) 
|Other financial instruments designated as FVTPL |  |  |  |  |   | 23    |   | (10) 
|                                                |  |  |  |  |   | 25    |   | (39) 
|Total fair value gains (losses), net            |  |  |  |  | $ | 1,004 | $ | 957  



SHARE OF NET EARNINGS FROM EQUITY ACCOUNTED
INVESTMENTS



|                                                              | Funds from Operations | Fair Value Adjustments
        and Other | Share of Earnings
|------------------------------------------------------------- | --------------------- | ---------------------------------------- | -----------------
|(Millions)                                                    |                       | 2012                                     |                  
|U.S. Office Fund                                              | $                     | ―                                        | $                
|Other equity accounted investments(1)                         |                       | 105                                      |                  
|Total share of net earnings from equity accounted investments | $                     | 105                                      | $                

| | (1) | Includes jointly controlled entities as well as associates
| | --- | ----------------------------------------------------------



Share of net earnings from equity accounted
investments decreased to $127 million for the year ended December 31, 2012, from $599 million in 2011. The decrease is primarily
attributable to the consolidation of the U.S. Office Fund assets subsequent to the exercise of the U.S. Office Fund option in the
third quarter of 2011, the consolidation of 250 Vesey Street in New York and First Canadian Place in Toronto in the fourth quarter
of 2011, and the disposition of KBR Tower in the fourth quarter of 2012, offset by the acquisition of 450 West 33rd
Street in New York in the second quarter of 2011, which is a jointly controlled entity.



45







INCOME TAXES

Income tax expense for the year ended December
31, 2012 was $264 million, as compared with $314 million in 2011. The decrease year over year is primarily attributable to a decrease
in net income from continuing operations before income taxes and a larger release of tax reserves in the current year. This decrease
is offset by a change in tax rates recognized as well as a tax asset derecognized in the current year.



The major components of income tax expense
include the following:



|(Millions)           |  |  |  |  |   | 2012 |   | 2011
|-------------------- |  |  |  |  | - | ---- | - | ----
|Current tax expense  |  |  |  |  | $ | 48   | $ | 90  
|Deferred tax expense |  |  |  |  |   | 216  |   | 224 
|Total income taxes   |  |  |  |  | $ | 264  | $ | 314 



DISCONTINUED OPERATIONS

Our residential development operations
which were disposed of on March 31, 2011 contributed $13 million of net income from discontinued operations in the prior year.



The following table summarizes income from
discontinued operations:



|(Millions, except per share information)                                              |  |  |  |  |   | 2012 |   | 2011
|------------------------------------------------------------------------------------- |  |  |  |  | - | ---- | - | ----
|Commercial property revenue                                                           |  |  |  |  | $ | 54   | $ | 55  
|Direct commercial property expense                                                    |  |  |  |  |   | (29) |   | (28)
|                                                                                      |  |  |  |  |   | 25   |   | 27  
|Residential property revenue                                                          |  |  |  |  |   | ―    |   | 83  
|Direct residential property expense                                                   |  |  |  |  |   | ―    |   | (70)
|                                                                                      |  |  |  |  |   | ―    |   | 13  
|Interest and other income                                                             |  |  |  |  |   | ―    |   | 1   
|Interest expense                                                                      |  |  |  |  |   | (6)  |   | (7) 
|Depreciation                                                                          |  |  |  |  |   | ―    |   | (1) 
|Income from discontinued operations before fair value gains (losses) and income taxes |  |  |  |  |   | 19   |   | 33  
|Fair value gains (losses)                                                             |  |  |  |  |   | (7)  |   | 19  
|Income taxes                                                                          |  |  |  |  |   | ―    |   | (3) 
|Income (loss) from discontinued operations                                            |  |  |  |  | $ | 12   | $ | 49  



NON-CONTROLLING INTERESTS

The following table outlines our non-controlling
interests:



|(Millions)                      |  |  |  |  |   | 2012 |   | 2011
|------------------------------- |  |  |  |  | - | ---- | - | ----
|Preferred shares – subsidiaries |  |  |  |  | $ | 7    | $ | 7   
|Other non-controlling interests |  |  |  |  |   | 181  |   | 206 
|Total non-controlling interests |  |  |  |  | $ | 188  | $ | 213 



Preferred Shares – Subsidiaries

Preferred shares – subsidiaries consists
of dividends on preferred shares issued by BPO Properties. For the year ended December 31, 2012, dividends of $7 million were paid
on preferred shares issued by BPO Properties, compared to $7 million in 2011.



Other Non-Controlling Interests

Other non-controlling interests consists
of earnings attributable to interests not owned by us in BOX, BFP, Prime, Brookfield Heritage Partners LLC, 1801 California Street
and the U.S. Office Fund.



Non-controlling interests in subsidiary
earnings was $181 million for the year ended December 31, 2012, as compared with $206 million in 2011.



The following table outlines the dividends
and earnings paid or attributable to other shareholders of our subsidiaries:



|(Millions)                            | Type                    |  |  |  |   | 2012 | 2011
|------------------------------------- | ----------------------- |  |  |  | - | ---- | ----
|BOX                                   | Participating interests |  |  |  |   | $    | 95  
|BFP                                   | Participating interests |  |  |  |   |      | 2   
|Prime                                 | Participating interests |  |  |  |   |      | 4   
|Brookfield Heritage Partners LLC      | Participating interests |  |  |  |   |      | 18  
|1801 California Street                | Participating interests |  |  |  |   |      | (4) 
|U.S. Office Fund                      | Participating interests |  |  |  |   |      | 66  
|Total other non-controlling interests |                         |  |  |  | $ | 181  | $   





46







RECONCILIATION OF NET INCOME TO FUNDS FROM OPERATIONS AND
TOTAL RETURN



|(Millions)                                                               |  |  |  |  |   | 2012    |   | 2011 
|------------------------------------------------------------------------ |  |  |  |  | - | ------- | - | -----
|Net income attributable to shareholders                                  |  |  |  |  | $ | 1,287   | $ | 1,690
|Add (deduct) non-cash and certain non-recurring items:                   |  |  |  |  |   |         |   |      
|Fair value gains, net                                                    |  |  |  |  |   | (1,004) |   | (957)
|Fair value adjustments in net earnings from equity accounted investments |  |  |  |  |   | (22)    |   | (389)
|Gains, net                                                               |  |  |  |  |   | ―       |   | (150)
|Non-controlling interests in above items                                 |  |  |  |  |   | 118     |   | 151  
|Income taxes                                                             |  |  |  |  |   | 264     |   | 314  
|Discontinued operations(1)                                               |  |  |  |  |   | 7       |   | (15) 
|Cash payments under interest rate swap contracts                         |  |  |  |  |   | ―       |   | (4)  
|Funds from operations                                                    |  |  |  |  | $ | 650     | $ | 640  

| | (1) | Represents depreciation, fair value gains and income taxes related to discontinued operations
| | --- | ---------------------------------------------------------------------------------------------



After providing for preferred share dividends,
our funds from operations per share is calculated as follows:



|(Millions, except per share information)                |  |  |  |  |   | 2012 |   | 2011
|------------------------------------------------------- |  |  |  |  | - | ---- | - | ----
|Funds from operations                                   |  |  |  |  | $ | 650  | $ | 640 
|Preferred share dividends                               |  |  |  |  |   | (70) |   | (58)
|                                                        |  |  |  |  | $ | 580  | $ | 582 
|Funds from operations per share – diluted               |  |  |  |  | $ | 1.03 | $ | 1.00
|Funds from operations per share – diluted (adjusted)(1) |  |  |  |  | $ | 1.14 | $ | 1.14

| | (1) | The calculation of funds from operations per diluted share (adjusted) includes potential common
shares at December 31, 2012, and December 31, 2011, from the exercise of options as well as restricted stock but excludes the effects
of settling our capital securities in common shares as we intend to redeem our capital securities for cash prior to conversion.
Refer to page 14
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Total return represents the amount by which
we increase the value of our common equity and is calculated as follows:



|(Millions, except per share information)           |  |  |  |  |   | 2012  |   | 2011 
|-------------------------------------------------- |  |  |  |  | - | ----- | - | -----
|Funds from operations                              |  |  |  |  | $ | 650   | $ | 640  
|Fair value gains, net of non-controlling interests |  |  |  |  |   | 910   |   | 1,198
|Preferred share dividends                          |  |  |  |  |   | (70)  |   | (58) 
|Total return                                       |  |  |  |  | $ | 1,490 | $ | 1,780
|Total return per share – diluted                   |  |  |  |  | $ | 2.64  | $ | 3.07 
|Total return per share – diluted (adjusted)(1)     |  |  |  |  | $ | 2.93  | $ | 3.50 

| | (1) | The calculation of total return per diluted share (adjusted) includes potential common shares
at December 31, 2012, and December 31, 2011, from the exercise of options as well as restricted stock but excludes the effects
of settling our capital securities in common shares as we intend to redeem our capital securities for cash prior to conversion.
Refer to page 14
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

47







SEGMENTED INFORMATION

Brookfield Office Properties and our subsidiaries
operate in the United States, Canada, Australia and the United Kingdom within the commercial property business. The commercial
markets in which we operate are primarily New York, Boston, Washington, D.C., Houston, Los Angeles, Denver, Seattle and Minneapolis
in the United States; Toronto, Calgary, Ottawa and Vancouver in Canada; Sydney, Melbourne and Perth in Australia; and London in
the United Kingdom. For the year ended December 31, 2012, approximately 62% of our commercial property revenue is derived from
the United States (2011 – 57%) and at December 31, 2012, approximately 61% of our assets are invested in the United States
(2011 – 61%).



In the third quarter of 2012, we acquired
a portfolio of investment properties in the United Kingdom and established a platform to manage our investment in that market.
This investment was previously managed out of the platform in the United States. We have presented segment information for the
United Kingdom segment beginning in the third quarter of 2012 and have revised our segment presentation for the comparative year
consistent with our current segment composition as required by IFRS 8, “Operating Segments.”



We disclose information about our reportable
segments based upon the measures used by management in assessing the performance of those reportable segments. We use commercial
property net operating income as a measure of operating performance and funds from operations, a widely used measure in analyzing
real estate, as a measure of segment profit or loss. The following summary presents segmented financial information for our principal
areas of business:



|                                                          | United States | Canada(1) | Australia | United Kingdom | Total
|--------------------------------------------------------- | ------------- | --------- | --------- | -------------- | -----
|(Millions)                                                |               | 2012      |           | 2011           |      
|Commercial property revenue                               | $             | 1,356     | $         | 954            | $    
|Direct commercial property expense                        | (550)         |           | (400)     |                | (237)
|Commercial property net operating income                  | 806           |           | 554       |                | 326  
|Interest and other income                                 |               | 11        |           | 75             |      
|Interest expense(2)                                       |               | (414)     |           | (326)          |      
|Administrative expense(3)                                 |               | (84)      |           | (72)           |      
|Other                                                     |               | —         |           | (10)           |      
|Funds from operations of equity accounted investments     | 79            |           | 169       |                | 7    
|Funds from discontinued operations                        | 19            |           | 21        |                | —    
|Non-controlling interests in funds from operations        | (37)          |           | (33)      |                | (24) 
|Funds from operations                                     |               | 380       |           | 378            |      
|Fair value gains                                          |               | 473       |           | 611            |      
|Fair value gains (losses) of equity accounted investments | 32            |           | 414       |                | —    
|Other(4)                                                  |               | 5         |           | 161            |      
|Income taxes                                              |               | (56)      |           | (150)          |      
|Funds from discontinued operations                        |               | (19)      |           | (21)           |      
|Non-controlling interestsin funds from operations         | 37            |           | 33        |                | 24   
|Income from continuing operations                         | 852           |           | 1,426     |                | 405  
|Income (loss) from discontinued operations                | 12            |           | 36        |                | —    
|Net income                                                |               | 864       |           | 1,462          |      
|Net income attributable to non-controlling interests      |               | 81        |           | 131            |      
|Net income attributable to shareholders                   | $             | 783       | $         | 1,331          | $    
|                                                          |               |           |           |                |      

| | (1) | Includes $13 million of funds from discontinued operations and $13 million of income from discontinued
operations attributable to the residential development segment, a separate line of business disposed of on March 31, 2011, for
the year ended December 31, 2011
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Includes allocation of interest expense on corporate debt and capital securities of $18 million
to United States and $60 million to Canada for year ended December 31, 2012 (2011 - $17 million to United States and $52 million
to Canada)
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Includes allocation of corporate-level administrative expenses of $18 million to United States
and $8 million to Canada for the year ended December 31, 2012 (2011 - $12 million to United States and $9 million to Canada)
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Includes $150 million gain in U.S. commercial operations recognized in connection with the exercise
of the U.S. Office Fund option in the year ended December 31, 2011
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

48







|                                            | United States | Canada                | Australia     | United Kingdom        | Total         |                      
|------------------------------------------- | ------------- | --------------------- | ------------- | --------------------- | ------------- | ---------------------
|(Millions)                                  | Dec. 31, 2012 | Dec. 31,
        2011 | Dec. 31. 2012 | Dec. 31,
        2011 | Dec. 31. 2012 | Dec. 31,
        2011
|Non-current assets(1)                       | $             | 16,006                | $             | 14,588                | $             | 5,401                
|Other assets                                |               | 528                   |               | 1,061                 |               | 112                  
|Total assets                                | $             | 16,534                | $             | 15,649                | $             | 5,513                
|Total liabilities                           | $             | 8,417                 | $             | 8,186                 | $             | 3,753                
|Investment in commercial properties         | $             | 316                   | $             | 5,967                 | $             | —                    
|Investment in development properties        |               | —                     |               | 50                    |               | 91                   
|Investment in equity accounted investments  |               | —                     |               | 20                    |               | —                    
|Capital expenditures-commercial properties  |               | 203                   |               | 114                   |               | 51                   
|Capital expenditures-development properties |               | 58                    |               | 24                    |               | 46                   
|                                            |               |                       |               |                       |               |                      

| | (1) | At December 31, 2012, non-current assets includes equity accounted investments in the United
states, Canada, Australia and the United Kingdom segments of $1,486 million, $16 million, $1,034 million and $26 million, respectively
(December 31, 2011 - $1,467 million, $13 million, $714 million, and $62 million, respectively)
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(Millions)                                        |   | 2012 |   | 2011 |   | 2012 |   | 2011 |   | 2012 |   | 2011 |   | 2012 | 2011 |   | 2012 | 2011 
|------------------------------------------------- | - | ---- | - | ---- | - | ---- | - | ---- | - | ---- | - | ---- | - | ---- | ---- | - | ---- | -----
|Total commercial property net operating income(1) | $ | 926  | $ | 830  | $ | 333  | $ | 329  | $ | 289  | $ | 231  | $ | 2    | $    | 1 | $    | 1,550
|                                                  |   |      |   |      |   |      |   |      |   |      |   |      |   |      |      |   |      |      

| | (1) | Includes commercial property net operating income of equity accounted investments of $120 million,
$7 million, $78 million and nil in the United States, Canada, Australia and the United Kingdom commercial operations, respectively,
for the year ended December 31, 2012 (2011 - $276 million, $22 million, $78 million and $1 million, respectively)
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



QUARTERLY RESULTS

The 2012 and 2011 results in accordance
with IFRS by quarter are as follows:



|                                                                          |     | 2012 | 2011
|------------------------------------------------------------------------- | --- | ---- | ----
|(Millions, except per share information)                                  |     | Q4   | Q3  
|Commercial property revenue                                               | $   | 579  | $   
|Net income from continuing operations attributable to shareholders        | 333 |      | 371 
|Net income attributable to shareholders                                   | 342 |      | 376 
|                                                                          |     |      |     
|Net income (loss) per share attributable to common shareholders – basic   |     |      |     
|Continuing operations                                                     | $   | 0.62 | $   
|Discontinued operations                                                   |     | 0.02 |     
|                                                                          |     | $    | 0.64
|                                                                          |     |      |     
|Net income (loss) per share attributable to common shareholders – diluted |     |      |     
|Continuing operations                                                     | $   | 0.58 | $   
|Discontinued operations                                                   |     | 0.01 |     
|                                                                          |     | $    | 0.59



Commercial property revenue varies quarter
to quarter due to acquisitions and dispositions of investment properties as well as new leases and renewals at market rents. In
addition to the variations in commercial property revenue, net income attributable to shareholders varies largely due to fair value
gains and losses in each given period.



In the fourth quarter of 2012, commercial
property revenue increased as a result of the acquisition of 99 Bishopsgate in London, at the end of the third quarter of 2012
as well as new leases and renewals at market rents. Net income from continuing operations attributable to shareholders decreased
in the fourth quarter of 2012, when compared with the third quarter, due to lower fair value gains on commercial properties.

49







PART III – RISKS AND UNCERTAINTIES

Brookfield Office Properties’ financial
results are affected by the performance of our operations 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 strategy is to invest in premier assets
that generate sustainable streams of cashflow. Although high-quality assets may initially generate lower returns on capital, we
believe that the sustainability and future growth of their cashflows is more assured over the long term, and as a result, warrant
higher valuation levels. We also believe that the high quality of our asset base protects us against future uncertainty and enables
us to invest with confidence when opportunities arise.



The following is a review of the material
factors and the potential impact these factors may have on our business operations. A more detailed description of our business
environment and risks is contained in our Annual Information Form, which is posted on our website at www.brookfieldofficeproperties.com,
or on www.sedar.com or www.sec.gov.



PROPERTY RELATED RISKS

Commercial Properties

Our strategy is to invest in high-quality
office properties as defined by the physical characteristic of the asset and, more importantly, the certainty of receiving rental
payments from large corporate tenants (with investment grade credit ratings – see “Credit Risk” below) that these
properties attract. Nonetheless, we remain exposed to certain risks inherent in the office property business.



Commercial 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
(such as the availability and costs of mortgage funds), local conditions (such as 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. Our office properties are subject to mortgages that 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.



As owners and managers of premier office
properties, lease roll-overs also present a risk, as 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. Refer below to “Lease Roll-Over
Risk” for further details.



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.



As outlined under “Capital Resources
and Liquidity,” beginning on page 37 of this MD&A, we have an on-going obligation 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 of staggering the maturities of our mortgage portfolio attempts to mitigate our exposure
to excessive amounts of debt maturing in any one year.



At December 31, 2012, we had a floating
rate bank credit facility of $695 million which matures in March 2014. Additionally, one of our subsidiaries has bilateral agreements
with a number of Canadian chartered banks for an aggregate floating rate bank credit facility of C$200 million, the terms of which
extend to June 2014. At December 31, 2012, the balances drawn on these facilities were $68 million. There is a risk that lenders
will not refinance these facilities on terms and conditions acceptable to us or on any terms at all. However, we have historically
been successful in negotiating extension options. Approximately 29% of our outstanding commercial property debt at December 31,
2012, is floating rate debt (December 31, 2011 – 27%) and subject to fluctuations in interest rates. The effect of a 100
basis point increase in interest rates on interest expense relating to our corporate and commercial floating rate debt, up to 5%
LIBOR, is an increase in interest expense of $34 million or $0.06 per diluted weighted average share outstanding on an annualized
basis. Taking into account our preferred shares issued by a subsidiary, a 100 basis point increase in rates would increase income
attributable to non-controlling interests by an additional $4 million on an annualized basis. We have exposure to interest rates
within our equity accounted investments. In addition, we have exposure to interest rates on fixed rate debt that is maturing in
the near term, which we define as 3 years. This exposure totals $1,838 million based on the amount of debt at maturity. As discussed
in the Derivative Financial Instruments section beginning on page 54, we have mitigated, to some extent, the exposure to interest
rate fluctuations on variable rate debt and near term maturities of fixed rate debt through interest rate derivative contracts.



We currently have a level of indebtedness
of 48% of fair value of our commercial properties (December 31, 2011 – 50%). 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.





50







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. Government and government agencies comprise 8.5% of our tenant base and currently, no one tenant
comprises more than this.



We attempt to mitigate our credit risk
by signing long-term leases with tenants who have investment grade credit ratings. Additional discussion of this strategy is included
on page 16 of this MD&A.



The following list shows the largest tenants
by leasable area in our portfolio and their respective lease commitments:



|   |                                   |                            |                  | 000’s Sq. Ft.(2) |       |       |      
|-- | --------------------------------- | -------------------------- | ---------------- | ---------------- | ----- | ----- | -----
|   | Tenant                            | Primary Location           | Credit Rating(1) | 2013             | 2014  | 2015  | 2016 
|1  | Government & Government Agencies  | All Markets                | AA+/AAA          | 1,355            | 1,344 | 223   | 273  
|2  | Bank of America/Merrill Lynch(4)  | NY/Toronto/Denver/LA       | A/A-             | 3,179            |       | 21    |      
|3  | CIBC World Markets(5)             | NY/Toronto/Calgary         | A+               |                  |       |       | 7    
|4  | Suncor Energy                     | Calgary                    | BBB+             |                  |       |       |      
|5  | RBC                               | Van./Tor./Cal./NY/LA/Minn. | AA-              | 71               |       | 12    | 16   
|6  | Morgan Stanley                    | NY/Los Angeles/Denver      | A-               | 23               | 18    | 31    |      
|7  | Bank of Montreal                  | Calgary/Toronto            | A+               | 51               |       |       | 17   
|8  | PricewaterhouseCoopers            | Sydney/Houston/Calgary/LA  | Not Rated        |                  |       | 568   |      
|9  | Imperial Oil                      | Calgary                    | AAA              |                  |       |       | 717  
|10 | Encana                            | Calgary/Denver             | BBB              |                  |       | 241   |      
|11 | KPMG                              | Sydney/Toronto             | Not Rated        |                  |       |       | 298  
|12 | BHP Billiton                      | Perth                      | A+               |                  |       |       |      
|13 | Devon Energy                      | Houston                    | BBB+             | 18               |       |       |      
|14 | Macquarie Group                   | Sydney/Houston/Tor./Van.   | BBB              |                  | 62    |       | 8    
|15 | Wells Fargo                       | New York                   | AA-              | 3                | 66    | 468   |      
|16 | Société Générale                  | New York/Houston           | A                |                  |       |       |      
|17 | Commonwealth Bank                 | Sydney                     | AA-              |                  |       |       |      
|18 | Cadwalader, Wickersham & Taft LLP | New York                   | Not Rated        |                  |       |       |      
|19 | Talisman Energy                   | Calgary                    | BBB              |                  |       |       |      
|20 | Continental Airlines              | Houston                    | B                |                  | 117   | 170   |      
|   | Total                             |                            |                  | 4,700            | 1,607 | 1,734 | 1,336
|   | Total %                           |                            |                  | 18.9%            | 6.5%  | 7.0%  | 5.4% 

| | (1) | From Standard & Poor’s, Moody’s or DBRS
| | --- | ---------------------------------------

| | (2) | Prior to considering partnership interests in partially-owned properties
| | --- | ------------------------------------------------------------------------

| | (3) | Reflects the year of maturity related to lease(s) included in the ‘Beyond’ column
and is calculated for multiple leases on a weighted average basis based on square feet where practicable
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Bank of America/Merrill Lynch leases 4.6 million square feet at Brookfield Place in New York,
of which they occupy 2.7 million square feet with the balance being subleased to various subtenants ranging in size up to 500,000
square feet. Of this 2.7 million square feet, 1.9 million is in 250 Vesey Street and 0.8 million square feet is in 225 Liberty
Street
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | CIBC World Markets leases 1.1 million square feet at 300 Madison Avenue in New York, of which
they sublease 925,000 square feet to PricewaterhouseCoopers
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



When we make loans or enter into other financial arrangements
with related parties, we manage credit risk by entering into such transactions under normal commercial terms.

51







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; on average only 7% of our 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. Additional
discussion of our strategy to manage lease roll-over risk can be found on page 16 of this MD&A.



The following table sets out lease expiries,
by square footage, for our portfolio at December 31, 2012, including our equity accounted investments:



|(000's Sq. Ft.)    | Currently
        Available | 2013  | 2014  | 2015  | 2016  | 2017  | 2018  | 2019  | 2020
        & Beyond | Total 
|------------------ | --------------------------- | ----- | ----- | ----- | ----- | ----- | ----- | ----- | --------------------- | ------
|Midtown, New York  | 535                         | 398   | 79    | 411   | 329   | 54    | 272   | 803   | 3,395                 | 6,276 
|Downtown, New York | 745                         | 3,442 | 347   | 846   | 438   | 648   | 9     | 3     | 6,150                 | 12,628
|Boston             | 203                         | ―     | 13    | 9     | 5     | 16    | 254   | 23    | 273                   | 796   
|Washington, D.C.   | 637                         | 498   | 1,521 | 396   | 304   | 216   | 968   | 291   | 1,875                 | 6,706 
|Los Angeles        | 540                         | 195   | 325   | 272   | 418   | 286   | 669   | 326   | 1,499                 | 4,530 
|Houston            | 953                         | 273   | 334   | 704   | 265   | 675   | 379   | 339   | 3,193                 | 7,115 
|Denver             | 883                         | 135   | 140   | 113   | 178   | 217   | 90    | 514   | 375                   | 2,645 
|Seattle            | 72                          | 28    | 36    | 87    | 99    | 167   | 80    | ―     | 130                   | 699   
|Minneapolis        | 81                          | 180   | 112   | 122   | 105   | 25    | 11    | 87    | 329                   | 1,052 
|Toronto            | 484                         | 405   | 249   | 508   | 793   | 553   | 431   | 596   | 4,740                 | 8,759 
|Calgary            | 21                          | 37    | 52    | 397   | 756   | 65    | 225   | 89    | 3,997                 | 5,639 
|Ottawa             | 4                           | 1,154 | 9     | 546   | 4     | 8     | ―     | ―     | 20                    | 1,745 
|Sydney             | 61                          | 115   | 102   | 592   | 818   | 120   | 703   | 73    | 1,502                 | 4,086 
|Melbourne          | 31                          | 32    | 86    | 153   | 106   | 153   | 30    | 512   | 969                   | 2,072 
|Perth              | 4                           | ―     | 272   | 9     | 12    | 88    | 14    | 219   | 917                   | 1,535 
|London             | 133                         | 4     | 1     | 5     | 59    | ―     | ―     | 1     | 146                   | 349   
|Other              | 14                          | 101   | 11    | 35    | 77    | 19    | 23    | 37    | 275                   | 592   
|Total              | 5,401                       | 6,997 | 3,689 | 5,205 | 4,766 | 3,310 | 4,158 | 3,913 | 29,785                | 67,224



ENVIRONMENTAL RISKS

As an owner 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 present in our buildings, 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 such real estate as collateral
and could potentially result in claims or other proceedings against us. We are not aware of any material non-compliance 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 rapidly and we may become
subject to more stringent environmental laws and regulations in the future. Compliance with more stringent environmental laws and
regulators could have an adverse effect on our business, financial condition or results of operations.



OTHER RISKS AND UNCERTAINTIES

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 or new tenants are found promptly to fill vacancies at attractive rental rates. With
leasing markets performance being impacted by the strength of the economies in which we operate, it is possible we could see downward
pressure on overall occupancy levels and net effective rents if economic recovery slows or stalls. We are, however, substantially
protected against short-term market conditions, as most of our leases are long-term in nature with an average remaining term of
seven years.



52







INSURANCE RISKS

United States

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 weather catastrophe).
Our all risk policy limit is $1.5 billion per occurrence. Our earthquake limit is $300 million per occurrence and in the annual
aggregate for our California properties and a separate $300 million per occurrence and annual aggregate limit for all other U.S.
properties. This coverage is subject to a deductible of 5% of the value of the affected property for California and Seattle locations
and $100,000 for all other locations. The weather catastrophe limit is $300 million per occurrence and in the annual aggregate
subject to a deductible of 3% of the value of the affected property for U.S. locations located in traditional windstorm-exposed
areas. All other locations are subject to a $50,000 deductible. The flood limit is $300 million per occurrence and in the annual
aggregate subject to a deductible of $50,000 per occurrence. In New York State, the Commonwealth of Massachusetts and the District
of Columbia, the weather catastrophe deductible is $50,000 with the exception of one insurer that has a deductible of $875,000.
Where properties are insured by our partners, all risk property insurance and rental value coverage is provided with limits that
we believe are in line with what owners of similar properties carry.



The Terrorism Risk Insurance Act (“TRIA”)
was enacted in November 2002 in response to the uncertainty surrounding the insurance market in the aftermath of the terrorist
attacks of September 11, 2001, and provides protection for “certified acts” as defined by the statute. TRIA mandates
that insurance carriers offer insurance covering physical damage from terrorist incidents as certified by the U.S. Secretary of
the Treasury. The Terrorism Risk Insurance Program Reauthorization Act of 2007 was signed into law on December 26, 2007. It extends
the TRIA program through December 2014.



With respect to our U.S. properties (including
our U.S. Office Fund), in October 2008, we formed a segregated cell captive facility, Liberty IC Casualty, LLC (“Liberty”).
Liberty provides $4.0 billion of TRIA coverage for all U.S. properties. In 2009 we formed a second segregated cell captive facility,
Liberty IC Casualty II, LLC (“Liberty II”). Liberty II provides protection against losses due solely to biological,
chemical or radioactive contamination arising out of a certified terrorist act. In the event of a covered loss in 2013, we expect
Liberty IC Casualty II LLC to recover 85% of its losses, less certain deductibles, from the United States government with the remaining
15% to be funded by us.



Canada

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 windstorm). Our all risk
policy limit is C$1.5 billion per occurrence. Our earthquake limit is C$500 million per occurrence and in the annual aggregate.
This coverage is subject to a C$100,000 deductible for all locations except for British Columbia where the deductible is 3% of
the values for all locations where the physical loss, damage or destruction occurred. The flood limit is C$500 million per occurrence
and in the annual aggregate, and is subject to a deductible of C$25,000 for all losses arising from the same occurrence. Windstorm
is included under the all risk coverage limit of C$1.5 billion.



With respect to our Canadian properties,
we purchase an insurance policy that covers acts of terrorism for limits up to C$1.2 billion.



Australia

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 weather catastrophe).
Our all risk policy limit is A$1.25 billion per occurrence. Our earthquake limit is A$727 million per occurrence and in the aggregate.
The weather catastrophe limit is A$727 million per occurrence and in the annual aggregate. Both earthquake and weather catastrophe
coverage is subject to a deductible of 3% of the values for all locations where the physical loss, damage or destruction occurred.
The flood limit is A$727 million per occurrence and in the annual aggregate subject to a deductible of A$10,000 per occurrence.
Where properties are insured by our partners, all risk property insurance and rental value coverage is provided with limits that
we believe are in line with what owners of similar properties carry.



Terrorism insurance is provided through
the Australian Reinsurance Pool Corporation (“ARPC”). ARPC is a statutory corporation established under the Terrorism
Insurance Act 2003 to offer reinsurance for terrorism risk in Australia. The Terrorism Insurance Act 2003 renders terrorism exclusion
clauses in eligible insurance contracts ineffective in relation to loss or liabilities arising from a declared terrorist incident
affecting eligible property located in Australia.



United Kingdom

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 up to the replacement cost value of the asset. Flood, earthquake, wind and terrorism
coverage is included in the coverage provided all subject to a £250 deductible.



53







FOREIGN EXCHANGE FLUCTUATIONS

Approximately 39% of our assets and 38%
of our revenues originate in Canada, Australia and U.K. 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. Similarly,
we attempt to mitigate the currency risk on revenues by incurring associated operating costs and interest expense in local currencies.
As discussed under Derivative Financial Instruments our hedging policy does not require us to hedge the remaining net capital invested
in non-U.S. operations, due to the long term ownership profile of our assets. We will, however, enter into hedging arrangements
from time to time if we believe currency valuations are misaligned and to protect shorter term capital flows. However, even if
we do so, the carrying value may not equal the economic value, and any differences therein may not be hedged.



At December 31, 2012, based on our net
Canadian dollar funds from operations, a $0.01 appreciation in the Canadian dollar relative to the U.S. dollar would result in
an increase in our funds from operations of approximately $1 million on an annual basis. At December 31, 2012, based on our net
Australian dollar funds from operations, a $0.01 appreciation in the Australian dollar relative to the U.S. dollar would result
in an increase in our funds from operations of $1 million on an annual basis. At December 31, 2012, based on our net British pound
funds from operations, a $0.01 appreciation in the British pound relative to the U.S. dollar would not result in a material increase
in our funds from operations on an annual basis.



DERIVATIVE FINANCIAL INSTRUMENTS

We 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. In
2012 and/or 2011, we used the following derivative instruments to manage these risks:



| | • | Foreign currency forward contracts to hedge exposures to Canadian dollar, Australian dollar and British pound denominated net
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 a portion of our variable rate debt; and
| | - | ------------------------------------------------------------------------------------------



| | • | Total return swaps on our shares to economically hedge exposure to variability in share price under our Deferred Share Unit
Plans.
| | - | ----------------------------------------------------------------------------------------------------------------------------------



We also designate certain of our financial
liabilities as hedges of our Canadian dollar net investments in self-sustaining subsidiaries.



Interest Rate Hedging

The following table provides details of
derivatives designated as cash flow hedges in interest rate hedging relationships outstanding as at December 31, 2012, and December
31, 2011:



|(Millions)    | Hedging Item                                      | Notional | Rates        | Maturity Dates        | Fair Value
|------------- | ------------------------------------------------- | -------- | ------------ | --------------------- | ----------
|Dec. 31, 2012 | Interest rate caps of US$ LIBOR debt              | $1,138   | 3.8% to 5.5% | Jan 2013 to Mar 2014  | nil       
|              | Interest rate swaps of US$ LIBOR debt             | $929     | 0.6% to 1.5% | Jul 2013 to Jun 2016  | ($13)     
|              | Interest rate swaps of £ LIBOR debt               | £134     | 1.1%         | Sep 2017              | (£2)      
|              | Interest rate swaps of A$ BBSW/BBSY debt          | A$1,045  | 3.5% to 5.9% | Jan 2014 to Jul 2017  | (A$66)    
|              | Interest rate swaps on forecasted fixed rate debt | $1,075   | 2.1% to 4.7% | Jun 2023 to May 2025  | ($143)    
|              | Interest rate swaps on forecasted fixed rate debt | C$300    | 2.6% to 3.4% | Nov 2023 to Dec 2024  | (C$7)     
|Dec. 31, 2011 | Interest rate caps of US$ LIBOR debt              | $918     | 3.8% to 5.5% | Mar 2012 to Mar 2014  | nil       
|              | Interest rate swaps of US$ LIBOR debt             | $957     | 0.8% to 5.7% | Sept 2012 to May 2014 | ($14)     
|              | Interest rate swaps of A$ BBSW/BBSY debt          | A$931    | 4.8% to 5.9% | Jan 2012 to Jul 2016  | (A$43)    
|              | Interest rate swaps on forecasted fixed rate debt | $1,015   | 2.6% to 4.7% | Feb 2022 to Nov 2024  | ($140)    
|              | Interest rate swaps on forecasted fixed rate debt | A$357    | 5.2%         | Jan 2014              | (A$10)    
|              | Interest rate swaps on forecasted fixed rate debt | C$225    | 3.4% to 3.6% | Apr to Nov 2023       | (C$17)    



We enter into interest rate caps to limit
debt service costs on certain LIBOR-based debt as required by the lender. We enter into interest rate swaps to fix the interest
rate on certain floating rate debt to limit exposure to fluctuations in floating interest rates. We enter into swaps, from time
to time, on forecasted fixed rate debt to lock in interest rates on future refinancings and protect against higher debt service
costs in a rising interest rate environment.



For the years ended December 31, 2012 and
2011, the amount of hedge ineffectiveness recorded in earnings in connection with our interest rate hedging activities was not
significant. In the current year, we settled interest rate hedges that hedged a notional of $525 million for a net loss of $43
million which is being amortized over the term of the associated hedged cash flows.



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 swap curves derived from
market interest rates.









54







Foreign Currency Hedging

The following table provides details of
derivatives designated as net investment hedges in foreign currency hedging relationships outstanding as at December 31, 2012,
and December 31, 2011:



|(Millions)    | Hedging Item             | Hedged Currency   | Notional | Rate       | Fair Value | Maturity | Hedged Item                   
|------------- | ------------------------ | ----------------- | -------- | ---------- | ---------- | -------- | ------------------------------
|Dec. 31, 2012 | Foreign currency forward | British pounds    | £45      | £0.62/US$  | nil        | Mar 2013 | GBP denominated net investment
|Dec. 31, 2011 | Foreign currency forward | Australian dollar | A$135    | A$0.98/US$ | ($4)       | Jan 2012 | A$ denominated net investment 
|              | Foreign currency forward | British pounds    | £45      | £0.64/US$  | nil        | Mar 2012 | GBP denominated net investment



In addition, as of December 31, 2012, we
have designated C$1,100 million (December 31, 2011 – C$903 million) of its Canadian dollar financial liabilities as hedges
of the net investment in its Canadian operations.



For the years ended December 31, 2012 and
2011 the amount of hedge ineffectiveness recorded in earnings in connection with our foreign currency hedging activities was not
significant.



Other Derivatives

The following table provides details of
other derivatives outstanding as at December 31, 2012, and December 31, 2011:



|(Millions)    | Derivative Type      |  |  |  | Fair Value | Fair Value (Gain)/Loss | Classification of Gain/Loss
|------------- | -------------------- |  |  |  | ---------- | ---------------------- | ---------------------------
|Dec. 31, 2012 | Total return swap(1) |  |  |  | $1         | ($1)                   | Administrative expense     
|Dec. 31, 2011 | Total return swap(1) |  |  |  | $2         | ($2)                   | Administrative expense     

| | (1) | Relates to the total return swap on our shares in connection with our Deferred Share Unit Plans
| | --- | -----------------------------------------------------------------------------------------------



The primary risks associated with our use
of derivatives are credit risk and price risk. Credit risk is the risk that losses will be incurred from the default of the counterparty
on its contractual obligations. The use of derivative contracts is governed by documented risk management policies and approved
limits, which includes an evaluation of the creditworthiness of counterparties, as well as managing the size, diversification and
maturity of the portfolio. Price risk is the risk that we will incur losses from derivatives from adverse changes in foreign exchange
rates, interest rates or share prices. We mitigate price risk by entering only into derivative transactions where we have determined
a significant offset exists between changes in the fair value of, or the cashflows attributable to, the hedged item and the hedging
item.

55





PART IV – CRITICAL ACCOUNTING POLICIES AND ESTIMATES



CHANGES IN ACCOUNTING POLICY

We 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”. 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.
We have determined that based on our business model, the rebuttable presumption introduced by the amendments to IAS 12 has been
overcome and have 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 our deferred tax liabilities.



FUTURE
ACCOUNTING POLICY CHANGES

Financial Instruments

IFRS 9, “Financial Instruments”
(“IFRS 9”) is a multi-phase project to replace IAS 39, “Financial Instruments: Recognition and Measurement”
(“IAS 39”). IFRS 9 introduces new requirements for classifying and measuring financial assets. In October 2010 the
International Accounting Standards Board (“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, “Financial Instruments: Disclosures.” 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” establishes principles for the preparation of consolidated financial statements when a reporting entity 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”
(“IFRS 11”) replaces the existing IAS 31, “Interests in Joint Ventures.” IFRS 11 requires that 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” applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated
structured entity. The standard requires the 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 entity’s financial position, financial performance and cashflows.



Fair Value Measurement

IFRS 13, “Fair Value Measurement”
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.



Financial Statement Presentation

The IASB issued amendments to IAS 1, “Presentation
of Financial Statements” which requires items within OCI that will be reclassified to profit and loss to be grouped separately
from those that will not.



Each of the above are effective for annual
periods beginning on or after January 1, 2013, except for IFRS 9 which is effective for annual periods beginning on or after January
1, 2015. Earlier application is permitted for each standard. We anticipate adopting each of the above in the first quarter of the
year for which the standard is applicable and are currently evaluating the impact of each to our financial statements.



56







CRITICAL
ACCOUNTING POLICIES

Our critical accounting policies are those
that we believe are the most important in portraying our financial condition and results, and which require the most subjective
judgment and estimates on the part of management.



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 cashflows.



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.



Australian Portfolio

We acquired, through participating loan
notes, an economic interest in the results of operations and changes in fair values of the properties in the Australian portfolio.
We have the ability to convert these participating loan notes, at any time, into direct ownership interests in either the properties
in the Australian portfolio or the property subsidiaries. Certain of these participating loan interests provide us with control
over the property subsidiaries into which the loan interest can be converted and, accordingly, we have consolidated the assets,
liabilities and results of operations of the property subsidiaries. Where the participating loan interests do not provide us with
control over a property subsidiary, they are presented as participating loan interests and accounted for as loans and receivables.



As a result of this arrangement, we hold
an 80.5% controlling interest in Prime, an entity that holds direct ownership interest in certain of the properties in the Australian
portfolio, and have recognized the non-controlling interest in the net assets of Prime in equity.



Business Combinations

We account for the acquisition of businesses
using the acquisition method. We measure the cost of an acquisition 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” are recognized at their fair values at the acquisition date, except for non-current assets that are classified
as held-for-sale and measured at fair value, less costs to sell. The interests of non-controlling shareholders in the acquiree
are initially measured at fair value or at the non-controlling interests’ proportionate share of identifiable assets, liabilities
and contingent liabilities acquired.



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. 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.



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.



In applying this policy, judgment is applied
in determining whether an acquisition meets the definition of a business combination or an asset acquisition by considering the
nature of the assets acquired and the processes applied to those assets, or if the integrated set of assets and activities is capable
of being conducted and managed for the purpose of providing a return to investors or other owners.



57







Tax

Current income tax assets and liabilities
are measured at the amount expected to be paid to tax authorities, net of recoveries, based on the tax rates and laws enacted or
substantively enacted at the balance sheet date. Current income tax relating to items recognized directly in equity are also recognized
directly in equity.



In accordance with IFRS, we use the liability
method of accounting for deferred income taxes and provide for deferred income taxes for all significant 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 are 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.



Deferred taxes related to temporary differences
arising in our 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 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.



Judgment is required in determining the
provision for income taxes, deferred tax assets and liabilities and any related valuation allowance. To the extent a valuation
allowance is created or revised, current period earnings will be affected. Judgment is required to assess tax interpretations,
regulations and legislation, which are continually changing to ensure liabilities are complete and to ensure assets net of valuation
allowances are realizable. The impact of different interpretations and applications could potentially be material.



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.



Revenue Recognition

We account for our leases with tenants
as operating leases as we have retained substantially all of the risks and benefits of ownership of our investment properties.
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 company 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. Where a lease allows a tenant to elect to take all or a portion of any unused tenant improvement
allowance as a rent abatement, we 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.



An allowance for doubtful accounts is recorded,
if necessary, for estimated losses resulting from the inability of tenants to make required rent payments. The computation of this
allowance is based on the tenants’ payment history and current credit status, as well as certain industry or geographic specific
credit considerations.



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.



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.



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.

58







USE OF ESTIMATES

The preparation of our financial statements
requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Our estimates are based on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances. The result of our ongoing evaluation of these estimates forms the basis for making judgments
about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions.



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. The following table summarizes transactions and balances with BAM and its subsidiaries:



|                                               |  |  |  |  | Year ended Dec. 31,
|---------------------------------------------- |  |  |  |  | -------------------
|(Millions)                                     |  |  |  |  |                    
|Transactions with related parties              |  |  |  |  |                    
|Lease revenue(1)                               |  |  |  |  | $                  
|Interest and other income                      |  |  |  |  |                    
|Interest expense on commercial property debt   |  |  |  |  |                    
|Other expense(2)                               |  |  |  |  |                    
|                                               |  |  |  |  | Dec. 31, 2012      
|Balances outstanding to (from) related parties |  |  |  |  |                    
|Participating loan interests                   |  |  |  |  | $                  
|BRPI promissory notes                          |  |  |  |  |                    
|Loans receivable designated as FVTPL           |  |  |  |  |                    
|Other loans receivable                         |  |  |  |  |                    
|Commercial property debt                       |  |  |  |  |                    

| | (1) | Amounts received from BAM and its subsidiaries for the rental of office premises
| | --- | --------------------------------------------------------------------------------

| | (2) | Amounts paid to BAM and its subsidiaries for administrative services
| | --- | --------------------------------------------------------------------



During
the year ended December 31, 2012, we entered into contracts to construct investment properties in London and Toronto with a subsidiary
of BAM.



We hold a 90% interest in Brookfield Properties
Management Pty Ltd. which manages the properties in the Australian portfolio and certain other properties owned by subsidiaries
of BAM, with the remaining 10% held by BAM. We have an option to acquire BAM’s interest in Brookfield Properties Management
Pty Ltd. for nominal consideration at any time prior to September 30, 2020.

59







PART
v – bUSINESS ENVIRONMENT AND OUTLOOK



OPERATING
ENVIRONMENT AND OUTLOOK

We entered 2012 on the heels of the debt
crisis in Europe which had a stagnant effect on our U.S. markets throughout most of the year. It was also an election year in the
U.S., which caused much hesitation in occupancy decisions being made. Now with the election over, we are seeing the positive effects
of the pent-up leasing demand that has been building over the last 12 months. We start 2013 with more solid footing and expect
to begin to see an uptick in activity this year in our core U.S. markets. We are also heavily invested in Canada and Australia,
two countries which have upheld strong financial fundamentals and have not seen much economic adversity. As a result, we have maintained
strong occupancies and healthy mark-to-market leasing in spite of the uncertainties impacting much of the rest of the globe. As
an organization, we have a healthy respect for the cyclical nature of real estate and financial markets and we attempt to implement
a strategy accordingly. We aim to position ourselves to perform well despite the direction of the general economy and have made
an effort over recent years to diversify our tenant base and enter into new markets where we see strong and growing economies.
In 2012, these efforts resulted in a more meaningful investment in the United Kingdom through the acquisition of a portfolio of
operating assets and development sites in the city of London. In addition, a concerted effort to expand into technology based markets
resulted in an acquisition in Seattle.



In 2012, we leased 6.8 million square feet
globally. New leases accounted for 3.2 million square feet of the total, or about 46%. Of the remaining 54%, 2.0 million square
feet represented in-year renewals with the remaining 1.6 million square feet renewals related to out-year expiries. These early
renewals led to a reduction in our 3-year rollover exposure by 310 basis points. We ended 2012 with a portfolio occupancy of 92.0%.
This occupancy level is lower than our historical average but is largely attributable to recent acquisitions of low-leased assets
which we plan to reposition and lease-up at positive mark-to-market spreads. We have been active in recent years in recycling capital
out of mature or non-core assets into opportunistic assets in our core markets or new target markets like Seattle and London, where
we believe we can put our successful business strategies to work and achieve growth and positive results.



Our diverse tenant base remains strong
and we have found our global platform has been beneficial in supporting tenant synergies around the world. Our major focus continues
to be Brookfield Place New York (formerly the World Financial Center), where a significant expiry will take place in October of
2013. While the leasing activity related to this expiry was slower than we hoped in 2012, we’ve seen higher volume thus far
in 2013 and have a substantial amount of space currently in serious discussions. Further, we have embarked on a rebranding campaign
that represents not only the transformation of the complex, the changing demographics of Lower Manhattan and the companies and
industries relocating to the area, but also to reaffirm our commitment to one of the most prominent and sought-after business addresses
in New York City. Brookfield has branded similar real estate in other cities of the world as ‘Brookfield Place,’ including
Toronto and Perth, as these properties also represent best-in-class districts for office space, dining, retail and the arts. We
are excited about the prospects that this rebranding effort will have on Lower Manhattan.



On the development front, our retail and
common area redevelopment at Brookfield Place New York is well underway, paving the way to an entirely new experience for tenants
and visitors. Additionally, we successfully completed the development of Brookfield Place Perth in 2012 on time and within budget.
This asset is fully leased and our success has helped to bring average in-place rents up in our overall Perth portfolio. We secured
an anchor tenant at the second phase of our Bay Adelaide project in Toronto and construction of the East tower commenced in early
2013. Since then, we’ve signed another lease bringing the project to 60% pre-leased. In January of 2013, we broke ground
on our 5-million-square-foot Manhattan West development site where we have commenced construction of the platform with financing
in place. We expect development activities to be a focus for 2013 with the potential to commence additional projects in Perth,
London and Calgary. With returns being depressed on acquisitions of existing marginal and aging assets, higher returns are possible
through development. Of course, new developments will have to provide an appropriate risk-adjusted return, achieve pre-leasing
targets and be financeable before we would be willing to proceed.



We ended 2012 with $27.5 billion of assets
at a value per share of $19.80, which represents an 11% increase over the course of the year. Attributing to this increase was
a number of opportunistic acquisitions made throughout the year where we feel we can add value through repositioning efforts and
bring in considerable incremental funds from operations once stabilized. Additionally, our total return of $1.5 billion in 2012
is a testament to our ability to enhance the value of our common equity through growing funds from operations and the increase
in value of our investment properties over the course of the year. Looking to the upcoming years, with a solid global platform
consisting of a strong balance sheet offering financial flexibility, a well-leased portfolio with below-market net rents, a high-quality
global tenant base, and a 17-million-square foot development pipeline, Brookfield Office Properties is well-positioned to deliver
on its commitments to shareholders.



DISCLOSURE
CONTROLS AND PROCEDURES

Management, including the Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in applicable
U.S. and Canadian securities law) as of December 31, 2012. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that such disclosure controls and procedures are effective as of December 31, 2012 in providing reasonable assurance
that material information relating to the company and our consolidated subsidiaries would be made known to us by others within
those entities.





60







INTERNAL
CONTROL OVER FINANCIAL REPORTING

There was no change in our company’s
internal control over financial reporting that occurred during 2012 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. Management has also evaluated the effectiveness of our internal control
over financial reporting as of December 31, 2012, and based on that assessment concluded that our internal control over financial
reporting was effective. Refer to Management’s Report on Internal Control over Financial Reporting on page 65 of this annual
report.











Bryan K. Davis

Chief Financial Officer

March 1, 2013

61







DIVIDENDS

Dividends paid per share by Brookfield
Office Properties during the year ended December 31, 2012 and in the past three fiscal years are as follows:



|                                    |          | Year ended    | Year ended    | Year ended    | Year ended   
|----------------------------------- | -------- | ------------- | ------------- | ------------- | -------------
|                                    | Currency | Dec. 31, 2012 | Dec. 31, 2011 | Dec. 31, 2010 | Dec. 31, 2009
|Common shares                       | US$      | $             | 0.5600        | $             | 0.5600       
|Class A preferred shares            | C$       |               | 0.0833        |               | 0.0833       
|Class AA Series E preferred shares  | C$       |               | 0.5250        |               | 0.5250       
|Class AAA Series E preferred shares | C$       |               | 0.5250        |               | 0.5250       
|Class AAA Series F preferred shares | C$       |               | 1.5000        |               | 1.5000       
|Class AAA Series G preferred shares | US$      |               | 1.3125        |               | 1.3125       
|Class AAA Series H preferred shares | C$       |               | 1.4375        |               | 1.4375       
|Class AAA Series I preferred shares | C$       |               | 0.3250        |               | 1.3583       
|Class AAA Series J preferred shares | C$       |               | 1.2500        |               | 1.2500       
|Class AAA Series K preferred shares | C$       |               | 1.3000        |               | 1.3000       
|Class AAA Series L preferred shares | C$       |               | 1.6875        |               | 1.6875       
|Class AAA Series N preferred shares | C$       |               | 1.5375        |               | 1.5375       
|Class AAA Series P preferred shares | C$       |               | 1.2875        |               | 1.2875       
|Class AAA Series R preferred shares | C$       |               | 1.2750        |               | 0.4192       
|Class AAA Series T preferred shares | C$       |               | 0.3434        |               | ―            

62







Management’s Responsibility
for the Financial Statements



The consolidated
financial statements and management’s financial analysis and review contained in this annual report are the responsibility
of the management of the company. To fulfill this responsibility, the company maintains a system of internal controls to ensure
that its reporting practices and accounting and administrative procedures are appropriate and provide assurance that relevant and
reliable financial information is produced. The consolidated financial statements have been prepared in conformity with International
Financial Reporting Standards as issued by the International Accounting Standards Board and, where appropriate, reflect estimates
based on management’s best judgment in the circumstances. The financial information presented throughout this annual report
is consistent with the information contained in the consolidated financial statements.



Deloitte
LLP, the independent registered chartered accountants appointed by the shareholders, have audited the consolidated financial statements
in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight
Board (United States) to enable them to express to the Board of Directors and Shareholders their opinion on the consolidated financial
statements. Their report as independent registered chartered accounts is set out on the following page.



The consolidated
financial statements have been further examined by the Board of Directors and by its Audit Committee, which meets with the auditors
and management to review the activities of each and reports to the Board of Directors. The auditors have direct and full access
to the Audit Committee and meet with the committee both with and without management present. The Board of Directors, directly and
through its Audit Committee, oversees management responsibilities and is responsible for reviewing and approving the financial
statements.







|                        |                        
|----------------------- | -----------------------
|                        |                        
|Dennis H. Friedrich     | Bryan K. Davis         
|Chief Executive Officer | Chief Financial Officer
|March 1, 2013           |                        





63







Report of Independent Registered Chartered
Accountants



To the Board of Directors and Shareholders of Brookfield
Office Properties Inc.



We have audited the accompanying consolidated
financial statements of Brookfield Office Properties Inc. and subsidiaries (the “Company”), which comprise the consolidated
balance sheets as at December 31, 2012 and December 31, 2011, and the consolidated statements of income, statements of comprehensive
income, statements of changes in equity and statements of cashflow for the years then ended, and the notes to the consolidated
financial statements.



Management's Responsibility for the
Consolidated Financial Statements

Management is responsible for the preparation
and fair presentation of these consolidated financial statements 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 consolidated financial statements that are free from material misstatement, whether due to fraud or
error.



Auditor's Responsibility

Our responsibility is to express an opinion
on these consolidated financial statements 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 consolidated
financial statements are free from material misstatement.



An audit involves performing procedures
to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend
on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements,
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 consolidated financial statements in order to design audit procedures that are appropriate
in the circumstances. 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 consolidated financial statements.



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 consolidated financial
statements present fairly, in all material respects, the financial position of the Company as at December 31, 2012 and December
31, 2011 and its financial performance and cash flows for the years then ended in accordance with International Financial Reporting
Standards as issued by the International Accounting Standards Board.



Other Matters

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, 2012, based on the criteria established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2013 expressed an unqualified
opinion on the Company’s internal control over financial reporting.











Independent Registered Chartered
Accountants

Licensed Public Accountants

March 1, 2013

Toronto, Canada

64







Management’s Report on Internal
Control over Financial Reporting



Management of Brookfield Office Properties
Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over
financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and the Chief Financial
Officer and effected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board.



Due to its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements on a timely basis. Also, projections of any evaluation
to the effectiveness of internal control over the financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Management assessed the effectiveness of
Brookfield Office Properties Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management concluded that, as at December 31, 2012, Brookfield Office Properties Inc.’s
internal control over financial reporting is effective. There are no material weaknesses that have been identified by Management.



Brookfield Office Properties Inc.'s internal
control over financial reporting as of December 31, 2012 has been audited by Deloitte LLP, Independent Registered Chartered Accountants,
who also audited Brookfield Office Properties Inc.’s consolidated financial statements for the year ended December 31, 2012,
and as stated in the Report of Independent Registered Chartered Accountants, Deloitte LLP, expressed an unqualified opinion on
the effectiveness of Brookfield Office Properties Inc.'s internal control over financial reporting.









|                        |                        
|----------------------- | -----------------------
|                        |                        
|Dennis H. Friedrich     | Bryan K. Davis         
|Chief Executive Officer | Chief Financial Officer
|March 1, 2013           |                        







65







Report of Independent Registered Chartered
Accountants



To the Board of Directors and Shareholders
of Brookfield Office Properties Inc.



We have audited the internal control over
financial reporting of Brookfield Office Properties Inc. and subsidiaries (the “Company”) as of December 31, 2012,
based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control
over financial reporting based on our audit.



We conducted our audit 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 effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.



A company's internal control over financial
reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers,
or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material effect on the financial statements.



Because of the inherent limitations of
internal control over financial reporting, including the possibility of collusion or improper management override of controls,
material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation
of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the criteria established
in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.



We have also audited, in accordance with
Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements as of and for the year ended December 31, 2012 of the Company and our report dated March
1, 2013 expressed an unqualified opinion on those financial statements.









Independent Registered Chartered
Accountants

Licensed Public Accountants

March 1, 2013

Toronto, Canada

66







Consolidated Balance Sheets



|(US Millions)                                                 |  | Note | Dec. 31, 2012 | Dec. 31, 2011
|------------------------------------------------------------- |  | ---- | ------------- | -------------
|Assets                                                        |  |      |               |              
|Non-current assets                                            |  |      |               |              
|Investment properties                                         |  |      |               |              
|Commercial properties                                         |  |      | 5             | $            
|Commercial developments                                       |  |      | 5             |              
|Equity accounted investments and participating loan interests |  |      |               |              
|Investments in jointly controlled entities                    |  |      | 6             |              
|Investments in associates                                     |  |      | 8             |              
|Participating loan interests                                  |  |      | 9             |              
|Other non-current financial assets                            |  |      | 10            |              
|                                                              |  |      |               |              
|Current assets                                                |  |      |               |              
|Receivables and other assets                                  |  |      | 11            |              
|Restricted cash and deposits                                  |  |      | 12            |              
|Cash and cash equivalents                                     |  |      |               |              
|                                                              |  |      |               |              
|Assets held for sale                                          |  |      | 13            |              
|Total assets                                                  |  |      |               | $            
|                                                              |  |      |               |              
|Liabilities                                                   |  |      |               |              
|Non-current liabilities                                       |  |      |               |              
|Commercial property debt                                      |  |      | 14            | $            
|Capital securities                                            |  |      | 15            |              
|Other non-current financial liabilities                       |  |      | 16            |              
|Deferred tax liabilities                                      |  |      | 18            |              
|                                                              |  |      |               |              
|Current liabilities                                           |  |      |               |              
|Commercial property debt                                      |  |      | 14            |              
|Capital securities                                            |  |      | 15            |              
|Accounts payable and accrued liabilities                      |  |      | 17            |              
|                                                              |  |      |               |              
|Liabilities associated with assets held for sale              |  |      | 13            |              
|Total liabilities                                             |  |      |               |              
|                                                              |  |      |               |              
|Equity                                                        |  |      |               |              
|Preferred equity                                              |  |      | 19            |              
|Common equity                                                 |  |      | 19            |              
|Total shareholders’ equity                                    |  |      |               |              
|Non-controlling interests                                     |  |      | 19            |              
|Total equity                                                  |  |      |               |              
|Total liabilities and equity                                  |  |      |               | $            

See accompanying notes to the consolidated
financial statements

67







Consolidated Statements of Income



|(US Millions, except per share information)                                                                                                                         |  |  | Note | 2012 | 2011
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ---- | ---- | ----
|Commercial property revenue                                                                                                                                         |  |  |      |      | 20  
|Direct commercial property expense                                                                                                                                  |  |  |      |      | 20  
|                                                                                                                                                                    |  |  |      |      |     
|Interest and other income                                                                                                                                           |  |  |      |      | 20  
|                                                                                                                                                                    |  |  |      |      |     
|Interest expense                                                                                                                                                    |  |  |      |      |     
|Commercial property debt                                                                                                                                            |  |  |      |      | 20  
|Capital securities                                                                                                                                                  |  |  |      |      | 20  
|Administrative expense                                                                                                                                              |  |  |      |      | 20  
|Income (loss) from continuing operations before gains (losses), fair value gains (losses), share of net earnings from equity accounted investments and income taxes |  |  |      |      |     
|Gains (losses), net                                                                                                                                                 |  |  |      |      |     
|Fair value gains (losses), net                                                                                                                                      |  |  |      |      | 21  
|Share of net earnings from equity accounted investments                                                                                                             |  |  |      |      | 22  
|Income (loss) from continuing operations before income taxes                                                                                                        |  |  |      |      |     
|Income taxes                                                                                                                                                        |  |  |      |      | 18  
|Income (loss) from continuing operations                                                                                                                            |  |  |      |      |     
|Income (loss) from discontinued operations                                                                                                                          |  |  |      |      | 13  
|Net income (loss)                                                                                                                                                   |  |  |      |      |     
|                                                                                                                                                                    |  |  |      |      |     
|Net income (loss) attributable to                                                                                                                                   |  |  |      |      |     
|Shareholders                                                                                                                                                        |  |  |      |      |     
|Non-controlling interests                                                                                                                                           |  |  |      |      |     
|                                                                                                                                                                    |  |  |      |      |     
|Net income (loss) per share attributable to common shareholders - basic                                                                                             |  |  |      |      |     
|Continuing operations                                                                                                                                               |  |  |      |      |     
|Discontinued operations                                                                                                                                             |  |  |      |      |     
|                                                                                                                                                                    |  |  |      |      |     
|Net income (loss) per share attributable to common shareholders - diluted                                                                                           |  |  |      |      |     
|Continuing operations                                                                                                                                               |  |  |      |      |     
|Discontinued operations                                                                                                                                             |  |  |      |      |     
|                                                                                                                                                                    |  |  |      |      |     

See accompanying notes to the consolidated
financial statements

68







Consolidated Statements of Comprehensive
Income



|(US Millions)                                                                                                                                                        |  |  |  | 2012 | 2011
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ---- | ----
|Net income                                                                                                                                                           |  |  |  |      |     
|Foreign currency translation                                                                                                                                         |  |  |  |      |     
|Unrealized foreign currency translation gains (losses) in respect of foreign operations                                                                              |  |  |  |      |     
|Gains (losses) on hedges of net investments in foreign operations, net of income taxes for the year ended December 31, 2012 of $1 million (2011 – $8 million)        |  |  |  |      |     
|Reclassification of net foreign exchange gains on disposition of residential development segment                                                                     |  |  |  |      |     
|                                                                                                                                                                     |  |  |  |      |     
|Derivatives designated as cash flow hedges                                                                                                                           |  |  |  |      |     
|Losses on derivatives designated as cash flow hedges, net of income taxes for the year ended December 31, 2012 of $25 million (2011 – $52 million)                   |  |  |  |      |     
|Reclassification of losses on derivatives designated as cash flow hedges, net of income taxes for the year ended December 31, 2012 of $3 million (2011 – $1 million) |  |  |  |      |     
|Unrealized gains (losses) on equity securities designated as available-for-sale, net of income taxes for the year ended December 31, 2012 of nil                     |  |  |  |      |     
|Revaluation surplus, net of income taxes for the year ended December 31, 2012 of nil                                                                                 |  |  |  |      |     
|                                                                                                                                                                     |  |  |  |      |     
|Other comprehensive income (loss)                                                                                                                                    |  |  |  |      |     
|Comprehensive income (loss)                                                                                                                                          |  |  |  |      |     
|                                                                                                                                                                     |  |  |  |      |     
|Comprehensive income (loss) attributable to                                                                                                                          |  |  |  |      |     
|Shareholders                                                                                                                                                         |  |  |  |      |     
|Net income                                                                                                                                                           |  |  |  |      |     
|Other comprehensive income (loss)                                                                                                                                    |  |  |  |      |     
|                                                                                                                                                                     |  |  |  |      |     
|Non-controlling interests                                                                                                                                            |  |  |  |      |     
|Net income                                                                                                                                                           |  |  |  |      |     
|Other comprehensive income (loss)                                                                                                                                    |  |  |  |      |     
|                                                                                                                                                                     |  |  |  |      |     

See accompanying notes to the consolidated
financial statements

69







Consolidated Statements of Changes in
Equity



|2012 (US Millions)           | Common Shares                                  | Contributed Surplus | Retained Earnings | Accumulated Other Comprehensive Income | Total Common Equity | Preferred Equity | Non-Controlling Interests  | Total Equity
|---------------------------- | ---------------------------------------------- | ------------------- | ----------------- | -------------------------------------- | ------------------- | ---------------- | -------------------------- | ------------
|Balance at December 31, 2011 | $ 3,330                                        | $ 185               | $ 5,540           | $ 25                                   | $ 9,080             | $ 1,095          | $1,504                     | $ 11,679    
|Changes in period            |                                                |                     |                   |                                        |                     |                  |                            |             
|Net income                   | ―                                              | ―                   | 1,287             | ―                                      | 1,287               | ―                | 181                        | 1,468       
|Other comprehensive income   | ―                                              | ―                   | ―                 | 51                                     | 51                  | ―                | 16                         | 67          
|Comprehensive income         | ―                                              | ―                   | 1,287             | 51                                     | 1,338               | ―                | 197                        | 1,535       
|Shareholder distributions    |                                                |                     |                   |                                        |                     |                  |                            |             
|                             | Common equity                                  | ―                   | ―                 | (282)                                  | ―                   | (282)            | ―                          | ―           
|                             | Preferred equity                               | ―                   | ―                 | (70)                                   | ―                   | (70)             | ―                          | ―           
|                             | Non-controlling interests                      | ―                   | ―                 | ―                                      | ―                   | ―                | ―                          | (150)       
|Other items                  |                                                |                     |                   |                                        |                     |                  |                            |             
|                             | Equity issuances                               | 12                  | ―                 | ―                                      | ―                   | 12               | 250                        | ―           
|                             | Equity redemptions                             | (3)                 | (3)               | ―                                      | ―                   | (6)              | ―                          | ―           
|                             | Dividend reinvestment                          | 3                   | ―                 | ―                                      | ―                   | 3                | ―                          | ―           
|                             | Share-based compensation                       | ―                   | 8                 | ―                                      | ―                   | 8                | ―                          | ―           
|                             | Ownership changes, net                         | ―                   | 3                 | ―                                      | ―                   | 3                | ―                          | (18)        
|Change in period             | 12                                             | 8                   | 935               | 51                                     | 1,006               | 250              | 29                         | 1,285       
|Balance at December 31, 2012 | $ 3,342                                        | $ 193               | $ 6,475           | $ 76                                   | $ 10,086            | $ 1,345          | $ 1,533                    | $ 12,964    
|                             |                                                |                     |                   |                                        |                     |                  |                            |             
|                             |                                                |                     |                   |                                        |                     |                  |                            |             
|2011 (US Millions)           | Common Shares                                  | Contributed Surplus | Retained Earnings | Accumulated Other Comprehensive Income | Total Common Equity | Preferred Equity | Non- Controlling Interests | Total Equity
|Balance at December 31, 2010 | $ 3,316                                        | $ 101               | $ 4,216           | $ 326                                  | $ 7,959             | $ 848            | $ 1,263                    | $ 10,070    
|Changes in period            |                                                |                     |                   |                                        |                     |                  |                            |             
|Net income                   | ―                                              | ―                   | 1,690             | ―                                      | 1,690               | ―                | 206                        | 1,896       
|Other comprehensive income   | ―                                              | ―                   | ―                 | (301)                                  | (301)               | ―                | (19)                       | (320)       
|Comprehensive income         | ―                                              | ―                   | 1,690             | (301)                                  | 1,389               | ―                | 187                        | 1,576       
|Shareholder distributions    |                                                |                     |                   |                                        |                     |                  |                            |             
|                             | Common equity                                  | ―                   | ―                 | (280)                                  | ―                   | (280)            | ―                          | ―           
|                             | Preferred equity                               | ―                   | ―                 | (58)                                   | ―                   | (58)             | ―                          | ―           
|                             | Non-controlling interests                      | ―                   | ―                 | ―                                      | ―                   | ―                | ―                          | (25)        
|Other items                  |                                                |                     |                   |                                        |                     |                  |                            |             
|                             | Equity issuances                               | 15                  | ―                 | ―                                      | ―                   | 15               | 247                        | ―           
|                             | Equity redemptions                             | (6)                 | (8)               | ―                                      | ―                   | (14)             | ―                          | ―           
|                             | Dividend reinvestment                          | 5                   | ―                 | ―                                      | ―                   | 5                | ―                          | ―           
|                             | Share-based compensation                       | ―                   | 7                 | ―                                      | ―                   | 7                | ―                          | ―           
|                             | Ownership changes, net                         | ―                   | 94                | (3)                                    | ―                   | 91               | ―                          | 79          
|                             | Disposition of residential development segment | ―                   | (9)               | (25)                                   | ―                   | (34)             | ―                          | ―           
|Change in period             | 14                                             | 84                  | 1,324             | (301)                                  | 1,121               | 247              | 241                        | 1,609       
|Balance at December 31, 2011 | $ 3,330                                        | $ 185               | $ 5,540           | $ 25                                   | $ 9,080             | $ 1,095          | $ 1,504                    | $ 11,679    



See accompanying notes to the consolidated
financial statements





70









Consolidated Statements
of Cashflow



|(US Millions)                                                         | Note | 2012 | 2011   
|--------------------------------------------------------------------- | ---- | ---- | -------
|Operating activities                                                  |      |      |        
|Net income                                                            |      | $    | 1,468  
|Share of undistributed net earnings from equity accounted investments |      |      | (74)   
|Fair value gains (losses), net                                        |      |      | (997)  
|Deferred income tax expense                                           | 18   |      | 216    
|Gains (losses), net                                                   |      |      | ―      
|Accretion of discount on loan receivable                              |      |      | ―      
|Depreciation                                                          |      |      | 15     
|Accretion of debt discount and transaction costs                      |      |      | 24     
|Share-based compensation expense                                      | 23   |      | 11     
|Initial direct leasing costs                                          |      |      | (56)   
|Working capital and other                                             |      |      | (225)  
|                                                                      |      |      | 382    
|Financing activities                                                  |      |      |        
|Commercial property debt arranged                                     |      |      | 1,823  
|Commercial property debt repaid                                       |      |      | (1,385)
|Corporate credit facilities arranged                                  |      |      | 935    
|Corporate credit facilities repaid                                    |      |      | (918)  
|Capital securities redeemed                                           |      |      | (153)  
|Non-controlling interests issued                                      |      |      | ―      
|Non-controlling interests repurchased                                 |      |      | ―      
|Land development debt arranged                                        |      |      | ―      
|Land development debt repaid                                          |      |      | ―      
|Distributions to non-controlling interests                            |      |      | (60)   
|Proceeds from equity instalment receivable                            |      |      | ―      
|Preferred shares issued                                               |      |      | 247    
|Preferred share dividends                                             | 19   |      | (70)   
|Common shares issued                                                  |      |      | 12     
|Common shares repurchased                                             |      |      | (3)    
|Common share dividends                                                | 19   |      | (282)  
|                                                                      |      |      | 146    
|Investing activities                                                  |      |      |        
|Acquisitions of real estate                                           |      |      | (855)  
|Disposition of real estate                                            |      |      | 402    
|Other real estate investments                                         |      |      | (151)  
|Disposition of residential segment                                    |      |      | ―      
|Investment in Australia portfolio                                     |      |      | ―      
|Investment in real estate joint ventures                              |      |      | (54)   
|Cash acquired in business combination                                 |      |      | 1      
|Foreign currency hedges of net investments                            |      |      | (5)    
|Interest rate hedges on commercial property debt                      |      |      | (36)   
|Loans receivable repaid                                               |      |      | ―      
|Loans receivable from affiliate arranged                              |      |      | (75)   
|Loans receivable from affiliate repaid                                |      |      | 689    
|Restricted cash and deposits                                          |      |      | (34)   
|Capital expenditures – development and redevelopment                  |      |      | (221)  
|Capital expenditures – commercial properties                          |      |      | (261)  
|                                                                      |      |      | (600)  
|(Decrease) increase in cash resources                                 |      |      | (72)   
|Cash and cash equivalents, beginning of period                        |      |      | 434    
|Cash and cash equivalents, end of period                              |      | $    | 362    
|                                                                      |      |      |        

See accompanying
notes to the consolidated financial statements

71





Notes to the Consolidated Financial
Statements



NOTE 1: NATURE AND DESCRIPTION OF THE
COMPANY

Brookfield Office Properties Inc. (“Brookfield
Office Properties” or “the company”) is incorporated under the laws of Canada. The company owns, develops and
operates commercial office properties in select cities in North America, Australia and the United Kingdom. The company is a subsidiary
of Brookfield Asset Management Inc. (“BAM”), which owns approximately 51% of the company’s voting shares. The
company’s common shares are listed on the Toronto Stock Exchange and the New York Stock Exchange under the symbol BPO. The
registered office of the company is Brookfield Place, 181 Bay Street, Suite 300, Toronto, Ontario, M5J 2T3 and it operates head
offices in Toronto, New York, Sydney and London.



NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

| | (a) | Basis of presentation
| | --- | ---------------------

The consolidated financial statements are
prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board
(“IFRS”).



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. Policies not effective for the current accounting
period are described in Note 4, Future Accounting Policy Changes.



| | (b) | Basis of consolidation
| | --- | ----------------------

The consolidated financial statements include
the accounts of the company and its consolidated 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 benefit from its activities. Non-controlling interests in the equity and results of the company’s subsidiaries
are shown separately in equity in the consolidated balance sheets.



| | (c) | Investments in joint ventures and associates
| | --- | --------------------------------------------

| | (i) | Interests in joint ventures
| | --- | ---------------------------

A joint venture is a contractual
arrangement pursuant to which the company 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 venturer has an interest are referred to as jointly controlled entities.
The company 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 consolidated balance sheets 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 company 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 company 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 proportionate share of joint venture assets, liabilities, revenues
and expenses are recognized in the consolidated financial statements and classified according to their nature.



Where the company 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 company and jointly controlled entities in which it has an interest are
not eliminated in the consolidated balance sheets.



| | (ii) | Investments in associates
| | ---- | -------------------------

An associate is an entity over
which the investor has significant influence but not control and that is neither a subsidiary nor a joint venture.



The results of operations and
assets and liabilities of associates are incorporated in the company’s consolidated financial statements using the equity
method of accounting which is described in Note 2(c)(i), Interests in joint ventures, above.



| | (d) | 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. Related fair value gains and losses are recorded in net income in the period in which
they arise.





72







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 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 specific to other 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 company 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 company has pre-leased space as of or prior to the start of the development and
the lease requires the company 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 company in negotiating and arranging tenant leases are added to the carrying amount of investment properties.



| | (e) | Assets held for sale and discontinued operations
| | --- | ------------------------------------------------

Non-current assets and groups of assets
and liabilities which comprise disposal groups are presented as assets held for sale where the asset or disposal group is available
for sale in its present condition, and the sale is highly probable. For this purpose, a sale is highly probable if management is
committed to a plan to achieve the sale; there is an active program to find a buyer; the non-current asset or disposal group is
being actively marketed at a reasonable price; the sale is anticipated to be completed within one year from the date of classification,
and; it is unlikely there will be changes to the plan. Where an asset or disposal group is acquired with a view to resale, it is
classified as a non-current asset held for sale if the disposal is expected to take place within one year of the acquisition, and
it is highly likely that the other conditions referred to above will be met within a short period following the acquisition. Non-current
assets held for sale and disposal groups that are not investment properties are carried at the lesser of carrying amount and fair
value less costs to sell. Investment properties that are held for sale are carried at fair value determined in accordance with
IAS 40, “Investment Property” (“IAS 40”).



Where a component of an entity has been
disposed of, or is classified as held for sale, and it represents a separate major line of business or geographical area of operations
or is a subsidiary acquired exclusively with a view to resale, the related results of operations and gain or loss on reclassification
or disposition are presented in discontinued operations.



| | (f) | Taxation
| | --- | --------

Current income tax assets and liabilities
are measured at the amount expected to be paid to tax authorities, net of recoveries, based on the tax rates and laws enacted or
substantively enacted at the balance sheet date. Deferred income tax 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 and carry forward of unused tax credits and 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 company 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 company and the presentation currency for the consolidated 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, unless significant transactions occur
during the period, in which case the exchange rates at the dates of the transactions are used. The resulting foreign currency translation
adjustments are recognized in other comprehensive income (“OCI”). Cumulative foreign currency translation gains are
recognized in net income when there is a disposition or partial disposition of the foreign subsidiary.





73







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 income, 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) | Share-based compensation
| | --- | ------------------------

The company and its subsidiaries issue
share-based awards to certain employees and non-employee directors. The cost of equity-settled share-based transactions is determined
as the fair value of the awards on the grant date using a fair value model. The cost of the stock-options is recognized on a proportionate
basis consistent with the vesting features of each tranche of the grant. The cost of cash-settled share-based transactions is measured
as the fair value at the grant date, and expensed over the vesting period with the recognition of a corresponding liability. The
liability is measured at each reporting date at fair value with changes in fair value recognized in income.



| | (j) | Revenue recognition
| | --- | -------------------

| | (i) | Commercial operations
| | --- | ---------------------

The company 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 company 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.



| | (ii) | Recurring fee income
| | ---- | --------------------

The company is entitled to management
fees and performance fees on the management of properties for third parties. The company recognizes management fees as earned.
The company recognizes performance fees in revenue when the amount receivable from its fund partners is determinable at the end
of a contractually specified term.



| | (iii) | Lease termination income
| | ----- | ------------------------

The company recognizes lease
termination when the amount of the termination fee can be reliably determined, it is probable the fee will be received and the
costs associated with the termination can be measured reliability.



| | (iv) | Interest and other income
| | ---- | -------------------------

Interest and other income includes
interest earned on bank deposits, loans, notes and mortgages receivables as well as miscellaneous income, not part of ordinary
property operations. The company recognizes interest and other income as earned.







74







| | (k) | Financial instruments and derivatives
| | --- | -------------------------------------

The following summarizes the company’s
classification and measurement of financial assets and liabilities:



|                                                                               |  | Classification        | Measurement(1)   
|------------------------------------------------------------------------------ |  | --------------------- | -----------------
|Financial assets                                                               |  |                       |                  
|Participating loan notes                                                       |  | Loans and receivables | Amortized cost(2)
|Non-current financial assets                                                   |  |                       |                  
|Equity securities designated as available-for-sale (“AFS”)                     |  | AFS                   | Fair value       
|Brookfield Residential Properties Inc. (“BRPI”) promissory notes(3)            |  | Loans and receivables | Amortized cost   
|Loans receivable designated as fair value through profit and loss (“FVTPL”)(3) |  | 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                                                             |  | Other liabilities     | Amortized cost   
|Other non-current financial liabilities                                        |  |                       |                  
|Loan payable                                                                   |  | Other liabilities     | Amortized cost   
|Note payable                                                                   |  | Other liabilities     | Amortized cost   
|Other loans payable                                                            |  | Other liabilities     | Amortized cost   
|Accounts payable and accrued liabilities                                       |  | Other liabilities     | Amortized cost   

| | (1) | Fair value gains and losses on AFS financial assets are recognized in OCI and reclassified to
net income upon sale or impairment. Fair value gains and losses on financial instruments designated as FVTPL are recognized in
fair value gains (losses), net
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Except for derivatives embedded in the related financial instruments that are classified as
FVTPL
| | --- | -------------------------------------------------------------------------------------------------

| | (3) | Non-current financial asset was repaid during the year ended December 31, 2012
| | --- | ------------------------------------------------------------------------------



Certain of the company’s Class AAA
preferred shares are presented as financial liabilities within capital securities on the basis that they may be settled, at the
company’s option, in cash or the equivalent value of a variable number of the company’s common shares.



The company 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 with a functional currency other than the U.S. dollar. 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 net income when the hedged item is sold or terminated or when it is determined a hedged forecasted transaction
is no longer probable.



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.



Derivative instruments are recorded in
the consolidated balance sheet 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. Changes in the fair value of derivative instruments, including embedded
derivatives, which are not designated as hedges for accounting purposes, are recognized in fair value
gains (losses), net or administrative expense consistent with the underlying nature and purpose of the derivative instrument.



| | (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 and measured at fair value, less costs to sell. The interests of non-controlling shareholders
in the acquiree are initially measured at fair value or at the non-controlling interests’ proportionate share of identifiable
assets, liabilities and contingent liabilities acquired.



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. 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.



75







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.



| | (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 consolidated financial statements:



| | (i) | Investment in Brookfield Office Properties Australia
| | --- | ----------------------------------------------------

The company has an economic
interest in a portfolio of properties in Australia owned by BAM in the form of participating loan agreements that provide the company
with an interest in the results of operations and changes in fair values of the properties in the Australian portfolio. These participating
loan interests are convertible by the company at any time into direct ownership interests in either the properties in the Australian
portfolio or the entities that have direct ownership of the property (the “property subsidiaries”). The critical judgments
made in the accounting for this investment relate to the company’s determination that the economic interests held by the
company in certain entities within the Australian portfolio represent controlling interests in those entities, the determination
of unit of account where related financial instruments have been entered into in contemplation of each other, the identification
of the terms of embedded derivatives within the company’s participating loan interests, the recognition of certain amounts
paid to the company’s parent as financial assets or equity transactions, and the measurement of assets and liabilities recognized
as a result of transactions with entities under common control.



As a result of these judgments,
the company has accounted for its interests in certain property subsidiaries as a controlling interest in a subsidiary of an equity
accounted interest in a jointly controlled entity. Interests in other properties and subsidiaries are accounted for as participating
loan notes that give rise to interest income reflecting the results of operations of the underlying property and gain or losses
on an embedded derivative that corresponds to the property’s change in fair value. Refer to Note 9, Participating Loan Interests.



| | (ii) | Income taxes
| | ---- | ------------

The company 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 company intends that
these entities will continue to distribute their taxable income and continue to qualify as REITs for the foreseeable future.



The company 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 company 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 company also makes judgments
with respect to the taxation of gains inherent in its investments in foreign subsidiaries and joint ventures. While the company
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.



| | (iii) | Leases
| | ----- | ------

The company’s policy for
revenue recognition on commercial properties is described in Note 2(j)(i), Commercial operations. In applying this policy, the
company makes judgments with respect to whether tenant improvements provided in connection with a lease enhance the value of the
leased property which determines whether such amounts are treated as additions to commercial 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 company 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 company 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 company is lessor, are operating or finance leases. The company has
determined that all of its leases are operating leases.







76







| | (iv) | Investment property
| | ---- | -------------------

The company’s accounting
policies relating to investment property are described in Note 2(d), Investment properties. 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.



| | (v) | Financial instruments
| | --- | ---------------------

The company’s accounting
policies relating to financial instruments are described in Note 2(k), Financial instruments and derivatives. 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 FVTPL, assessment of the effectiveness of hedging relationships, including
evaluation of whether anticipated transactions are highly probable of occurring, determining whether the company 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.



| | (vi) | Assets held for sale and discontinued operations
| | ---- | ------------------------------------------------

The company’s accounting
policies relating to assets held for sale are described in Note 2(e), Asset held for sale and discontinued operations. In applying
this policy, judgment is applied in determining whether sale of certain assets is highly probably, which is a necessary condition
for being presented within assets held for sale. Also, judgment is applied in determining whether disposal groups represent a component
of the entity, the results of which should be recorded in discontinued operations on the consolidated statements of income.



| | (vii) | Common control transactions
| | ----- | ---------------------------

IFRS does not include specific
measurement guidance for transfers of businesses or subsidiaries between entities under common control. Accordingly, the company
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 company is the transferor, and the carrying amount
of the assets and liabilities transferred are recorded directly in equity.



| | (viii) | Business combinations
| | ------ | ---------------------

The company’s accounting
policies relating to business combinations are described in Note 2(l), Business combinations. In applying this policy, judgment
is applied in determining whether an acquisition meets the definition of a business combination or an asset acquisition by considering
the nature of the assets acquired and the processes applied to those assets, or if the integrated set of assets and activities
is capable of being conducted and managed for the purpose of providing a return to investors or other owners.



| | (o) | Critical accounting estimates and assumptions
| | --- | ---------------------------------------------

The company makes estimates and assumptions
that affect the carrying 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 commercial properties and commercial developments are set out in Note 5, Investment Properties.



| | (ii) | Financial instruments
| | ---- | ---------------------

The company has certain financial
assets and liabilities with embedded participation features related to the values of investment properties. The fair values of
these features are based on the fair values of the related investment properties and are subject to the estimates and assumption
associated with investment properties discussed in Note 5, Investment Properties.



The company holds other financial
instruments that represent equity interests in commercial properties that are measured at fair value as AFS financial assets. Estimation
of the fair value of these instruments is also subject to the estimates and assumptions associated with investment properties.



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.



| | (iii) | Assets held for sale and discontinued operations
| | ----- | ------------------------------------------------

The company makes estimates
and assumptions about the fair value and selling costs of non-current assets held for sale and disposal groups in determining their
carrying amounts.





77







NOTE 3: Adoption
of Accounting Standard

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.” 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.



NOTE 4:
FUTURE ACCOUNTING POLICY CHANGES

The following are the accounting policies that the company 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 International Accounting Standards Board (“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, “Financial Instruments: Disclosures.” 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” establishes principles for the preparation of consolidated financial statements when a reporting entity 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 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 by recording the company’s share of assets, liabilities, revenues and expenses.



| | (d) | Disclosure of Interests in Other Entities
| | --- | -----------------------------------------

IFRS 12, “Disclosure of Interests
in Other Entities” applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated
structured entity. The standard requires the 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 entity’s financial position, financial performance and cashflows.



| | (e) | Fair Value Measurement
| | --- | ----------------------

IFRS 13, “Fair Value Measurement”
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) | Financial Statement Presentation
| | --- | --------------------------------

The IASB issued amendments to IAS 1, “Presentation
of Financial Statements” which requires items within OCI that will be reclassified to profit and loss to be grouped separately
from those that will not.



Each of the above are effective for annual
periods beginning on or after January 1, 2013, except for IFRS 9 which is effective for annual periods beginning on or after January
1, 2015. Earlier application is permitted for each standard. The company 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.





78







NOTE 5: INVESTMENT PROPERTIES



|                                                                       | Dec. 31, 2012 | Dec. 31, 2011
|---------------------------------------------------------------------- | ------------- | -------------
|                                                                       | Commercial    | Commercial   
|(Millions)                                                             | properties    | developments 
|Balance, beginning of period                                           | $             | 19,258       
|Additions                                                              |               |              
|Property acquisitions and investments                                  |               | 741          
|Capital expenditures                                                   |               | 241          
|Initial direct leasing costs                                           |               | 56           
|Dispositions and reclassification to assets held for sale              |               | (44)         
|Reclassification from commercial developments to commercial properties |               | 989          
|Fair value gains (losses)                                              |               | 897          
|Foreign currency translation                                           |               | 205          
|Other changes                                                          |               | 99           
|Balance, end of period                                                 | $             | 22,442       



During the fourth quarter of 2012, the
company acquired an additional 37.5% interest in The 100 Bishopsgate Partnership for £47 million, bringing its ownership
in the entity that owns 100 Bishopsgate, a commercial development in London, to 87.5%. As a result, the company has consolidated
The 100 Bishopsgate Partnership and recognized a $279 million addition to commercial developments. Prior to the acquisition date,
The 100 Bishopsgate Partnership was accounted for within investments in jointly controlled entities under the equity method of
accounting.



During the third quarter of 2012, the company
acquired two commercial properties, 99 Bishopsgate and Shoreditch, in London for £263 million. In addition, the company has
committed to acquire two additional commercial properties for an aggregate purchase price of £123 million in a transaction
that is expected to close in June 2013. The fair value of those properties as of December 31, 2012 is consistent with the anticipated
purchase price.



During the second quarter of 2012, the
company acquired three office towers including Metropolitan Park East & West in Seattle for $210 million and 799 9th
Street in Washington, D.C. for $106 million. The company also acquired the Bow Parkade, a seven-story public parking facility,
in Calgary for C$90 million which is part of the company’s 225 Sixth development.



The acquisitions of 99 Bishopsgate, Metropolitan
Park East & West and 799 9th Street represent business combinations accounted for in accordance with IFRS 3. Total
consideration paid for these business combinations was $730 million. The following is a summary of the amounts assigned to each
major class of asset and liability of the investment properties acquired through business combinations at the dates the company
acquired control:



|(Millions)                                        |  |  |  |  |  | 
|------------------------------------------------- |  |  |  |  |  | 
|Commercial properties and commercial developments |  |  |  |  |  | 
|Commercial property debt                          |  |  |  |  |  | 
|Other assets and liabilities                      |  |  |  |  |  | 
|Total                                             |  |  |  |  |  | 



The purchase price for 99 Bishopsgate of
£253 million was provisionally allocated to the assets acquired and liabilities assumed at the date of acquisition pending
completion of the company’s determination of their fair values. Such allocation was completed in the fourth quarter of 2012
with no material differences from the provisional allocation.



In the period from their acquisition dates
to December 31, 2012, the company recorded commercial property revenue and net income attributable to shareholders in connection
with these properties of $20 million and $11 million, respectively. If the acquisitions had been as of January 1, 2012, the commercial
property revenue and net income attributable to shareholders of the combined company would have been $2,234 million and $1,306
million, respectively, for the year ended December 31, 2012. In connection with these acquisitions, the company recognized acquisition-related
costs of $4 million through administrative expense.



In the second quarter of 2012, the company’s
Brookfield Place in Perth, commercial development reached practical completion and was reclassified from commercial developments
to commercial properties at a fair value of $989 million.



On March 8, 2012, the company sold the
Altius Centre building in downtown Calgary for C$180 million. The company had owned a 25% interest in the building.





79







The company determines the fair value of
each commercial 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 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. Commercial developments
under active development are also 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. In accordance with
its policy, the company measures its commercial properties and commercial developments using valuations prepared by management.
The company does not measure its investment properties based on valuations prepared by external valuation professionals.



The key valuation metrics for commercial
properties, including properties accounted for under the equity method, are set out in the following table:



|                         | Dec. 31, 2012 | Dec. 31, 2011
|------------------------ | ------------- | -------------
|                         | Maximum       | Minimum      
|United States            |               |              
|Discount rate            | 10.75%        | 6.25%        
|Terminal cap rate        | 9.00%         | 5.75%        
|Investment horizon (yrs) | 21            | 4            
|Canada                   |               |              
|Discount rate            | 7.50%         | 6.00%        
|Terminal cap rate        | 7.00%         | 5.25%        
|Investment horizon (yrs) | 14            | 10           
|Australia                |               |              
|Discount rate            | 9.75%         | 8.50%        
|Terminal cap rate        | 9.00%         | 7.00%        
|Investment horizon (yrs) | 10            | 10           
|United Kingdom           |               |              
|Discount rate            | 7.20%         | 4.50%        
|Terminal cap rate        | 5.80%         | 2.00%        
|Investment horizon (yrs) | 10            | 10           



Values are most sensitive to changes in
discount rates and timing or variability of cashflows.



Included in commercial properties is $504
million (December 31, 2011 – $424 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.”



Commercial properties with a fair value
of approximately $4,892 million (December 31, 2011 – $4,385 million) 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, 2012,
the company capitalized a total of $258 million (2011 – $312 million) of costs related to commercial developments. Included
in this amount is $194 million (2011 – $225 million), of construction and related costs and $64 million (2011 – $87
million) of capitalized borrowing costs. The weighted average capitalization rate used for capitalization of borrowing costs to
commercial developments is 5.78% (December 31, 2011 – 6.92%). Included in construction and related costs for the year ended
December 31, 2012, is $165 million (2011 – $206 million) paid to a subsidiary of BAM pursuant to contracts to construct investment
properties.



Included in investment properties are $3,282
million (December 31, 2011 – $3,015 million) of properties located in Australia that the company controls through a participating
loan agreement with BAM which is convertible by the company at any time into a direct equity interest in the entities that have
a direct ownership interest in the underlying assets.



Investment properties with a fair value
of $21,124 million (December 31, 2011 – $18,207 million) are pledged as security for commercial property debt. In addition,
investment properties with a fair value of $1,767 million (December 31, 2011 – $2,071 million) are pledged as security for
liabilities of other subsidiaries of BAM as part of cross-collateralized financing pools that are also secured by investment properties
owned by BAM that have a fair value of $1,226 million (December 31, 2011 – $2,083 million).





80







NOTE 6: INVESTMENTS IN JOINTLY CONTROLLED
ENTITIES

The company has investments in joint ventures
that are jointly controlled entities. These joint ventures hold individual commercial properties and commercial developments that
the company owns together with co-owners.



At December 31, 2012, the company had interests
in the following jointly controlled entities, which have been accounted for following the equity method:



|                                   |                      |                                      | Ownership Interest
|---------------------------------- | -------------------- | ------------------------------------ | ------------------
|Name of Entity                     | Name of Property     | Principal Purpose/Activity           | Dec. 31, 2012     
|1114 6th Avenue Co. LLC            | The Grace Building   | Property holding company             |                   
|750 Ninth Street Parent, LLC       | Victor Building      | Property holding company             |                   
|Marina Airport Building, Ltd.      | Marina Towers        | Property holding company             |                   
|Dresser-Cullen Venture(1)          | KBR Tower            | Property holding company             |                   
|BFP 245 Park Co. LLC(2)            | 245 Park Avenue      | Property holding company             |                   
|33rd Street Partners JV LLC(2)     | 450 West 33rd Street | Property holding company             |                   
|Latitude Landowner Pty Ltd(3)      | E&Y Complex          | Property holding company             |                   
|The 100 Bishopsgate Partnership(4) | 100 Bishopsgate      | Development property holding company | —                 
|London Wall Place LP(5)            | London Wall Place    | Development property holding company | 50%               

| | (1) | On November 15, 2012, the company sold its interest in the Dresser-Cullen Venture for $76 million
| | --- | -------------------------------------------------------------------------------------------------

| | (2) | The company exercises joint control over BFP 245 Park Co. LLC and 33rd Street Partners JV LLC
based on the rights assigned to the company and its joint venture partners under joint venture agreements
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The company exercises joint control over Latitude Landowner Pty Ltd through a participating
loan agreement with BAM that is convertible at any time into a direct equity interest in the entity
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | During the fourth quarter of 2012, the company acquired an additional 37.5% interest in The
100 Bishopsgate Partnership resulting in acquisition of control of the entity
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | During the third quarter of 2012, the company acquired a 50% interest in London Wall Place LP,
a jointly controlled entity that owns London Wall Place, a commercial development in London, for £13 million
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Summarized financial information in respect
of the company’s investment in jointly controlled entities is set out below:



|(Millions)                    |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|----------------------------- |  |  |  |  | ------------- | -------------
|Non-current assets            |  |  |  |  |               |              
|Commercial properties         |  |  |  |  | $             | 5,080        
|Commercial developments       |  |  |  |  |               | 43           
|Current assets                |  |  |  |  |               | 130          
|Total assets                  |  |  |  |  |               | 5,253        
|Non-current liabilities       |  |  |  |  |               |              
|Commercial property debt      |  |  |  |  |               | 1,747        
|Current liabilities           |  |  |  |  |               | 49           
|Total liabilities             |  |  |  |  |               | 1,796        
|Net assets                    |  |  |  |  | $             | 3,457        
|Company’s share of net assets |  |  |  |  | $             | 1,778        



|(Millions)                                |  |  |  |  |   | 2012  |   | 2011 
|----------------------------------------- |  |  |  |  | - | ----- | - | -----
|Revenue                                   |  |  |  |  | $ | 393   | $ | 549  
|Expense                                   |  |  |  |  |   | (205) |   | (299)
|Earnings before fair value gains (losses) |  |  |  |  |   | 188   |   | 250  
|Fair value gains (losses)                 |  |  |  |  |   | 30    |   | 159  
|Net earnings                              |  |  |  |  | $ | 218   | $ | 409  
|Company’s share of net earnings           |  |  |  |  | $ | 123   | $ | 209  



The company’s share of net earnings
from jointly controlled entities for the year ended December 31, 2011 in Note 22, Share of Net Earnings from Equity Accounted Investments,
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:



|(Millions)                                |  |  |  |  |  |  |   | 2011 
|----------------------------------------- |  |  |  |  |  |  | - | -----
|Revenue                                   |  |  |  |  |  |  | $ | 476  
|Expense                                   |  |  |  |  |  |  |   | (345)
|Earnings before fair value gains (losses) |  |  |  |  |  |  |   | 131  
|Fair value gains (losses)                 |  |  |  |  |  |  |   | 585  
|Net earnings                              |  |  |  |  |  |  | $ | 716  
|Company’s share of net earnings(1)        |  |  |  |  |  |  | $ | 383  

| | (1) | Net of $63 million for the year ended December 31, 2011 representing the amortization of the
excess of the company’s carrying amount over its share of the net assets of the venture
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------









81







NOTE 7: Other
jointly controlled assets

The company’s interests in the following
properties are subject to joint control and, accordingly, the company has recorded its proportionate share of the related assets,
liabilities, revenue and expenses of the properties following the proportionate consolidation method:



|                                    |  | Proportionate Ownership Interest
|----------------------------------- |  | --------------------------------
|Name of Property                    |  |                                 
|Brookfield Place – Retail & Parking |  |                                 
|Brookfield Place III (Development)  |  |                                 
|Exchange Tower                      |  |                                 
|First Canadian Place(1)             |  |                                 
|151 Yonge Street                    |  |                                 
|2 Queen Street East                 |  |                                 
|Bankers Hall                        |  |                                 
|Bankers Court                       |  |                                 
|Bankers West Parkade (Development)  |  |                                 
|Suncor Energy Centre                |  |                                 
|Fifth Avenue Place                  |  |                                 
|Altius Centre(2)                    |  |                                 
|Place de Ville I                    |  |                                 
|Place de Ville II                   |  |                                 
|Jean Edmonds Towers                 |  |                                 
|300 Queen Street (Development)      |  |                                 
|KPMG Tower(3)                       |  |                                 
|World Square Retail(3)              |  |                                 
|52 Goulburn Street(3)               |  |                                 
|235 St Georges Terrace(3)           |  |                                 
|108 St Georges Terrace(3)           |  |                                 

| | (1) | First Canadian Place in Toronto is subject to a ground lease with respect to 50% of the land
on which the property is situated. At the expiry of the ground lease, the other land owner will have the option to acquire, for
a nominal amount, an undivided 50% beneficial interest in the property
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | On March 8, 2012, the company sold the Altius Centre building in downtown Calgary for C$180
million
| | --- | ---------------------------------------------------------------------------------------------------

| | (3) | The company exercises joint control over these jointly controlled assets through a participating
loan agreement with BAM that is convertible by the company at any time into a direct equity interest in the entities that have
a direct co-ownership interest in the underlying assets
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Summarized financial information in respect
of the company’s investment in jointly controlled assets is set out below:



|(Millions)              |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|----------------------- |  |  |  |  | ------------- | -------------
|Non-current assets      |  |  |  |  | $             | 3,067        
|Current assets          |  |  |  |  |               | 41           
|Total assets            |  |  |  |  |               | 3,108        
|Non-current liabilities |  |  |  |  |               | 828          
|Current liabilities     |  |  |  |  |               | 314          
|Total liabilities       |  |  |  |  |               | 1,142        
|Net assets              |  |  |  |  | $             | 1,966        



|(Millions)                                |  |  |  |  |   | 2012  |   | 2011 
|----------------------------------------- |  |  |  |  | - | ----- | - | -----
|Revenue                                   |  |  |  |  | $ | 313   | $ | 256  
|Expense                                   |  |  |  |  |   | (186) |   | (171)
|Earnings before fair value gains (losses) |  |  |  |  |   | 127   |   | 85   
|Fair value gains (losses)                 |  |  |  |  |   | 229   |   | 78   
|Net earnings                              |  |  |  |  | $ | 356   | $ | 163  



NOTE 8: INVESTMENTS IN ASSOCIATES

The company exercises significant influence
over the following investments which have been accounted for using the equity method:



|                                   |                         |  |  |  |  | Ownership Interest
|---------------------------------- | ----------------------- |  |  |  |  | ------------------
|Name of Investment                 | Principal activity      |  |  |  |  | Dec. 31, 2012     
|BSREP Australia Trust              | Investment properties   |  |  |  |  |                   
|Brookfield LePage Johnson Controls | Facilities management   |  |  |  |  |                   
|Oakridges                          | Residential development |  |  |  |  |                   



In the fourth quarter of 2012, the company
acquired a 41.22% indirect equity interest in BSREP Australia Trust, an entity that acquired the outstanding shares of the Wynyard
Properties Holding Group (formerly known as Thakral Holdings Group) on October 10, 2012. The remaining equity of BSREP Australia
Trust was acquired by a fund that is controlled by a subsidiary of BAM. The company has accounted for its interest in BSREP Australia
Trust as an associate as the company has the ability to exercise significant influence over the financial and operating policy
decisions of the trust.



82







Summarized financial information in respect
of the company’s investment in associates is set out below:



|(Millions)                    |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|----------------------------- |  |  |  |  | ------------- | -------------
|Total assets                  |  |  |  |  | $             | 485          
|Total liabilities             |  |  |  |  |               | 103          
|Net assets                    |  |  |  |  | $             | 382          
|Company’s share of net assets |  |  |  |  | $             | 156          



|(Millions)                      |  |  |  |  |   | 2012  |   | 2011 
|------------------------------- |  |  |  |  | - | ----- | - | -----
|Revenue                         |  |  |  |  | $ | 553   | $ | 520  
|Expense                         |  |  |  |  |   | (542) |   | (500)
|Net earnings                    |  |  |  |  | $ | 11    | $ | 20   
|Company’s share of net earnings |  |  |  |  | $ | 4     | $ | 7    



NOTE 9: PARTICIPATING LOAN INTERESTS

Participating loan interests represent
interests in certain properties in Australia that do not provide the company with control over the entity that owns the underlying
property and are accounted for as loans and receivables. The instruments, which are receivable from a wholly-owned subsidiary of
BAM, have a contractual maturity date of September 26, 2020, subject to the company’s prior right to convert into direct
ownership interests in the underlying commercial properties, and have a contractual interest rate that varies with the results
of operations of those properties. The contractual maturity date was extended from 2015 to 2020 in the second quarter of 2012 through
an agreement with BAM.



The outstanding principal of the participating
loan interests relates to the following commercial properties:



|(Millions)                         |                        |  |  |  |  |               |              
|---------------------------------- | ---------------------- |  |  |  |  | ------------- | -------------
|Name of Property                   | Participation Interest |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|Darling Park Complex, Sydney       | 30%                    |  |  |  |  | $             | 178          
|IAG House, Sydney                  | 50%                    |  |  |  |  |               | 111          
|NAB House, Sydney                  | 25%                    |  |  |  |  |               | 122          
|Bourke Place Trust, Melbourne      | 43%                    |  |  |  |  |               | 217          
|Total participating loan interests |                        |  |  |  |  | $             | 628          



Included in the balance of participating
loan interests is an embedded derivative representing the company’s right to participate in the changes in the fair value
of the referenced properties. The embedded derivative is measured at fair value with changes in fair value reported through earnings
in fair value gains (losses), net. The carrying value of the embedded derivative at December 31, 2012, was $48 million (December
31, 2011 – $49 million).



Summarized financial information in respect
of the properties underlying the company’s investment in participating loan interests is set out below:



|(Millions)              |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|----------------------- |  |  |  |  | ------------- | -------------
|Non-current assets      |  |  |  |  | $             | 2,570        
|Current assets          |  |  |  |  |               | 106          
|Total assets            |  |  |  |  |               | 2,676        
|Non-current liabilities |  |  |  |  |               | 673          
|Current liabilities     |  |  |  |  |               | 274          
|Total liabilities       |  |  |  |  |               | 947          
|Net assets              |  |  |  |  | $             | 1,729        



|(Millions)                                |  |  |  |  |   | 2012  |   | 2011 
|----------------------------------------- |  |  |  |  | - | ----- | - | -----
|Revenue                                   |  |  |  |  | $ | 219   | $ | 211  
|Expense                                   |  |  |  |  |   | (126) |   | (160)
|Earnings before fair value gains (losses) |  |  |  |  |   | 93    |   | 51   
|Fair value gains (losses)                 |  |  |  |  |   | 15    |   | 87   
|Net earnings                              |  |  |  |  | $ | 108   | $ | 138  



NOTE 10: OTHER NON-CURRENT FINANCIAL
ASSETS

The components of other non-current financial
assets are as follows:



|(Millions)                               |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|---------------------------------------- |  |  |  |  | ------------- | -------------
|Equity securities designated as AFS      |  |  |  |  | $             | 105          
|BRPI promissory notes                    |  |  |  |  |               | —            
|Loans receivable designated as FVTPL     |  |  |  |  |               | —            
|Other loans receivable                   |  |  |  |  |               | 104          
|Total other non-current financial assets |  |  |  |  | $             | 209          



83







| | (a) | Equity securities designated as AFS
| | --- | -----------------------------------

Equity securities designated as AFS include
$105 million (December 31, 2011 – $107 million) representing the company’s 10% common equity interest and $92 million
preferred equity interest in 1625 Eye Street in Washington, D.C. The preferred equity securities, bearing a fixed dividend of 6.50%,
are redeemable by the issuer at par in 2016 and are pledged as security for a loan payable to the issuer in the amount of $92 million
(December 31, 2011 – $92 million) recognized in other non-current financial liabilities.



| | (b) | BRPI promissory notes
| | --- | ---------------------

At December 31, 2011, BRPI promissory notes
included unsecured promissory notes of C$480 million received on March 31, 2011 as partial proceeds for the disposition of the
company’s residential development segment to BRPI, a subsidiary of BAM. The loans receivable consisted of an unsecured senior
promissory note of C$265 million which bore interest at 6.5% on the first C$115 million and 7.5% on the remainder due December
31, 2015, and an unsecured subordinated promissory note of C$215 million which bore interest at 8.5% due December 31, 2020. The
principal of the subordinated promissory note was subject to mandatory prepayments of up to $100 million semi-annually, out of
excess cash flows of BRPI following the maturity of the senior promissory note, and of up to 50% of the proceeds of any issuance
of equity interests in BRPI to third parties, subject first to the mandatory prepayment of the senior promissory note resulting
from such equity issuance.



The company entered into an agreement with
BAM under which it had the right to put the BRPI subordinated promissory note to BAM for cash proceeds equal to the outstanding
principal amount on March 31, 2016, and annually on each March 31 thereafter until the maturity of the note or, at any time, upon
occurrence of an event of default by BRPI. In exchange for this put option, the company agreed to pay to BAM an annual fee of 2%
of the outstanding principal of the note. The company also entered into a put agreement in respect of the senior notes whereby
it could put $50 million of the outstanding principal of the note to BAM on each of December 31, 2012, 2013 and 2014 or, at any
time, upon occurrence of an event of default. In connection with this option, the company paid BAM an annual fee of 1% of the outstanding
principal subject to the put. These agreements were derivative financial instruments measured at fair value with changes in value
recorded in fair value gains (losses), net in the period in which they occur. At December 31, 2011, the fair value of these derivatives
was nil.



In the fourth quarter of 2012, BRPI repaid
the unsecured promissory notes of C$480 million. All principal and interest were repaid in full and the put agreement with BAM
was terminated.



| | (c) | Loans receivable designated as FVTPL
| | --- | ------------------------------------

At December 31, 2011, loans receivable
designated as FVTPL included A$135 million senior unsecured note receivable from a subsidiary of BAM that had a scheduled maturity
of December 19, 2014. The principal and interest payments on the note receivable were based on the returns of a referenced debenture
which was, in turn, secured by an equity interest in a publicly traded real estate entity in Australia. In the third quarter of
2012, the participating loan agreement was settled in exchange for an interest in the underlying debenture and 59% of the company’s
interest in the debenture was concurrently transferred to a group of funds controlled by BAM for proceeds equal to the company’s
cost plus a fee equal to an annual return of 9% thereon to compensate the company for the acquisition and maintenance of the investment.
In the fourth quarter of 2012, the debenture was repaid and the company received proceeds approximating its carrying value.



In the year ended December 31, 2012, the
company recognized fair value gains of $23 million (2011 – nil), representing the increase in value of its interest in the
debenture. The company also recognized $8 million in interest and other income (2011 – nil), $6 million of which was to compensate
the company for the acquisition and maintenance of the investment through to its transfer in the third quarter of 2012.



| | (d) | Other loans receivable
| | --- | ----------------------

Other loans receivable includes a $104
million (December 31, 2011 – $102 million) receivable from BAM upon the earlier of the exercise of the company’s option
to convert its participating loan interests into direct ownership of the Australian portfolio or the maturity of the participating
loan notes.



NOTE 11: RECEIVABLES AND OTHER ASSETS

The components of receivables and other
assets are as follows:



|(Millions)                          |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|----------------------------------- |  |  |  |  | ------------- | -------------
|Accounts receivable                 |  |  |  |  | $             | 195          
|Loan receivable from affiliate(1,2) |  |  |  |  |               | 75           
|Prepaid expenses and other assets   |  |  |  |  |               | 255          
|Total receivables and other assets  |  |  |  |  | $             | 525          

| | (1) | At December 31, 2012, included a $75 million receivable from BAM that was due on demand (December
31, 2011 – $73 million)
| | --- | -------------------------------------------------------------------------------------------------------------------------

| | (2) | At December 31, 2011, included a $49 million secured loan receivable from a subsidiary of BAM
that was repaid March 15, 2012
| | --- | ----------------------------------------------------------------------------------------------------------------------------



During the third quarter of 2012, the company
made a £61 million contribution in relation to Principal Place, a commercial development in London, which is exercisable
anytime up to July 28, 2013 and presented within prepaid expenses and other assets at December 31, 2012. If certain conditions
are met, the company is entitled to a return of its contribution plus interest at a rate of LIBOR plus 3.25%.





84







NOTE
12: Restricted cash and deposits

Cash and deposits are considered restricted
when they are subject to contingent rights of third parties. Restricted cash and deposits totaled $103 million at December 31,
2012 (December 31, 2011 - $69 million).



NOTE 13: ASSETS HELD FOR SALE AND DISCONTINUED
OPERATIONS

On November 20, 2012, the company sold
33 South Sixth Street in Minneapolis for $106 million. In addition, on March 30, 2012, the company sold its interest in Defence
Plaza in Melbourne for proceeds of A$87 million. Both 33 South Sixth Street and Defence Plaza were presented in assets held for
sale at December 31, 2011.



At December 31, 2012, and December 31,
2011, the properties that comprise the company’s Minneapolis portfolio are presented in assets held for sale as the company
intends to exit this market through the sale of these properties. These properties are part of the company’s U.S. Commercial
business segment.



|(Millions)                                       |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|------------------------------------------------ |  |  |  |  | ------------- | -------------
|Assets                                           |  |  |  |  |               |              
|Commercial properties                            |  |  |  |  | $             | 137          
|Receivables and other assets                     |  |  |  |  |               | 1            
|Assets held for sale                             |  |  |  |  | $             | 138          
|Liabilities                                      |  |  |  |  |               |              
|Commercial property debt                         |  |  |  |  | $             | 64           
|Accounts payable and accrued liabilities         |  |  |  |  |               | 6            
|Liabilities associated with assets held for sale |  |  |  |  | $             | 70           



Discontinued operations include the company’s
Minneapolis portfolio, a geographical area that is held for sale, and for the year ended December 31, 2011, the residential development
segment, a separate line of business that was disposed of on March 31, 2011. The following table summarizes the income and cash
flows from discontinued operations:



|(Millions, except per share information)                                                           |  |  |  |  |   | 2012  |   | 2011
|-------------------------------------------------------------------------------------------------- |  |  |  |  | - | ----- | - | ----
|Commercial property revenue                                                                        |  |  |  |  | $ | 54    | $ | 55  
|Commercial property operating costs                                                                |  |  |  |  |   | (29)  |   | (28)
|                                                                                                   |  |  |  |  |   | 25    |   | 27  
|Residential revenue                                                                                |  |  |  |  |   | ―     |   | 83  
|Residential operating expense                                                                      |  |  |  |  |   | ―     |   | (70)
|                                                                                                   |  |  |  |  |   | ―     |   | 13  
|Interest and other income                                                                          |  |  |  |  |   | ―     |   | 1   
|Interest expense                                                                                   |  |  |  |  |   | (6)   |   | (7) 
|Depreciation                                                                                       |  |  |  |  |   | ―     |   | (1) 
|Income from discontinued operations before fair value gains (losses) and income taxes              |  |  |  |  |   | 19    |   | 33  
|Fair value gains (losses)                                                                          |  |  |  |  |   | (7)   |   | 19  
|Income taxes                                                                                       |  |  |  |  |   | ―     |   | (3) 
|Income (loss) from discontinued operations                                                         |  |  |  |  | $ | 12    | $ | 49  
|Income (loss) from discontinued operations attributable to common shareholders per share – basic   |  |  |  |  | $ | 0.03  | $ | 0.09
|Income (loss) from discontinued operations attributable to common shareholders per share – diluted |  |  |  |  | $ | 0.02  | $ | 0.09
|Cash flows from operating activities                                                               |  |  |  |  | $ | 17    | $ | 15  
|Cash flows from (used) in investing activities                                                     |  |  |  |  |   | 201   |   | (4) 
|Cash flows used in financing activities                                                            |  |  |  |  |   | (100) |   | (3) 





85







NOTE 14: COMMERCIAL PROPERTY DEBT



|                                                               | Dec. 31, 2012         | Dec. 31, 2011
|-------------------------------------------------------------- | --------------------- | -------------
|(Millions)                                                     | Weighted Average Rate | Debt Balance 
|Unsecured Corporate Debt                                       |                       |              
|Corporate revolving facility                                   |                       | ―            
|Brookfield Canada Office Properties (“BOX”) revolving facility |                       | 3.22%        
|Senior unsecured notes                                         |                       | 4.17%        
|Australian property loans(1)                                   |                       | 6.38%        
|                                                               |                       |              
|Secured Commercial Property Debt                               |                       |              
|Fixed rate property debt                                       |                       | 5.60%        
|Variable rate property debt(2)                                 |                       | 4.48%        
|Secured note payable                                           |                       | 8.50%        
|Total                                                          |                       | 5.31%        
|                                                               |                       |              
|Current                                                        |                       |              
|Non-current                                                    |                       |              
|Associated with assets held for sale                           |                       |              
|Total                                                          |                       |              

| | (1) | Property level debt payable to a subsidiary of BAM
| | --- | --------------------------------------------------

| | (2) | At December 31, 2012 and December 31, 2011, includes $30 million of other indebtedness outstanding
to a subsidiary of BAM
| | --- | -------------------------------------------------------------------------------------------------------------------------



On January 17, 2012, the company issued
C$200 million of senior unsecured notes with a January 17, 2017 maturity date and a yield of 4.30%. On April 12, 2012, the company
issued C$150 million of senior unsecured notes with an April 16, 2018 maturity date and a yield of 4.00%.



Commercial property debt includes foreign
currency denominated debt payable in the functional currencies of the borrowing subsidiaries. Commercial property debt by currency
is as follows:



|                   | Dec. 31, 2012 | Dec. 31, 2011 
|------------------ | ------------- | --------------
|(Millions)         | U.S. Dollars  | Local Currency
|U.S. Dollars       | $             | 7,241         
|Canadian Dollars   |               | 2,431         
|Australian Dollars |               | 1,625         
|British Pounds     |               | 215           
|Total              | $             | 11,512        



Included in commercial property debt is
$1,625 million (December 31, 2011 – $1,718 million) of commercial property debt related to properties located in Australia
that the company controls or accounts for as jointly controlled assets through a participating loan agreement with BAM. Refer to
Note 5, Investment Properties, and Note 7, Other Jointly Controlled Assets.



Included in commercial 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 commercial 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 fair value through profit and
loss with changes in fair value reported in earnings as fair value gains (losses). The carrying amount of the embedded derivative
at December 31, 2012, is $54 million (December 31, 2011 – $56 million).





86







NOTE 15: CAPITAL SECURITIES

The company has the following capital securities
outstanding:



|                                     | Shares      | Cumulative        |                  |                 
|------------------------------------ | ----------- | ----------------- | ---------------- | ----------------
|(Millions, except share information) | Outstanding | Dividend Rate     | Dec. 31, 2012(1) | Dec. 31, 2011(1)
|Class AAA Series E(2)                | 8,000,000   | 70% of bank prime | $                | ―               
|Class AAA Series F                   | 8,000,000   | 6.00%             |                  | 202             
|Class AAA Series G                   | 4,400,000   | 5.25%             |                  | 110             
|Class AAA Series H                   | 8,000,000   | 5.75%             |                  | 202             
|Class AAA Series I                   | ―           | 5.20%             |                  | ―               
|Class AAA Series J                   | 8,000,000   | 5.00%             |                  | 202             
|Class AAA Series K                   | 6,000,000   | 5.20%             |                  | 150             
|Total capital securities             |             |                   | $                | 866             
|                                     |             |                   |                  |                 
|Current                              |             |                   | $                | 202             
|Non-current                          |             |                   |                  | 664             
|Total capital securities             |             |                   | $                | 866             

| | (1) | Net of transaction costs of nil at December 31, 2012 (December 31, 2011 – $1 million)
| | --- | -------------------------------------------------------------------------------------

| | (2) | Class AAA, Series E capital securities are owned by BAM, the company’s parent. The company
has an offsetting loan receivable against these securities earning interest at 108% of bank prime
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On March 30, 2012, the company redeemed
all of the outstanding Class AAA Series I shares for cash of C$25.00 per share. On December 21, 2012, the company announced its
intention to redeem all of the outstanding Class AAA Series F shares for cash of C$25.00 per share plus accrued and unpaid dividends
thereon of C$0.1233, representing a total redemption price of C$25.1233 per share, subsequent to December 31, 2012.



Capital securities includes $756 million
(December 31, 2011 – $884 million) repayable in Canadian dollars of C$750 million (December 31, 2011 – C$903 million).



Cumulative preferred dividends are payable
quarterly, as and when declared by the Board of Directors, on the last day of March, June, September and December. On January 31,
2013 the Board of Directors of the company declared quarterly dividends payable for the Class AAA Series G, H, J and K preferred
shares.



The redemption terms of capital securities
are as follows:



|                   | Redemption Date(1) | Redemption Price(2) | Company’s Option(3) | Holder’s Option(4)
|------------------ | ------------------ | ------------------- | ------------------- | ------------------
|Class AAA Series E | Retractable at par | ―                   | —                   | —                 
|Class AAA Series F | September 30, 2009 | C$25.75             | September 30, 2009  | March 31, 2013    
|Class AAA Series G | June 30, 2011      | US$26.00            | June 30, 2011       | September 30, 2015
|Class AAA Series H | December 31, 2011  | C$26.00             | December 31, 2011   | December 31, 2015 
|Class AAA Series J | June 30, 2010      | C$26.00             | June 30, 2010       | December 31, 2014 
|Class AAA 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 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 the company, 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, J and K into common shares of the company. The Class AAA, Series F, G,
H, 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, 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
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





87







NOTE 16: OTHER NON-CURRENT FINANCIAL
LIABILITIES

The components of other non-current financial
liabilities are as follows:



|(Millions)                                    |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|--------------------------------------------- |  |  |  |  | ------------- | -------------
|Loan payable                                  |  |  |  |  | $             | 92           
|Note payable                                  |  |  |  |  |               | 90           
|Other loans payable                           |  |  |  |  |               | 69           
|Total other non-current financial liabilities |  |  |  |  | $             | 251          



Other non-current financial liabilities
includes a loan payable of $92 million at December 31, 2012 (December 31, 2011 – $92 million). The loan payable matures in
2019, bears interest at 7% and is secured by the company’s preferred equity interest in 1625 Eye Street in Washington, D.C.
Refer to Note 10(a), Equity securities designated as AFS.



Other non-current financial liabilities
includes a note payable of $90 million at December 31, 2012 (December 31, 2011 – nil) issued to the non-controlling shareholders
of the U.S. Office Fund in connection with a distribution declared in 2012 which is payable in the fourth quarter of 2016. Other
non-current financial liabilities also includes $25 million representing the present value of an amount payable to the non-controlling
shareholders of The 100 Bishopsgate Partnership in the event of the exercise of a put option held by the non-controlling shareholders
to put their interest to the company in the fourth quarter of 2014 (December 31, 2011 – nil).



NOTE 17: ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES

Accounts payable and accrued liabilities
was $1,148 million at December 31, 2012 (December 31, 2011 – $980 million). Current tax liabilities included in accounts
payable amount to $177 million (December 31, 2011 – $217 million).



Included in accounts payable and accrued
liabilities are derivative liabilities with a carrying amount of $235 million (December 31, 2011 – $228 million). Refer to
Note 26, Financial Instruments.



NOTE 18: INCOME TAXES

The sources of deferred income tax balances
are as follows:



|(Millions)                   |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|---------------------------- |  |  |  |  | ------------- | -------------
|Deferred tax assets          |  |  |  |  |               |              
|Loss carry forwards          |  |  |  |  | $             | 280          
|Deferred financing costs     |  |  |  |  |               | 24           
|Foreign currency             |  |  |  |  |               | 37           
|Deferred revenue             |  |  |  |  |               | 12           
|Other                        |  |  |  |  |               | 7            
|                             |  |  |  |  |               | 360          
|Deferred tax liabilities     |  |  |  |  |               |              
|Properties                   |  |  |  |  |               | 1,092        
|Net deferred tax liabilities |  |  |  |  | $             | 732          



The movements of deferred income tax balances
are as follows:



|(Millions)                                                                 | Dec. 31, 2011 | Recognized in |              | Dec. 31, 2012
|-------------------------------------------------------------------------- | ------------- | ------------- | ------------ | -------------
|Income                                                                     | Equity        | OCI           | Reclassified
|Deferred tax assets related to non-capital losses and capital losses       | $             | 220           | $            | 34           
|Deferred tax liabilities related to differences in tax and book basis, net |               | (767)         |              | (250)        
|Net deferred tax liabilities                                               | $             | (547)         | $            | (216)        
|                                                                           |               |               |              |              



|(Millions)                                                                 | Dec. 31, 2010 | Recognized in |                 | Dec. 31, 2011
|-------------------------------------------------------------------------- | ------------- | ------------- | --------------- | -------------
|Income(1)                                                                  | Equity        | OCI           | Reclassified(2)
|Deferred tax assets related to non-capital losses and capital losses       | $             | 204           | $               | 4            
|Deferred tax liabilities related to differences in tax and book basis, net |               | (570)         |                 | (218)        
|Net deferred tax liabilities                                               | $             | (366)         | $               | (214)        
|                                                                           |               |               |                 |              

| | (1) | Deferred tax liabilities recognized in income is net of a $10 million reversal in connection
with the change in ownership in the U.S. Office Fund in 2011 that was included in gains (losses), net
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Reclassification of deferred tax liability from equity accounted investment in connection with
the reorganization of ownership in First Canadian Place in 2011
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



The company and its Canadian subsidiaries
have deferred tax assets of $115 million (December 31, 2011 – $73 million) related to non-capital losses that expire over
the next 20 years, and $127 million (December 31, 2011 – $121 million) related to capital losses that have no expiry. The
company’s U.S. subsidiaries have deferred tax assets of $38 million (December 31, 2011 – $26 million) related to net
operating losses that expire over the next 20 years.

88







The major components of income tax expense
include the following:



|(Millions)           |  |  |  |  |   | 2012 |   | 2011
|-------------------- |  |  |  |  | - | ---- | - | ----
|Current tax expense  |  |  |  |  | $ | 48   | $ | 90  
|Deferred tax expense |  |  |  |  |   | 216  |   | 224 
|Total income taxes   |  |  |  |  | $ | 264  | $ | 314 



|(Millions)                                                                                        |  |  |  |  |   | 2012  |   | 2011 
|------------------------------------------------------------------------------------------------- |  |  |  |  | - | ----- | - | -----
|Income tax expense at the Canadian federal and provincial income tax rate of 26.5% (2011 – 28.3%) |  |  |  |  | $ | 456   | $ | 612  
|Increase (decrease) in income tax expense due to                                                  |  |  |  |  |   |       |   |      
|Non-deductible preferred share dividends                                                          |  |  |  |  |   | 13    |   | 16   
|Lower income tax rates in other jurisdictions                                                     |  |  |  |  |   | (153) |   | (207)
|Tax asset derecognized (previously not recognized)                                                |  |  |  |  |   | 13    |   | (21) 
|Change in tax rate applicable to temporary differences                                            |  |  |  |  |   | 14    |   | ―    
|Change in tax reserve                                                                             |  |  |  |  |   | (47)  |   | (39) 
|Foreign exchange gains and losses                                                                 |  |  |  |  |   | ―     |   | (2)  
|Capital gains realized on distributions                                                           |  |  |  |  |   | 7     |   | 5    
|Change in Canadian tax rate                                                                       |  |  |  |  |   | 7     |   | ―    
|Non-controlling interests in income of flow-through entities                                      |  |  |  |  |   | (48)  |   | (58) 
|Other                                                                                             |  |  |  |  |   | 2     |   | 8    
|Total income taxes                                                                                |  |  |  |  | $ | 264   | $ | 314  



The applicable tax rate is the aggregate
of the Canadian Federal income tax rate of 15.0% (2011 – 16.5%) and the Provincial income tax rate of 11.5% (2011 –
11.8%).



The company has approximately $3 billion
of temporary differences associated with its investments in foreign subsidiaries and joint ventures for which no deferred taxes
have been provided on the basis that the company is able to the control the timing of the reversal of such temporary differences
and such reversal is not probable in the foreseeable future.



NOTE 19: EQUITY

| | (a) | Common Shares
| | --- | -------------

The authorized common share capital consists
of an unlimited number of common voting shares. Common shares issued and outstanding changed as follows:



|                                                          |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|--------------------------------------------------------- |  |  |  |  | ------------- | -------------
|Common shares issued and outstanding, beginning of period |  |  |  |  |               | 503,667,579  
|Shares issued on exercise of options                      |  |  |  |  |               | 1,175,305    
|Dividend reinvestment                                     |  |  |  |  |               | 199,074      
|Shares repurchased(1)                                     |  |  |  |  |               | (321,329)    
|Common shares issued and outstanding, end of period       |  |  |  |  |               | 504,720,629  

| | (1) | At December 31, 2012 consists of shares repurchased in connection with the company’s normal
course issuer bid as well as the company’s restricted stock plan net of shares sold to cover income taxes less dividends
received
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Total common share dividends in the year
ended December 31, 2012, were $282 million or $0.56 per share. On January 31, 2013, the Board of Directors of the company declared
common share dividends of $0.14 per share to be paid in the first quarter of 2013.



| | (b) | Accumulated Other Comprehensive Income
| | --- | --------------------------------------

As of December 31, 2012, and December 31,
2011, accumulated other comprehensive income consists of the following amounts:



|(Millions)                                                                                                                                                                                           |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  | ------------- | -------------
|Foreign currency translation gains on investments in subsidiaries, net of related hedging activities, net of taxes of $32 million (December 31, 2011 – $31 million), net of non-controlling interest |  |  |  |  | $             | 313          
|Losses on derivatives designated as cash flow hedges, net of taxes of $78 million (December 31, 2011 - $52 million)(1)                                                                               |  |  |  |  |               | (236)        
|Unrealized losses on equity securities designated as AFS, net of taxes of nil                                                                                                                        |  |  |  |  |               | (2)          
|Revaluation surplus, net of taxes of nil                                                                                                                                                             |  |  |  |  |               | 1            
|Accumulated other comprehensive income                                                                                                                                                               |  |  |  |  | $             | 76           

| | (1) | Includes losses of $10 million (December 31, 2011 - $7 million), which will be reclassified
to interest expense over the next 12 months
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------



89







| | (c) | Earnings per Share
| | --- | ------------------

Net income attributable to common shareholders
and weighted average common shares outstanding used in determining net income per share are calculated as follows:



|(Millions, except share information)                                             |  |  |  |  |   | 2012  |   | 2011 
|-------------------------------------------------------------------------------- |  |  |  |  | - | ----- | - | -----
|Net income from continuing operations                                            |  |  |  |  | $ | 1,456 | $ | 1,847
|Non-controlling interests                                                        |  |  |  |  |   | (181) |   | (206)
|Preferred share dividends                                                        |  |  |  |  |   | (70)  |   | (58) 
|Net income from continuing operations available to common shareholders – basic   |  |  |  |  |   | 1,205 |   | 1,583
|Dilutive effect of conversion of capital securities                              |  |  |  |  |   | 50    |   | 57   
|Net income from continuing operations available to common shareholders – diluted |  |  |  |  | $ | 1,255 | $ | 1,640
|                                                                                 |  |  |  |  |   |       |   |      
|Net income attributable to shareholders                                          |  |  |  |  | $ | 1,287 | $ | 1,690
|Preferred share dividends                                                        |  |  |  |  |   | (70)  |   | (58) 
|Net income available to common shareholders – basic                              |  |  |  |  |   | 1,217 |   | 1,632
|Dilutive effect of conversion of capital securities                              |  |  |  |  |   | 50    |   | 57   
|Net income available to common shareholders – diluted                            |  |  |  |  | $ | 1,267 | $ | 1,689
|                                                                                 |  |  |  |  |   |       |   |      
|Weighted average shares outstanding – basic                                      |  |  |  |  |   | 503.8 |   | 503.2
|Unexercised dilutive options and restricted stock                                |  |  |  |  |   | 3.1   |   | 4.7  
|Conversion of capital securities                                                 |  |  |  |  |   | 56.7  |   | 71.4 
|Weighted average shares outstanding – diluted(1)                                 |  |  |  |  |   | 563.6 |   | 579.3

| | (1) | The calculation of diluted weighted average shares outstanding at December 31, 2012, excludes
options for 16 million shares as their inclusion would be anti-dilutive (December 31, 2011 – 13 million)
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | Preferred Equity
| | --- | ----------------

The company has the following preferred
shares authorized and outstanding included in equity:



|                                     | Shares      | Cumulative        |               |              
|------------------------------------ | ----------- | ----------------- | ------------- | -------------
|(Millions, except share information) | Outstanding | Dividend Rate     | Dec. 31, 2012 | Dec. 31, 2011
|Class A redeemable voting            | 14,201,980  | 7.50%             | $             | 11           
|Class AA Series E                    | 2,000,000   | 70% of bank prime |               | 34           
|Class AAA Series L                   | 11,500,000  | 6.75%             |               | 259          
|Class AAA Series N                   | 11,000,000  | 6.15%             |               | 257          
|Class AAA Series P                   | 12,000,000  | 5.15%             |               | 287          
|Class AAA Series R                   | 10,000,000  | 5.10%             |               | 247          
|Class AAA Series T                   | 10,000,000  | 4.60%             |               | 250          
|Total preferred equity               |             |                   | $             | 1,345        



On September 13, 2012, the company issued
10 million Class AAA Series T preferred shares at a price of C$25.00 per share with a December 31, 2018 maturity and a yield of
4.60%. The proceeds from the share issuance were approximately $250 million, net of share issuance costs of $7 million. Holders
of Series T shares receive fixed rate cumulative preferred cash dividends and will have the rights, subject to certain conditions,
to convert into Class AAA Series U preferred shares receiving floating rate cumulative preferred cash dividends on December 31,
2018 and on December 31 every five years thereafter.



During the year ended December 31, 2012,
the company paid preferred dividends of $70 million (2011 - $58 million). Cumulative preferred dividends are payable quarterly,
as and when declared by the Board of Directors, on the last day of March, June, September and December. On January 31, 2013 the
Board of Directors of the company declared quarterly dividends payable for the Class AA Series E and Class AAA Series L, N, P,
R and T preferred shares and semi-annual dividends payable for the Class A redeemable voting preferred shares.



Holders of Class A preferred shares are
entitled to receive notice of and to attend all shareholders’ meetings and for all purposes are entitled to one vote for
each Class A preferred share held, except in respect to the election of directors, where cumulative voting will apply in the same
manner as for the common shares. The company may redeem all, or from time to time any part, of the outstanding Class A preferred
shares on payment to the holders thereof, for each share to be redeemed of an amount equal to C$1.11 per share, together with all
accrued and unpaid cumulative dividends thereon. Notice of redemption must be given by the company not less than 30 days before
the date specified for redemption.



The company may redeem all, or from time
to time any part, of the then outstanding Class AA Series E preferred shares on payment to the holders thereof, for each share
to be redeemed of an amount equal to C$25.00 per share, together with all accrued and unpaid dividends thereon. Notice of redemption
must be given by the company not less than 30 days and not more than 60 days before the date specified for redemption.





90







The redemption terms of Class AAA preferred
shares is as follows:



|                   | Redemption Date(1) | Redemption Price(2) | Conversion at the Option of the Holder(3)
|------------------ | ------------------ | ------------------- | -----------------------------------------
|Class AAA Series L | September 30, 2014 | C$25.00             | Class AAA Series M                       
|Class AAA Series N | June 30, 2016      | C$25.00             | Class AAA Series O                       
|Class AAA Series P | March 31, 2017     | C$25.00             | Class AAA Series Q                       
|Class AAA Series R | September 30, 2016 | C$25.00             | Class AAA Series S                       
|Class AAA Series T | December 31, 2018  | C$25.00             | Class AAA Series U                       

| | (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 at the redemption price
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Together with accrued and unpaid dividends up to but excluding the date fixed for redemption
| | --- | --------------------------------------------------------------------------------------------

| | (3) | Holders of Class AAA shares receive fixed rate cumulative preferred cash dividends and will
have the right, subject to certain conditions, to convert into preferred shares receiving floating rate cumulative preferred cash
dividends on the redemption rate and every five years thereafter
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) | Non-Controlling Interests
| | --- | -------------------------

Non-controlling interests consist of the following:



|(Millions)                      |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|------------------------------- |  |  |  |  | ------------- | -------------
|Preferred equity – subsidiaries |  |  |  |  | $             | 385          
|Other non-controlling interests |  |  |  |  |               | 1,148        
|Total non-controlling interests |  |  |  |  | $             | 1,533        



Preferred Equity - Subsidiaries

Subsidiaries’ preferred shares outstanding
total $385 million (December 31, 2011 – $374 million) as follows:



|(Millions, except share information)   | Shares Outstanding | Preferred Shares Series | Cumulative Dividend Rate | Dec. 31, 2012 | Dec. 31, 2011
|-------------------------------------- | ------------------ | ----------------------- | ------------------------ | ------------- | -------------
|BPO Properties Ltd. (“BPO Properties”) | 1,805,489          | Series G                | 70% of bank prime        | $             | 46           
|                                       | 3,816,527          | Series J                | 70% of bank prime        |               | 96           
|                                       | 300                | Series K                | 30-day BA + 0.4%         |               | 151          
|                                       | 2,847,711          | Series M                | 70% of bank prime        |               | 72           
|                                       | 800,000            | Series N                | 30-day BA + 0.4%         |               | 20           
|Total preferred equity – subsidiaries  |                    |                         |                          | $             | 385          



The redemption terms of the preferred shares
issued by BPO Properties are as follows:



| | (i) | Series G preferred shareholders are entitled to cumulative dividends at an annual rate equal to 70% of the average bank prime
rate. BPO Properties may, at its option, redeem the shares at a price of C$25 per share plus arrears on any accrued and unpaid
dividends.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Series J and M preferred shareholders are entitled to cumulative dividends at an annual rate equal to 70% of the average bank
prime rate for the previous quarter. BPO Properties may, at its option, redeem the shares at a price of C$25 per share plus arrears
on any accrued and unpaid dividends.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Series K preferred shareholders are entitled to cumulative dividends at the 30 day bankers’ acceptance rate plus 0.4%.
BPO Properties may, at its option, redeem the shares at a price of C$500,000 per share plus an amount equal to all accrued and
unpaid dividends.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | Series N preferred shareholders are entitled to cumulative dividends at the 30 day bankers’ acceptance rate plus 0.4%.
BPO Properties may, at its option, redeem the shares at C$25 per share plus arrears on any accrued and unpaid dividends.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





91







Other non-controlling interests

Other non-controlling interests include
the amounts of common equity related to non-controlling shareholders’ interests in the company’s subsidiaries. The
balances are as follows:



|(Millions)                                                                |      | Others’ Equity Ownership | Dec. 31, 2012 | Dec. 31, 2011
|------------------------------------------------------------------------- | ---- | ------------------------ | ------------- | -------------
|Units of BOX(1)                                                           |      | 16.7%                    | $             | 512          
|Limited partnership units of Brookfield Financial Properties L.P. (“BFP") | 0.6% |                          | 38            |              
|Units of Brookfield Prime Property Fund (“Prime”)(2,3)                    |      | 19.5%                    |               | 45           
|Partnership units of The 100 Bishopsgate Partnership(4)                   |      | 12.5%                    |               | 2            
|Members interest in Brookfield Heritage Partners LLC                      |      | 49.0%                    |               | 105          
|Interest in 1801 California Street                                        |      | 49.0%                    |               | 33           
|U.S. Office Fund                                                          |      | 15.7%                    |               | 413          
|Total other non-controlling interests                                     |      |                          |               | $            

| | (1) | Canadian dollar denominated
| | --- | ---------------------------

| | (2) | Australian dollar denominated
| | --- | -----------------------------

| | (3) | During the year ended December 31, 2012, the company acquired additional units of Prime which
decreased the others' equity ownership from 26.2% at December 31, 2011 to 19.5% at December 31, 2012
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | British pound denominated
| | --- | -------------------------



NOTE 20: REVENUE AND
Expenses

| | (a) | Commercial property revenue
| | --- | ---------------------------

The following represents an analysis of the nature of the revenue
included in commercial property revenue:



|(Millions)                              |  |  |  |  |   | 2012  |   | 2011 
|--------------------------------------- |  |  |  |  | - | ----- | - | -----
|Rental revenue                          |  |  |  |  | $ | 2,125 | $ | 1,612
|Recurring fee income                    |  |  |  |  |   | 53    |   | 59   
|Lease termination, fee and other income |  |  |  |  |   | 17    |   | 6    
|Total commercial property revenue       |  |  |  |  | $ | 2,195 | $ | 1,677



The company leases commercial properties
under operating leases generally with lease terms of between 1 and 15 years, with options to extend up to a further 5 years.



Recurring fee income includes revenue earned
for property management, leasing and third party service fees.



Minimum rental commitments on non-cancellable
tenant operating leases are as follows:



|(Millions)                                    |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|--------------------------------------------- |  |  |  |  | ------------- | -------------
|Not later than 1 year                         |  |  |  |  | $             | 1,272        
|Later than 1 year and not longer than 5 years |  |  |  |  |               | 4,296        
|Later than 5 years                            |  |  |  |  |               | 5,915        
|Total                                         |  |  |  |  | $             | 11,483       



| | (b) | Expenses
| | --- | --------

The following represents an analysis of the nature of the expenses
included in direct commercial property expense, interest expense, and administrative expense:



|(Millions)                    |  |  | 2012 | 2011
|----------------------------- |  |  | ---- | ----
|Interest expense              |  |  |      |     
|Property maintenance          |  |  |      |     
|Real estate taxes             |  |  |      |     
|Employee benefits             |  |  |      |     
|Ground rents                  |  |  |      |     
|Depreciation and amortization |  |  |      |     
|Transaction costs             |  |  |      |     
|Other                         |  |  |      |     
|Total expenses                |  |  |      |     



The company
recognized acquisition-related costs of $4 million for the year ended December 31, 2012 (2011 – nil),
in connection with investment properties acquired through business combinations accounted for in accordance with IFRS 3.



92







Property operating costs for the year ended
December 31, 2012 includes $27 million (2011 – $21 million) representing rent expense associated with operating leases for
land on which certain of the company’s commercial properties are situated. The company 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:



|(Millions)                                    |  |  |  |  | Dec. 31, 2012 | Dec. 31, 2011
|--------------------------------------------- |  |  |  |  | ------------- | -------------
|Not later than 1 year                         |  |  |  |  | $             | 30           
|Later than 1 year and not longer than 5 years |  |  |  |  |               | 102          
|Later than 5 years                            |  |  |  |  |               | 1,407        
|Total                                         |  |  |  |  | $             | 1,539        



| | (c) | Interest and other income
| | --- | -------------------------

The components of interest and other income
are as follows:



|(Millions)                                                               |  |  |  |  |   | 2012 |   | 2011
|------------------------------------------------------------------------ |  |  |  |  | - | ---- | - | ----
|Interest income on loans receivable from BAM                             |  |  |  |  | $ | 3    | $ | 50  
|Interest income on residential note receivable from BRPI                 |  |  |  |  |   | 29   |   | 23  
|Interest income on participating loan interests with subsidiaries of BAM |  |  |  |  |   | 32   |   | 18  
|Interest and other income on loans receivable designated as FVTPL        |  |  |  |  |   | 8    |   | (1) 
|Other interest income                                                    |  |  |  |  |   | 2    |   | 12  
|Other income(1)                                                          |  |  |  |  |   | 13   |   | 28  
|Total interest and other income                                          |  |  |  |  | $ | 87   | $ | 130 

| | (1) | Includes condemnation award of $11 million, partnership settlement of $6 million and gain on
repurchase of debt of $5 million for the year ended December 31, 2011
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 21: FAIR VALUE GAINS (LOSSES),
NET

The components of fair value gains (losses),
net are as follows:



|(Millions)                                      |  |  |  |  |   | 2012  |   | 2011 
|----------------------------------------------- |  |  |  |  | - | ----- | - | -----
|Investment properties                           |  |  |  |  |   |       |   |      
|Commercial properties                           |  |  |  |  | $ | 897   | $ | 1,012
|Development properties                          |  |  |  |  |   | 82    |   | (16) 
|                                                |  |  |  |  |   | 979   |   | 996  
|Financial instruments                           |  |  |  |  |   |       |   |      
|Participating loan interests                    |  |  |  |  |   | 2     |   | 30   
|U.S. Office Fund option and true-up liability   |  |  |  |  |   | ―     |   | (59) 
|Other financial instruments designated as FVTPL |  |  |  |  |   | 23    |   | (10) 
|                                                |  |  |  |  |   | 25    |   | (39) 
|Total fair value gains (losses), net            |  |  |  |  | $ | 1,004 | $ | 957  



NOTE 22: SHARE OF NET EARNINGS FROM
EQUITY ACCOUNTED INVESTMENTS

The components of net earnings of equity
accounted investments are as follows:



|(Millions)                                                    |  |  |  |  |   | 2012 |   | 2011
|------------------------------------------------------------- |  |  |  |  | - | ---- | - | ----
|Jointly controlled entities                                   |  |  |  |  | $ | 123  | $ | 592 
|Associates                                                    |  |  |  |  |   | 4    |   | 7   
|Total share of net earnings from equity accounted investments |  |  |  |  | $ | 127  | $ | 599 



NOTE 23: SHARE-BASED COMPENSATION

Options issued under the company’s
Share Option Plan vest proportionately over five years and expire ten years after the grant date.



During the three months ended June 30,
2012, the company granted 1,500,000 stock options (2011 – nil), under the Share Option Plan with an exercise price of $18.54
per share which was equal to the closing price on the New York Stock Exchange on the last trading day preceding the grant date
of May 3, 2012. At the grant date, the options each had a fair value of $4.06 per share determined using the Black-Scholes model
of valuation, assuming a 9.7-year term, 38.78% volatility, a weighted average dividend yield of 1.50% and a risk free interest
rate of 1.38%. The expected volatility is based on historical volatility over a period of time corresponding to the expected term.
The resulting total compensation of $6 million is charged to expense over the vesting period of the options granted. A corresponding
amount is initially recorded in contributed surplus and subsequently reclassified to share capital when options are exercised.
Any consideration paid upon exercise of options is credited directly to common shares.



93







During the three months ended March 31,
2012, the company granted 2,416,000 stock options (2011 – 1,971,000), under the Share Option Plan with an exercise price
of $17.84 per share (2011 – $17.35 per share), which was equal to the five-day volume weighted average price of a share on
the New York Stock Exchange for the five business days preceding the effective grant date of February 22, 2012. At the grant date,
the options each had a fair value of $3.63 per share (2011 – $2.73 per share) determined using the Black-Scholes model of
valuation, assuming a 7.5-year term, 38.72% volatility (2011 – 30.00%), a weighted average dividend yield of 2.50% (2011
– 5.00%) and a risk free interest rate of 1.35% (2011 – 2.65%). The expected volatility is based on historical volatility
over a period of time corresponding to the expected term. The resulting total compensation of $9 million is charged to expense
over the vesting period of the options granted. A corresponding amount is initially recorded in contributed surplus and subsequently
reclassified to share capital when options are exercised. Any consideration paid upon exercise of options is credited directly
to common shares.



The following table sets out the number
of options to purchase common shares which were issued and outstanding at December 31, 2012 under the company’s Share Option
Plan:



|Issue Date |  |  | Expiry Date | Number of Shares | Weighted Average Exercise Price
|---------- |  |  | ----------- | ---------------- | -------------------------------
|2004       |  |  | 2014        |                  | 1,213,220                      
|2005       |  |  | 2015        |                  | 728,255                        
|2006       |  |  | 2016        |                  | 773,637                        
|2007       |  |  | 2017        |                  | 1,384,694                      
|2008       |  |  | 2018        |                  | 1,998,647                      
|2009       |  |  | 2019        |                  | 5,017,355                      
|2010       |  |  | 2020        |                  | 2,984,600                      
|2011       |  |  | 2021        |                  | 1,889,000                      
|2012       |  |  | 2022        |                  | 3,879,500                      
|Total      |  |  |             |                  | 19,868,908                     



The change in the number of options during
2012 and 2011 is as follows:



|                                 | Dec. 31, 2012 | Dec. 31, 2011   
|-------------------------------- | ------------- | ----------------
|                                 | Number of     | Weighted Average
|                                 | Options       | Exercise Price  
|Outstanding, beginning of period | 17,715,060    | $               
|Granted                          | 3,916,000     |                 
|Exercised                        | (1,175,307)   |                 
|Expired/Forfeited                | (586,845)     |                 
|Outstanding, end of period       | 19,868,908    |                 
|Exercisable at end of period     | 12,939,311    | $               



Deferred Share Unit Plans are offered to
executive officers and non-employee directors of the company. Under these plans, each officer and director may choose to receive
all or a percentage of his or her annual incentive bonus or directors’ fees in the form of Deferred Share Units (“DSUs”).
The DSUs either vest over a five year period or immediately and accumulate additional DSUs at the same rate as dividends on common
shares. Officers and directors are not permitted to convert the DSUs into cash until retirement or cessation of employment. The
value of the vested and non-vested DSUs, when converted to cash, will be equivalent to the market value of the common shares at
the time the conversion takes place. Employee compensation expense for this plan is charged to expense over the vesting period
of the DSUs. Changes in the amount payable by the company in respect of vested DSUs as a result of dividends and share price movements
are recorded as employee compensation expense in the period of the change. At December 31, 2012, the company had 1,356,410 deferred
share units outstanding and vested (December 31, 2011 – 1,282,079).



In 2011, the company established a restricted
stock plan. Restricted shares granted under this plan vest in equal installments over a period of five years, except that restricted
shares awarded in lieu of a cash bonus vest immediately. Vested and unvested restricted shares must be held until the fifth anniversary
of the award date. Holders of restricted shares are entitled to vote their shares and to receive dividends that are paid on the
company’s common shares. Prior to the fifth anniversary of the award date, these dividends are distributed in the form of
additional restricted shares, equivalent in value to the cash dividends paid on the restricted shares net of required withholding
taxes and subject to the same vesting and hold provisions as the original restricted shares. During the year ended December 31,
2012, 56,646 (2011 – 200,000) shares were granted under the restricted stock plan with a grant date fair value of $17.65
per share (2011 – $18.64 per share). The resulting total compensation of $1 million is charged to employee compensation expense
over the vesting period of the restricted stock granted. At December 31, 2012, 248,357 shares were outstanding and 83,040 shares
were vested under the restricted stock plan (December 31, 2011 – 200,000 and 40,000, respectively).





94







In 2011, the company adopted a management
global stock option plan for officers and employees outside of the United States and Canada. The terms of this plan are substantially
similar to the Share Option Plan except that officers and employees do not have the ability to elect to receive the company’s
shares when exercising their rights under this plan. Rather, their sole entitlement is to a cash payment equal to the increase
in the value of a specified number of shares over a specified period of time. Employee compensation expense for this plan is determined
every quarter and changes in the amount payable by the company in respect of the specified number of shares is charged to employee
compensation expense in the period of the change. During the year ended December 31, 2012, 111,500 (2011 – 160,000) shares
were granted under the global stock option plan with an exercise price of $15.64 per share (2011 – $17.35 per share). At
December 31, 2012, 226,000 shares were outstanding and 71,200 shares were exercisable under the global stock option plan (December
31, 2011 – 160,000 and 32,000, respectively).



Employee compensation expense related to
the share option, deferred share unit, restricted stock and global share option plans for the year ended December 31, 2012 was
$11 million (2011– $7 million).



NOTE 24: GUARANTEES, CONTINGENCIES AND
OTHER

In the normal course of operations, the
company 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.



| | (a) | Guarantees, Commitments and Contingencies
| | --- | -----------------------------------------

The company 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 company is uncertain but could be up to C$65 million (A$63 million) in the event the company is completely unsuccessful in
defending the claims. During the year ended December 31, 2012, the amount of the contingent cash outflow increased by C$20 million
(A$19 million) due to a change in the methodology of determining the amount of the claim that was adopted by the courts.



The company, through its 50% interest in
London Wall Place LP, has a £14 million commitment to the City of London related to the acquisition of London Wall Place
at December 31, 2012. In addition, the company has commitments totaling £27 million to third parties for the development
of 100 Bishopsgate in London.



At December 31, 2012, the company has commitments
totaling C$6 million to third parties for the development of 225 Sixth in Calgary and Bay Adelaide East in Toronto.



The company has also agreed to indemnify
its directors and certain of its officers and employees. The nature of substantially all of the indemnification undertakings prevent
the company 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 company nor its consolidated subsidiaries
have made significant payments under such indemnification agreements.



The company does not conduct its operations,
other than those of equity accounted investments, through entities that are not fully or proportionately consolidated in its consolidated
financial statements, and has not guaranteed or otherwise contractually committed to support any material financial obligations
not reflected in its consolidated financial statements.



| | (b) | Other
| | --- | -----

United States

The company maintains insurance on its
properties in amounts and with deductibles that it believes are in line with what owners of similar properties carry. The company
maintains all risk property insurance and rental value coverage (including coverage for the perils of flood, earthquake and weather
catastrophe). The all risk policy limit is $1.5 billion per occurrence. The earthquake limit is $300 million per occurrence and
in the annual aggregate for its California properties and a separate $300 million per occurrence and annual aggregate limit for
all other U.S. properties. This coverage is subject to a deductible of 5% of the value of the affected property for California
and Seattle locations and $100,000 for all other locations. The weather catastrophe limit is $300 million per occurrence and in
the annual aggregate subject to a deductible of 3% of the value of the affected property for U.S. locations located in traditional
windstorm-exposed areas. All other locations are subject to a $500,000 deductible. The flood limit is $300 million per occurrence
and in the annual aggregate subject to a deductible of $50,000 per occurrence. In New York State, the Commonwealth of Massachusetts
and the District of Columbia, the weather catastrophe deductible is $50,000 with the exception of one insurer that has a deductible
of $875,000. Where properties are insured by the company’s partners, all risk property insurance and rental value coverage
is provided with limits that the company believes are in line with what owners of similar properties carry.



The Terrorism Risk Insurance Act (“TRIA”)
was enacted in November 2002 in response to the uncertainty surrounding the insurance market in the aftermath of the terrorist
attacks of September 11, 2001 and provides protection for “certified acts” as defined by the statute. TRIA mandates
that insurance carriers offer insurance covering physical damage from terrorist incidents as certified by the U.S. Secretary of
the Treasury. The Terrorism Risk Insurance Program Reauthorization Act of 2007 was signed into law on December 26, 2007. It extends
the TRIA program through December 2014.





95







With respect to the company’s U.S.
properties (including the U.S. Office Fund), in October 2008, the company formed a segregated cell captive facility, Liberty IC
Casualty, LLC (“Liberty”). Liberty provides $4.0 billion of TRIA coverage for all U.S. properties. In 2009 the company
formed a second segregated cell captive facility, Liberty IC Casualty II, LLC (“Liberty II”). Liberty II provides protection
against losses due solely to biological, chemical or radioactive contamination arising out of a certified terrorist act. In the
event of a covered loss in 2013, the company expects Liberty IC Casualty II LLC to recover 85% of its losses, less certain deductibles,
from the United States government with the remaining 15% to be funded by the company.



Canada

The company maintains insurance on its
properties in amounts and with deductibles that it believes are in line with what owners of similar properties carry. The company
maintains all risk property insurance and rental value coverage (including coverage for the perils of flood, earthquake and windstorm).
The all risk policy limit is C$1.5 billion per occurrence. The earthquake limit is C$500 million per occurrence and in the annual
aggregate. This coverage is subject to a C$100,000 deductible for all locations except for British Columbia where the deductible
is 3% of the values for all locations where the physical loss, damage or destruction occurred. The flood limit is C$500 million
per occurrence and in the annual aggregate, and is subject to a deductible of C$25,000 for all losses arising from the same occurrence.
Windstorm is included under the all risk coverage limit of C$1.5 billion.



With respect to the company’s Canadian
properties, the company purchases an insurance policy that covers acts of terrorism for limits up to C$1.2 billion.



Australia

The company maintains insurance on its
properties in amounts and with deductibles that it believes are in line with what owners of similar properties carry. The company
maintains all risk property insurance and rental value coverage (including coverage for the perils of flood, earthquake and weather
catastrophe). The all risk policy limit is A$1.25 billion per occurrence. The earthquake limit is A$727 million per occurrence
and in the aggregate. The weather catastrophe limit is A$727 million per occurrence and in the annual aggregate. Both earthquake
and weather catastrophe coverage is subject to a deductible of 3% of the values for all locations where the physical loss, damage
or destruction occurred. The flood limit is A$727 million per occurrence and in the annual aggregate subject to a deductible of
A$10,000 per occurrence. Where properties are insured by the company’s partners, all risk property insurance and rental value
coverage is provided with limits that the company believes are in line with what owners of similar properties carry.



Terrorism insurance is provided through
the Australian Reinsurance Pool Corporation (“ARPC”). ARPC is a statutory corporation established under the Terrorism
Insurance Act 2003 to offer reinsurance for terrorism risk in Australia. The Terrorism Insurance Act 2003 renders terrorism exclusion
clauses in eligible insurance contracts ineffective in relation to loss or liabilities arising from a declared terrorist incident
affecting eligible property located in Australia.



United Kingdom

The company maintains insurance on its
properties in amounts and with deductibles that it believes are in line with what owners of similar properties carry. The company
maintains all risk property insurance and rental value coverage up to the replacement cost value of the asset. Flood, earthquake,
wind and terrorism coverage is included in the coverage provided, all subject to a £250 deductible.



NOTE 25:
CAPITAL MANAGEMENT AND LIQUIDITY

The company employs a broad range of financing
strategies to facilitate growth and manage financial risk. The company’s objective is to reduce its weighted average cost
of capital and improve common shareholders’ equity returns through value enhancement initiatives and the consistent monitoring
of the balance between debt and equity financing. As at December 31, 2012, the company’s weighted average cost of capital,
assuming a 12% return on common equity, was 7.13%.



The following schedule details the components
of the company’s capital as at December 31, 2012 and the related costs thereof:



|                                   | Cost of Capital(1) | Underlying Value(2)
|---------------------------------- | ------------------ | -------------------
|(Millions)                         | Dec. 31, 2012      | Dec. 31, 2011      
|Liabilities                        |                    |                    
|Commercial property debt           |                    | 5.31%              
|Capital securities                 |                    | 5.47%              
|Shareholders’ equity               |                    |                    
|Preferred equity – corporate       |                    | 5.68%              
|Common equity(2)                   |                    | 12.00%             
|Non-controlling interests          |                    |                    
|Preferred equity – subsidiaries    |                    | 1.87%              
|Other non-controlling interests(3) |                    | 12.00%             
|Total(4)                           |                    | 7.13%              

| | (1) | As a percentage of average book value unless otherwise noted
| | --- | ------------------------------------------------------------

| | (2) | Underlying value of liabilities represents carrying value or the cost to retire on maturity.
Underlying value of common equity is based on the closing stock price of the company’s common shares
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Assuming 12% return on co-invested capital
| | --- | ------------------------------------------

| | (4) | In calculating the weighted average cost of capital, the cost of debt has been tax-effected
| | --- | -------------------------------------------------------------------------------------------



96







Commercial property debt –
The company’s commercial property debt is primarily fixed-rate and non-recourse to the company. These financings are typically
structured on a loan-to-appraised value basis of between 55% and 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 the company’s
equity requirement and enhances its equity returns when financing certain commercial properties. The company currently has a level
of indebtedness of 48% of fair value of its commercial properties. This level of indebtedness is considered by the company to be
within its target.



Capital securities, Preferred equity
– corporate and Preferred equity – subsidiaries. These represent sources of low-cost capital to the company, without
dilution to the common equity base.



Other non-controlling interests –The company invests its liquidity alongside capital from strategic institutional partners in fund formats to acquire individual
assets and portfolios. Also, the common equity of certain of the company’s subsidiaries includes publicly traded securities.



The company is subject to certain covenants
on its credit facilities. The covenants include a total and secured leverage ratio, an interest and fixed charge ratio, as well
as a dividend payout ratio and a recourse debt requirement. As of December 31, 2012 the company is in compliance with these covenants.
As of December 31, 2012, $68 million had been drawn on the credit facilities (2011 – $381 million).



The company’s strategy is to satisfy
its current liquidity needs using cash on hand, cashflows generated from operating activities and provided by financing activities,
as well as proceeds from asset sales. The company also generates liquidity by accessing capital markets on an opportunistic basis.
Rental revenue, recoveries from tenants, interest and other income, available cash balances, draws on corporate credit facilities
and refinancing of maturing indebtedness are the company’s principal sources of capital used to pay operating expenses, dividends,
debt service and recurring capital and leasing costs in its commercial property portfolio. Another source of cashflow includes
third-party fees generated by the company’s asset management, leasing and development businesses.



The principal liquidity needs for periods
beyond the next twelve months are for scheduled debt maturities, recurring and non-recurring capital expenditures, development
costs and potential property acquisitions. The company’s strategy is to meet these needs with one or more of the following:



| | • | cashflows from operations;
| | - | --------------------------



| | • | construction loans;
| | - | -------------------



| | • | proceeds from sales of assets;
| | - | ------------------------------



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



| | • | credit facilities and refinancing opportunities.
| | - | ------------------------------------------------



The company attempts to match the maturity
of its commercial property debt portfolio with the average lease terms of its properties. At December 31, 2012, the average term
to maturity of the company’s commercial property debt was five years, compared to its average lease term of seven years.



The following table presents the contractual
maturities of the company’s financial liabilities at December 31, 2012:



|                                         |   |        | Payments Due by Period
|---------------------------------------- | - | ------ | ----------------------
|(Millions)                               |   | Total  |                       
|Commercial property debt(1)              | $ | 11,512 | $                     
|Capital securities                       |   | 866    |                       
|Interest expense(2)                      |   |        |                       
|Commercial property debt                 |   | 2,597  |                       
|Capital securities                       |   | 106    |                       
|Other non-current financial liabilities  |   | 251    |                       
|Accounts payable and accrued liabilities |   | 603    |                       
|Derivative liabilities                   |   | 235    |                       

| | (1) | Net of $61 million of transaction costs and includes commercial property debt associated with
assets held for sale at December 31, 2012
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Represents aggregate interest expense expected to be paid over the term of the debt, on an undiscounted
basis, based on current interest and foreign exchange rates
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------





97







NOTE 26: FINANCIAL INSTRUMENTS

| | (a) | Derivatives and hedging activities
| | --- | ----------------------------------

The company uses 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 company does not use derivatives
for speculative purposes. The company 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 the company’s shares to economically hedge exposure to variability in share price under the Deferred
Share Unit Plans. Refer to Note 23, Share-Based Compensation.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The company also designates certain of
its financial liabilities as hedges of its Canadian dollar net investments in foreign subsidiaries.



Interest rate hedging

The following table provides details of
derivatives designated as cash flow hedges in interest rate hedging relationships outstanding as at December 31, 2012, and December
31, 2011:



|(Millions)    | Hedging Item                                      | Notional | Rates        | Maturity Dates        | Fair Value
|------------- | ------------------------------------------------- | -------- | ------------ | --------------------- | ----------
|Dec. 31, 2012 | Interest rate caps of US$ LIBOR debt              | $1,138   | 3.8% to 5.5% | Jan 2013 to Mar 2014  | nil       
|              | Interest rate swaps of US$ LIBOR debt             | $929     | 0.6% to 1.5% | Jul 2013 to Jun 2016  | ($13)     
|              | Interest rate swaps of £ LIBOR debt               | £134     | 1.1%         | Sep 2017              | (£2)      
|              | Interest rate swaps of A$ BBSW/BBSY debt          | A$1,045  | 3.5% to 5.9% | Jan 2014 to Jul 2017  | (A$66)    
|              | Interest rate swaps on forecasted fixed rate debt | $1,075   | 2.1% to 4.7% | Jun 2023 to May 2025  | ($143)    
|              | Interest rate swaps on forecasted fixed rate debt | C$300    | 2.6% to 3.4% | Nov 2023 to Dec 2024  | (C$7)     
|Dec. 31, 2011 | Interest rate caps of US$ LIBOR debt              | $918     | 3.8% to 5.5% | Mar 2012 to Mar 2014  | nil       
|              | Interest rate swaps of US$ LIBOR debt             | $957     | 0.8% to 5.7% | Sept 2012 to May 2014 | ($14)     
|              | Interest rate swaps of A$ BBSW/BBSY debt          | A$931    | 4.8% to 5.9% | Jan 2012 to Jul 2016  | (A$43)    
|              | Interest rate swaps on forecasted fixed rate debt | $1,015   | 2.6% to 4.7% | Feb 2022 to Nov 2024  | ($140)    
|              | Interest rate swaps on forecasted fixed rate debt | A$357    | 5.2%         | Jan 2014              | (A$10)    
|              | Interest rate swaps on forecasted fixed rate debt | C$225    | 3.4% to 3.6% | Apr to Nov 2023       | (C$17)    



For the years ended December 31, 2012 and
2011, the amount of hedge ineffectiveness recorded in earnings in connection with the company’s interest rate hedging activities
was not significant. In the current year, the company settled interest rate hedges that hedged a notional of $525 million for a
net loss of $43 million which is being amortized over the term of the associated hedged cash flows.



Foreign currency hedging

The following table provides details of
derivatives designated as net investment hedges in foreign currency hedging relationships outstanding as at December 31, 2012,
and December 31, 2011:



|(Millions)    | Hedging Item             | Hedged Currency   | Notional | Rate       | Fair Value | Maturity | Hedged Item                   
|------------- | ------------------------ | ----------------- | -------- | ---------- | ---------- | -------- | ------------------------------
|Dec. 31, 2012 | Foreign currency forward | British pounds    | £45      | £0.62/US$  | nil        | Mar 2013 | GBP denominated net investment
|Dec. 31, 2011 | Foreign currency forward | Australian dollar | A$135    | A$0.98/US$ | ($4)       | Jan 2012 | A$ denominated net investment 
|              | Foreign currency forward | British pounds    | £45      | £0.64/US$  | nil        | Mar 2012 | GBP denominated net investment



In addition, as of December 31, 2012, the
company had designated C$1,100 million (December 31, 2011 – C$903 million) of its Canadian dollar financial liabilities as
hedges of the net investment in its Canadian operations.



For the years ended December 31, 2012 and
2011, 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 table provides details of
other derivatives outstanding as at December 31, 2012, and December 31, 2011:



|(Millions)    | Derivative Type      |  |  |  | Fair Value | Fair Value (Gain)/Loss | Classification of Gain/Loss
|------------- | -------------------- |  |  |  | ---------- | ---------------------- | ---------------------------
|Dec. 31, 2012 | Total return swap(1) |  |  |  | $1         | ($1)                   | Administrative expense     
|Dec. 31, 2011 | Total return swap(1) |  |  |  | $2         | ($2)                   | Administrative expense     

| | (1) | Relates to the total return swap on the company’s shares in connection with its Deferred
Share Unit Plans
| | --- | ---------------------------------------------------------------------------------------------------------





98







| | (b) | Fair value of financial instruments
| | --- | -----------------------------------

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.



The carrying value and fair values of the
company’s financial instruments are summarized in the following table:



|                                         | Dec. 31, 2012 | Dec. 31, 2011
|---------------------------------------- | ------------- | -------------
|                                         |               |              
|                                         | FVTPL         | AFS          
|                                         | Fair          | Fair         
|(Millions) Measurement Basis             | Value         | Value        
|Financial assets                         |               |              
|Participating loan interests             | $ 48          | $ —          
|Non-current financial assets             |               |              
|Equity securities designated as AFS      | —             | 105          
|Brookfield Residential promissory notes  | —             | —            
|Loans receivable designated as FVTPL     | —             | —            
|Other loans receivable                   | —             | —            
|Receivables and other assets             |               |              
|Accounts receivable                      | —             | —            
|Loan receivable from affiliate           | —             | —            
|Restricted cash and deposits             | —             | —            
|Cash and equivalents                     | —             | —            
|                                         | $ 48          | $ 105        
|Financial liabilities                    |               |              
|Commercial property debt(1)              | $ 54          | $ —          
|Capital securities – corporate           | —             | —            
|Other non-current financial liabilities  |               |              
|Loan payable                             | —             | —            
|Note payable                             | —             | —            
|Other loans payable                      | —             | —            
|Accounts payable and accrued liabilities | 235           | —            
|                                         | $ 289         | $ —          



| | (1) | Includes $64 million of debt associated with asset held for sale
| | --- | ----------------------------------------------------------------



| | (c) | Fair value hierarchy
| | --- | --------------------

The company 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 company 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.



The following table outlines financial
assets and liabilities measured at fair value in the consolidated financial statements and the level of the inputs used to determine
those fair values in the context of the hierarchy as defined above:



|                                                   | Dec. 31, 2012 | Dec. 31, 2011
|-------------------------------------------------- | ------------- | -------------
|(Millions)                                         | Level 1       | Level 2      
|Financial assets                                   |               |              
|Participating loan interests – embedded derivative | $             | —            
|Non-current financial assets                       |               |              
|Equity securities designated as AFS                |               | —            
|Loans receivable designated as FVTPL               |               | —            
|Financial liabilities                              |               |              
|Commercial property debt                           |               | —            
|Accounts payable and accrued liabilities           |               | —            
|                                                   |               |              



There have been no transfers during the
year between levels. A reconciliation of fair value measurements in Level 3 is set out below:



|                          |  |  |  |  | Dec. 31, 2012   
|------------------------- |  |  |  |  | ----------------
|(Millions)                |  |  |  |  | Financial assets
|Opening balance           |  |  |  |  | $               
|Acquisitions              |  |  |  |  |                 
|Dispositions              |  |  |  |  |                 
|Fair value gains (losses) |  |  |  |  |                 
|Closing balance           |  |  |  |  | $               



99







| | (d) | Market risk
| | --- | -----------

Interest rate risk

The company 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 debts 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:



|(Millions)                                              |  |  |  |  |  |  | Dec. 31, 2012
|------------------------------------------------------- |  |  |  |  |  |  | -------------
|BOX revolving facility                                  |  |  |  |  |  |  | $            
|Variable rate commercial property debt                  |  |  |  |  |  |  |              
|Fixed rate commercial property debt due within one year |  |  |  |  |  |  |              
|Total                                                   |  |  |  |  |  |  | $            



In addition, the company has variable rate
debt included within its equity accounted investments which could result in a change in interest expense at ownership of $3 million
based on a 100 basis point change in rates.



The company manages interest rate risk
by primarily entering into fixed rate commercial 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 refinancing of fixed rate debt.



Foreign currency risk

The company 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 company is exposed to foreign currency risk on its net investment in its foreign currency
denominated operations and certain corporate level foreign currency denominated monetary assets and liabilities. 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:



|                                    | Dec. 31, 2012  | Dec. 31, 2011
|----------------------------------- | -------------- | -------------
|US$ Millions unless otherwise noted | Net investment |              
|Canadian Dollar                     | C$             | 2,356        
|Australian Dollar                   | A$             | 2,529        
|British Pound(1)                    | £              | 207          
|Total                               |                |              

| | (1) | Before taking into consideration the effect of hedges. The currency risk on these British pound
denominated investments has been hedged with a foreign currency forward contract
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Equity price risk

The company faces equity price risk in
connection with a total return swap under which it receives the returns on a notional 1,347,152 of the company’s common shares.
A $1 increase or decrease in the company’s share price would result in a $1 million gain or loss being recognized in administrative
expense.



| | (e) | 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 participating loan interests, other non-current financial assets, receivables and other assets, restricted cash and deposits
and cash and cash equivalents. The company also has indirect exposure to credit risk within its equity accounted investments, including
$7 million of receivables and other through its investment in jointly controlled entities. Further, as discussed in Note 5, Investment
Properties, the company has exposure to the credit risk of certain subsidiaries of BAM as certain properties included in the company’s
consolidated financial statements are pledged as collateral against cross-collateralized financing pools. This credit risk is limited
to the carrying amount of the pledged assets of $1,767 million.



Credit risk related to accounts receivable
arises from the possibility that tenants may be unable to fulfill their lease commitments. The company manages this risk by attempting
to ensure that its tenant mix is diversified and by limiting its exposure to any one tenant. The company 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 commercial property revenue. This risk is further managed by signing long-term leases with tenants who have investment
grade credit ratings.



Credit risk arises on secured loans and
other receivables in the event that borrowers default on the repayment to the company. The company manages this risk by attempting
to ensure that adequate security has been provided in support of such mortgages.



The company manages credit risk on financial
assets with related parties by entering into such transactions under normal commercial terms and, in certain instances, by obtaining
guarantees from its parent or other credit-worthy subsidiaries of its parent.



100







The majority of the company’s trade
receivables are collected within 30 days. The balance of accounts receivable past due, including real estate mortgages, is not
significant.



NOTE 27: 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. The following table summarizes transactions and balances with BAM and its subsidiaries:



|                                               |  |  |  |  | Year ended Dec. 31,
|---------------------------------------------- |  |  |  |  | -------------------
|(Millions)                                     |  |  |  |  |                    
|Transactions with related parties              |  |  |  |  |                    
|Lease revenue(1)                               |  |  |  |  | $                  
|Interest and other income                      |  |  |  |  |                    
|Interest expense on commercial property debt   |  |  |  |  |                    
|Other expense(2)                               |  |  |  |  |                    
|                                               |  |  |  |  | Dec. 31, 2012      
|Balances outstanding to (from) related parties |  |  |  |  |                    
|Participating loan interests                   |  |  |  |  | $                  
|BRPI promissory notes                          |  |  |  |  |                    
|Loans receivable designated as FVTPL           |  |  |  |  |                    
|Other loans receivable                         |  |  |  |  |                    
|Commercial property debt                       |  |  |  |  |                    

| | (1) | Amounts received from BAM and its subsidiaries for the rental of office premises
| | --- | --------------------------------------------------------------------------------

| | (2) | Amounts paid to BAM and its subsidiaries for administrative services
| | --- | --------------------------------------------------------------------



Refer
to Note 5, Investment Properties, Note 8, Investments in Associates, and Note 10, Other Non-Current Financial Assets, for additional
related party transactions.



During
the year ended December 31, 2012, the company entered into contracts to construct investment properties in London and Toronto with
a subsidiary of BAM.



The company holds a 90% interest in Brookfield
Properties Management Pty Ltd. which manages the properties in the company’s interest in a portfolio of properties in Australia
(the “Australian portfolio”) and certain other properties owned by subsidiaries of BAM, with the remaining 10% held
by BAM. The company has an option to acquire BAM’s interest in Brookfield Properties Management Pty Ltd. for nominal consideration
at any time prior to September 30, 2020.



Compensation of key management personnel

The remuneration of directors and other
key management personnel during the year ended December 31, 2012 and 2011 was as follows:



|(Millions)                                   |  |  |  |  | 2012 | 2011
|-------------------------------------------- |  |  |  |  | ---- | ----
|Salaries, incentives and short-term benefits |  |  |  |  | $    | 11  
|Post-employment benefits                     |  |  |  |  |      | ―   
|Share-based compensation                     |  |  |  |  |      | 12  
|Total                                        |  |  |  |  | $    | 23  



The remuneration of directors and key executives
is determined by the company’s human resources and compensation committee having regard to the performance of individuals
and market trends.







101







NOTE 28: OTHER INFORMATION

| | (a) | Supplemental cashflow information
| | --- | ---------------------------------



|(Millions)                                                     |  |  |  |  |   | 2012 |   | 2011 
|-------------------------------------------------------------- |  |  |  |  | - | ---- | - | -----
|Acquisitions of real estate                                    |  |  |  |  | $ | 855  | $ | 913  
|Mortgages and other balances assumed on acquisition            |  |  |  |  |   | ―    |   | (250)
|Net acquisitions                                               |  |  |  |  | $ | 855  | $ | 663  
|Dispositions of real estate                                    |  |  |  |  | $ | 438  | $ | 985  
|Mortgages and other balances assumed by purchasers             |  |  |  |  |   | (36) |   | (441)
|Net dispositions                                               |  |  |  |  | $ | 402  | $ | 544  
|                                                               |  |  |  |  |   |      |   |      
|(Millions)                                                     |  |  |  |  |   | 2012 |   | 2011 
|Cash taxes paid                                                |  |  |  |  | $ | 79   | $ | 68   
|Cash interest paid (excluding dividends on capital securities) |  |  |  |  |   | 612  |   | 529  



(b)	During the year ended December 31,
2012, interest expense included $19 million (2011 – $13 million) relating to amortization of transaction costs included in
the carrying amount of commercial property debt and capital securities which has been recognized in interest expense using the
effective interest method.



(c)	The assets and liabilities of certain
of the company’s subsidiaries are neither available to pay debts of, nor constitute legal obligations of, the parent or other
subsidiaries, respectively.



NOTE 29: SUBSEQUENT EVENTS

On January 31, 2013, the company sold RBC
Plaza in Minneapolis for net proceeds of $53 million. RBC Plaza was presented in assets held for sale at December 31, 2012.



On January 31, 2013, the company redeemed
all of the outstanding Class AAA Series F shares for cash of C$25.00 per share plus accrued and unpaid dividends thereon of C$0.1233,
representing a total redemption price of C$25.1233 per share.

102







NOTE 30: SEGMENTED INFORMATION

The company and its subsidiaries operate
in the United States, Canada, Australia and the United Kingdom within the commercial property business.



In the third quarter of 2012, the company
acquired a portfolio of investment properties in the United Kingdom and established a platform to manage its investment in that
market. This investment was previously managed out of the platform in the United States. The company has presented segment information
for the United Kingdom segment beginning in the third quarter of 2012 and has revised its segment presentation for the comparative
year consistent with its current segment composition as required by IFRS 8, “Operating Segments.”



The company discloses information about
its reportable segments based upon the measures used by management in assessing the performance of those reportable segments. The
company uses commercial property net operating income as a measure of operating performance and funds from operations, a widely
used measure in analyzing real estate, as a measure of segment profit or loss. The company defines commercial property net operating
income as revenue from commercial property operations less direct commercial property expense. The company defines funds from operations
as income before fair value gains (losses) and income taxes, less non-controlling interests in the foregoing. Funds from operations
includes funds from operations of consolidated properties, the company’s share of funds from operations of equity accounted
investments and funds from discontinued operations. The following summary presents segmented financial information for the company’s
principal areas of business:



|                                                          | United States | Canada(1) | Australia | United Kingdom | Total
|--------------------------------------------------------- | ------------- | --------- | --------- | -------------- | -----
|(Millions)                                                |               | 2012      |           | 2011           |      
|Commercial property revenue                               | $             | 1,356     | $         | 954            | $    
|Direct commercial property expense                        | (550)         |           | (400)     |                | (237)
|Commercial property net operating income                  | 806           |           | 554       |                | 326  
|Interest and other income                                 |               | 11        |           | 75             |      
|Interest expense(2)                                       |               | (414)     |           | (326)          |      
|Administrative expense(3)                                 |               | (84)      |           | (72)           |      
|Other                                                     |               | —         |           | (10)           |      
|Funds from operations of equity accounted investments     | 79            |           | 169       |                | 7    
|Funds from discontinued operations                        | 19            |           | 21        |                | —    
|Non-controlling interests in funds from operations        | (37)          |           | (33)      |                | (24) 
|Funds from operations                                     |               | 380       |           | 378            |      
|Fair value gains                                          |               | 473       |           | 611            |      
|Fair value gains (losses) of equity accounted investments | 32            |           | 414       |                | —    
|Other(4)                                                  |               | 5         |           | 161            |      
|Income taxes                                              |               | (56)      |           | (150)          |      
|Funds from discontinued operations                        |               | (19)      |           | (21)           |      
|Non-controlling interestsin funds from operations         | 37            |           | 33        |                | 24   
|Income from continuing operations                         | 852           |           | 1,426     |                | 405  
|Income (loss) from discontinued operations                | 12            |           | 36        |                | —    
|Net income                                                |               | 864       |           | 1,462          |      
|Net income attributable to non-controlling interests      |               | 81        |           | 131            |      
|Net income attributable to shareholders                   | $             | 783       | $         | 1,331          | $    
|                                                          |               |           |           |                |      

| | (1) | Includes $13 million of funds from discontinued operations and $13 million of income from discontinued
operations attributable to the residential development segment, a separate line of business disposed of on March 31, 2011, for
the year ended December 31, 2011
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Includes allocation of interest expense on corporate debt and capital securities of $18 million
to United States and $60 million to Canada for year ended December 31, 2012 (2011 - $17 million to United States and $52 million
to Canada)
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Includes allocation of corporate-level administrative expenses of $18 million to United States
and $8 million to Canada for the year ended December 31, 2012 (2011 - $12 million to United States and $9 million to Canada)
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Includes $150 million gain in U.S. commercial operations recognized in connection with the exercise
of the U.S. Office Fund option in the year ended December 31, 2011
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

103







|                                            | United States | Canada                | Australia     | United Kingdom        | Total         |                      
|------------------------------------------- | ------------- | --------------------- | ------------- | --------------------- | ------------- | ---------------------
|(Millions)                                  | Dec. 31, 2012 | Dec. 31,
        2011 | Dec. 31. 2012 | Dec. 31,
        2011 | Dec. 31. 2012 | Dec. 31,
        2011
|Non-current assets(1)                       | $             | 16,006                | $             | 14,588                | $             | 5,401                
|Other assets                                |               | 528                   |               | 1,061                 |               | 112                  
|Total assets                                | $             | 16,534                | $             | 15,649                | $             | 5,513                
|Total liabilities                           | $             | 8,417                 | $             | 8,186                 | $             | 3,753                
|Investment in commercial properties         | $             | 316                   | $             | 5,967                 | $             | —                    
|Investment in development properties        |               | —                     |               | 50                    |               | 91                   
|Investment in equity accounted investments  |               | —                     |               | 20                    |               | —                    
|Capital expenditures-commercial properties  |               | 203                   |               | 114                   |               | 51                   
|Capital expenditures-development properties |               | 58                    |               | 24                    |               | 46                   
|                                            |               |                       |               |                       |               |                      

| | (1) | At December 31, 2012, non-current assets includes equity accounted investments in the United
states, Canada, Australia and the United Kingdom segments of $1,486 million, $16 million, $1,034 million and $26 million, respectively
(December 31, 2011 - $1,467 million, $13 million, $714 million, and $62 million, respectively)
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(Millions)                                        |   | 2012 |   | 2011 |   | 2012 |   | 2011 |   | 2012 |   | 2011 |   | 2012 | 2011 |   | 2012 | 2011 
|------------------------------------------------- | - | ---- | - | ---- | - | ---- | - | ---- | - | ---- | - | ---- | - | ---- | ---- | - | ---- | -----
|Total commercial property net operating income(1) | $ | 926  | $ | 830  | $ | 333  | $ | 329  | $ | 289  | $ | 231  | $ | 2    | $    | 1 | $    | 1,550
|                                                  |   |      |   |      |   |      |   |      |   |      |   |      |   |      |      |   |      |      

| | (1) | Includes commercial property net operating income of equity accounted investments of $120 million,
$7 million, $78 million and nil in the United States, Canada, Australia and the United Kingdom commercial operations, respectively,
for the year ended December 31, 2012 (2011 - $276 million, $22 million, $78 million and $1 million, respectively)
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 31: APPROVAL OF FINANCIAL STATEMENTS

The financial statements were approved
by the board of directors and authorized for issue on January 31, 2013.





104





Selected Financial Information

Unaudited

|(Millions, except per share information)                                  |   | 2012   |   | 2011   |   | 2010   |   | 2009   |   | 2008(1)
|------------------------------------------------------------------------- | - | ------ | - | ------ | - | ------ | - | ------ | - | -------
|Financial results                                                         |   |        |   |        |   |        |   |        |   |        
|Net income(loss) attributable to shareholders                             | $ | 1,287  | $ | 1,690  | $ | 1,552  | $ | (220)  | $ | 700    
|Commercial property net operating income(2,3)                             |   | 1,345  |   | 1,014  |   | 729    |   | 690    |   | 1,308  
|Funds from operations(2)                                                  |   | 650    |   | 640    |   | 727    |   | 556    |   | 626    
|Total assets                                                              |   | 27,479 |   | 25,144 |   | 20,420 |   | 15,459 |   | 19,440 
|Total equity                                                              |   | 12,964 |   | 11,679 |   | 8,807  |   | 6,873  |   | 3,410  
|                                                                          |   |        |   |        |   |        |   |        |   |        
|Per common share                                                          |   |        |   |        |   |        |   |        |   |        
|Common shares outstanding                                                 |   | 504.7  |   | 503.7  |   | 502.7  |   | 501.3  |   | 391.1  
|Diluted common shares outstanding (adjusted)(2)                           |   | 524.9  |   | 521.4  |   | 520.1  |   | 516.7  |   | 400.8  
|Net income (loss) per share attributable to common shareholders – diluted |   | 2.25   |   | 2.92   |   | 2.73   |   | (0.52) |   | 1.77   
|Funds from operations per share – diluted (adjusted)(2)                   |   | 1.14   |   | 1.14   |   | 1.37   |   | 1.25   |   | 1.59   
|Dividends paid per share                                                  |   | 0.56   |   | 0.56   |   | 0.56   |   | 0.56   |   | 0.56   
|Common equity per share – diluted (adjusted)(2)                           |   | 19.80  |   | 17.90  |   | 15.75  |   | 13.10  |   | 8.75   
|Common equity per share at market                                         |   | 17.01  |   | 15.64  |   | 17.53  |   | 12.12  |   | 7.73   
|                                                                          |   |        |   |        |   |        |   |        |   |        
|Operating data—Commercial properties                                      |   |        |   |        |   |        |   |        |   |        
|Number of commercial properties                                           |   | 111    |   | 110    |   | 128    |   | 110    |   | 108    
|Leasable area (millions of square feet)                                   |   | 67     |   | 68     |   | 74     |   | 66     |   | 65     
|Effective interest (millions of square feet)                              |   | 51     |   | 51     |   | 50     |   | 50     |   | 50     
|Average occupancy (percent)                                               |   | 92.0   |   | 93.2   |   | 94.4   |   | 93.8   |   | 94.9   

| | (1) | Results reported under Canadian GAAP
| | --- | ------------------------------------

| | (2) | Non-IFRS measure. Refer to page 14 for definition
| | --- | -------------------------------------------------

| | (3) | Restated to reflect the impact of current discontinued operations
| | --- | -----------------------------------------------------------------

105







Corporate Responsibility



A MESSAGE FROM DENNIS FRIEDRICH



Brookfield Office Properties, Inc. has
a strong legacy of corporate responsibility from reducing our carbon footprint to volunteering in the communities where we work.
Along with a history of strong financial results and operational excellence, sustainability and community engagement are ingrained
in our company culture.



Our goal is to lead by example in the ownership
and operation of sustainable real estate. Our operations and property management teams continue to green the portfolio and secure
our place at the industry forefront in this realm. These efforts have been recognized globally and we have much to be proud
of this year. We earned NAREIT’s prestigious “Leader in the Light” award for high environmental achievement.
Two of our regional offices – Los Angeles and Washington, DC — were recognized by local business journals as among
their cities’ “Best Places to Work.”



Many of us, especially those in the New
York region, may remember 2012 as the year we endured an unprecedented and destructive weather event. Hurricane Sandy impacted
the Tri-State region like no other storm in recent history. Following Sandy, we were pleased to report minimal collateral damage
to our Lower Manhattan office portfolio; all of our properties in Lower Manhattan were fully operational by November 17. I am extremely
proud of our outstanding and dedicated property and operations personnel that allowed Brookfield to bounce back so quickly after
the storm. In addition, more than 75 Brookfield employees volunteered to help Sandy victims on Staten Island.



We believe that these efforts — from
green building operations to community involvement — promote the long-term interests of all our stakeholders, including employees,
tenants, business partners, investors, local communities, government officials and the commercial real estate industry at large.
We also recognize that this commitment requires an open conversation and collaboration with each of these constituencies. We invite
your views on our progress and your thoughts as to what we can and should be doing in the future.





Sincerely,





Dennis Friedrich

Chief Executive Officer

Brookfield Office Properties Inc.

106







INTRODUCTION

Brookfield Office Properties defines itself
by responsible business practices that are transparent and collaborative. We strive to achieve the highest global environmental
standards and we invest the necessary resources to make positive and lasting impacts in the cities where we operate worldwide.



Our Corporate Responsibility program is
focused on three areas of activity:



| | 1. | Environment Protection & Sustainable Growth
| | -- | -------------------------------------------

| | 2. | Community Engagement and Brookfield’s Arts & Events Program
| | -- | -----------------------------------------------------------

| | 3. | Fostering a Culture of Opportunity, Giving and Volunteerism
| | -- | -----------------------------------------------------------



These areas of activity are integrated
across the company and ingrained in our culture and long-term business strategy.



Environment
Protection & Sustainable Growth

At Brookfield, our mission focuses on providing
the highest quality commercial office space while bringing responsible environmental solutions and innovative energy-saving strategies
to our tenant and the communities where we work.



Environmental stewardship is major component
of Brookfield’s strategic business plan that ranks among our key business objectives, along with revenue growth and risk
management. Decisions we make as a company balance both our fiscal and our environmental responsibilities.



Our ultimate objective is to maximize energy
and resource efficiency at our properties, together with the wellness and safety of our tenants, employees, and those that live
in the neighborhoods that house our properties.



We achieve this through an integrated strategy
based on three principles that are embedded in the Brookfield corporate culture. These tenets are the foundation of our commitment
to environmental responsibility.



Principle 1

To develop, operate, retrofit,
redesign and renovate properties to achieve optimum energy efficiency, occupant satisfaction and reduced carbon emissions.



Principle 2

To incorporate innovative environmental
strategies in order to achieve best-in-industry environmental performance in all new office developments.



Principle 3

To seek best-in-class environmental
certifications, actively participate in green industry organizations, and support new initiatives that foster the energy- and resource-efficient
operation of office buildings and environmentally sustainable communities and practices.



In 2012, we made significant strides in
further integrating green-building practices throughout our portfolio and in executing strategies to provide the highest-quality
office space in healthy, sustainable environments with low operating costs.

107







LEED® Certification – U.S.
and Canada

In North America, Leadership in Energy
& Environmental Design (LEED®) is the industry standard for sustainable, green properties. The LEED standard rates the
environmental performance of many facets of real estate, including: 1) Existing buildings’ operations and maintenance (LEED
EB O&M); 2) the Core & Shell of new developments (LEED CS); and 3) the Commercial Interiors of specific tenant spaces (LEED
CI). In total, 37 properties, or 58% of Brookfield’s North American portfolio, meet LEED standards.



In 2012, Brookfield secured 16 new LEED
certifications at the following North American properties:



| | · | Ernst & Young Plaza, Los Angeles, CA: LEED EB:OM Platinum
| | - | ---------------------------------------------------------

| | · | Two Allen Center, Houston, TX: LEED EB:OM Gold
| | - | ----------------------------------------------

| | · | Three Allen Center, Houston, TX: LEED EB:OM Gold
| | - | ------------------------------------------------

| | · | 1201 Louisiana St., Houston, TX: LEED EB:OM Gold
| | - | ------------------------------------------------

| | · | The Grace Building, New York City, NY: LEED EB:OM Silver
| | - | --------------------------------------------------------

| | · | 1625 Eye Street, Washington, DC: LEED EB:OM Gold
| | - | ------------------------------------------------

| | · | 1250 Connecticut Avenue, Washington, DC: LEED EB:OM Gold
| | - | --------------------------------------------------------

| | · | Two Reston Crescent, Washington, DC Area: LEED EB:OM Gold
| | - | ---------------------------------------------------------

| | · | KBR Tower, Houston, TX: LEED EB:OM Gold
| | - | ---------------------------------------

| | · | Brookfield Place, Toronto, ON: LEED EB:OM Gold
| | - | ----------------------------------------------

| | · | First Canadian Place, Toronto, ON: LEED EB:OM Gold
| | - | --------------------------------------------------

| | · | HSBC Building, Toronto, ON: LEED EB:OM Gold
| | - | -------------------------------------------

| | · | Exchange Tower, Toronto, ON: LEED EB:OM Gold
| | - | --------------------------------------------

| | · | Bankers Hall, Calgary, AB: LEED EB:OM Gold
| | - | ------------------------------------------

| | · | Suncor Energy Centre, Calgary, AB: LEED EB:OM Gold
| | - | --------------------------------------------------

| | · | Fifth Avenue Place, Calgary, AB: LEED EB:OM Gold
| | - | ------------------------------------------------



In 2013, the company anticipates achieving
LEED certification at the following North American properties:

| | · | 2000 L Street, Washington, DC
| | - | -----------------------------

| | · | 601& 701 South 12th Street, Arlington, VA
| | - | -----------------------------------------

| | · | Royal Centre, Vancouver, BC
| | - | ---------------------------

| | · | Heritage Plaza, Houston, TX
| | - | ---------------------------



In addition, we have pledged to build all
future developments in our pipeline – more than 17 million square feet globally – to a minimum standard of LEED Gold
or its local equivalent. Our current development project, Bay Adelaide East, will achieve LEED Platinum.



LEED-Accredited Professionals

The company’s commitment to the LEED
program extends beyond our buildings and planned developments to our workforce. Many of our property management professionals have
sought out and secured personal LEED certifications, including LEED AP (Accredited Professional) and LEED GA (Green Associate),
through further study and testing on green building practices. This education ensures that the people designing, developing and
operating our buildings have the knowledge to do so in the most energy-efficient, sustainable manner.



In 2012, the total number of LEED-accredited
professionals at Brookfield increased to 28. Brookfield personnel who achieved LEED accreditation (LEED AP or LEED GA) in 2012
are:



| | · | Crossley Mears, Houston, TX
| | - | ---------------------------

| | · | Chris Foyt, Houston, TX
| | - | -----------------------

| | · | John Landry, Washington, DC
| | - | ---------------------------

| | · | Crystal Urrutia, Washington, DC
| | - | -------------------------------



Green Star and NABERS—Australia

In Australia, Green Star and NABERS (National
Australian Built Environment Rating System) are the two governing programs that certify sustainable building credentials, comparable
to LEED in North America. Green Star evaluates environmental design and the construction of buildings. NABERS measures the energy
performance, water performance and carbon footprint of existing properties over a 12-month operating period.



Brookfield’s Australian properties
continue to perform at or above the industry standard for Green Star and NABERS ratings. New and refurbished buildings aim to achieve
the higher ratings. Brookfield Place Perth, which opened in June 2012, achieved a 5-star Green Star Office design rating, taking
the total of Brookfield-rated buildings to five. 108 St. Georges Terrace is being refurbished to achieve 4.5 stars for NABERS.
Thirteen buildings were rated for NABERS Base Building Energy and four buildings achieved NABERS Indoor Environment Quality (IEQ)
rating.









108







Green Star(1) and NABERS
Ratings



Sydney

|Property               | NABERS
        Energy | NABERS
        Water | NABERS
        IEQ | Green Star –
        Office Design v2 | Green Star –
        Office As Built v2
|---------------------- | --------------------- | -------------------- | ------------------ | ------------------------------------- | ---------------------------------------
|52 Goulburn Street     | 5.5 stars             | 4 stars              |                    | N/A                                   | N/A                                    
|American Express House | 5 stars               | 4.5 stars            | 4.5 stars          | N/A                                   | N/A                                    
|Darling Park I         | 5.5 stars             | 3.5 stars            |                    | N/A                                   | N/A                                    
|Darling Park II        | 5.5 stars             | 3 stars              |                    | N/A                                   | N/A                                    
|E&Y Centre             | 4.5 stars             | 3.5 stars            |                    | N/A                                   | N/A                                    
|IAG House              | 4.5 stars             | 4 stars              |                    | 5 stars                               | 4 stars                                
|KPMG Tower             | 5 stars               | 2.5 stars            |                    | N/A                                   | N/A                                    
|NAB House              | 5 stars               | 4 stars              |                    | N/A                                   | N/A                                    
|One Shelley Street     | N/A                   | 5 stars              | 4 stars            | 6 stars                               | 6 stars                                



Melbourne

|Property            | NABERS
        Energy | NABERS
        Water | NABERS
        IEQ | Green Star –
        Office Design v2 | Green Star –
        Office As Built v2
|------------------- | --------------------- | -------------------- | ------------------ | ------------------------------------- | ---------------------------------------
|Bourke Place        | 3.5 stars             | 2.5 stars            |                    | N/A                                   | N/A                                    
|Southern Cross East | 4.5 stars             | 3 stars              | 4 stars            | N/A                                   | N/A                                    
|Southern Cross West | 4.5 stars             | 4.5 stars            | 4 stars            | 5 stars                               | N/A                                    



Perth

|Property               | NABERS
        Energy | NABERS
        Water | NABERS
        IEQ | Green Star –
        Office Design v2 | Green Star –
        Office As Built v2
|---------------------- | --------------------- | -------------------- | ------------------ | ------------------------------------- | ---------------------------------------
|Brookfield Place       | N/A(2)                | N/A                  |                    | 5 stars                               | N/A                                    
|235 St Georges Terrace | 5 stars               | 3.5 stars            |                    | 5 stars                               | N/A                                    
|108 St Georges Terrace | 0 stars(3)            | 0 stars              |                    | N/A                                   | N/A                                    

| | (1) | All buildings designed prior to introduction of the Green Star rating tool in 2003 are not applicable for this rating
| | --- | ---------------------------------------------------------------------------------------------------------------------

| | (2) | Newly constructed building currently in exemption period (less than two years) for NABERS rating
| | --- | ------------------------------------------------------------------------------------------------

| | (3) | Targeting 4.5 Stars as part of building refurbishment
| | --- | -----------------------------------------------------



Environmental achievements within the
Australia portfolio include:

| | · | Average 4.8 stars NABERS energy rating
| | - | --------------------------------------

| | · | Average 3.7 stars NABERS water rating
| | - | -------------------------------------

| | · | Average 5.2 stars Green Star Design across all sites developed or refurbished from 2006
| | - | ---------------------------------------------------------------------------------------



NABERS Energy – 6-star maximum

·0
stars	 - Very poor

·1
star	 - Poor

·2
stars	 - Below average

·2.5
to 3 stars	 - Average

·4
stars	 - Good

·5
stars	 - Excellent

·6
stars	 - Market leading



NABERS Water – 6-star maximum

·0
stars	 - Very poor

·1
star	 - Poor

·2
stars	 - Below average

·2.5
to 3 stars	 - Average

·4
stars	 - Good

·5
stars		 - Excellent

·6
stars	 - Market leading



Green Star – Office Design v2:
6-star maximum

| | · | 4-Star Green Star Certified Rating (score 45-59) signifies 'Best Practice' in environmentally sustainable
design and/or construction
| | - | ------------------------------------------------------------------------------------------------------------------------------------

| | · | 5-Star Green Star Certified Rating (score 60-74) signifies 'Australian Excellence' in environmentally
sustainable design and/or construction
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| | · | 6-Star Green Star Certified Rating (score 75-100) signifies 'World Leadership' in environmentally
sustainable design and/or construction
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



Green Star – Office As Built v2:
6-star maximum

| | · | 4-Star Green Star Certified Rating (score 45-59) signifies 'Best Practice' in environmentally sustainable
design and/or construction
| | - | ------------------------------------------------------------------------------------------------------------------------------------

| | · | 5-Star Green Star Certified Rating (score 60-74) signifies 'Australian Excellence' in environmentally
sustainable design and/or construction
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| | · | 6-Star Green Star Certified Rating (score 75-100) signifies 'World Leadership' in environmentally
sustainable design and/or construction
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



109







Green Skills Training, Green Star and
NABERS Energy Accredited Professionals (Australia)

Brookfield, in partnership with the University
of New England in Australia, developed a training program designed to provide our staff with essential knowledge and skills in
monitoring energy usage and implementing behavioral and process change to drive efficiency within our properties.



To date the total number of Brookfield
personnel who have completed the Green Skills Training totals 17. The Brookfield personnel who have completed the course are:



| | · | Abdul Gourbandi, Sydney, NSW
| | - | ----------------------------

| | · | Adam New, Perth, WA
| | - | -------------------

| | · | Aidan McGing, Sydney, NSW
| | - | -------------------------

| | · | Alison Robertson, Perth, WA
| | - | ---------------------------

| | · | Andrew Oldfield, Canberra, ACT
| | - | ------------------------------

| | · | Anthony Younis, Sydney, NSW
| | - | ---------------------------

| | · | Colin Smith, North Sydney, NSW
| | - | ------------------------------

| | · | David Morrison, Melbourne, VIC
| | - | ------------------------------

| | · | George Nasr, Sydney, NSW
| | - | ------------------------

| | · | Jamie Loader, Sydney, NSW
| | - | -------------------------

| | · | Marcel Van Den Camp, Brisbane, QLD
| | - | ----------------------------------

| | · | Natt Chamkunthod, Parramatta, NSW
| | - | ---------------------------------

| | · | Norman Gillman, Sydney, NSW
| | - | ---------------------------

| | · | Paul Dorahy, Parramatta NSW
| | - | ---------------------------

| | · | Phillip Naylor, Sydney, NSW
| | - | ---------------------------

| | · | Ross Moore, Sydney, NSW
| | - | -----------------------

| | · | Shannon Kolster, Sydney, NSW
| | - | ----------------------------



In 2012, six professionals at Brookfield
attended NABERS Energy Accreditation training for assessing a building’s performance in accordance with the NABERS ratings
protocols. They are:



| | · | Andrew Oldfield, Canberra ACT
| | - | -----------------------------

| | · | Antonio Marco, Sydney NSW
| | - | -------------------------

| | · | Danny De Sousa, Sydney NSW
| | - | --------------------------

| | · | George Nasr, Sydney NSW
| | - | -----------------------

| | · | Jamie Loader, Sydney NSW
| | - | ------------------------

| | · | Matt Osborne, Brisbane QLD
| | - | --------------------------



Green Star Accredited Professionals (GSAP)
are recognized for their advanced knowledge, experience and competency with the Green Star environmental rating system. Ongoing
training and a number of compliance criteria are required under the Continuing Professional Development (CPD) program.



To date, four professionals at Brookfield
had achieved this accreditation:



| | · | Jamie Loader, Sydney, NSW
| | - | -------------------------

| | · | Marcus Wraight, Sydney, NSW
| | - | ---------------------------

| | · | Mark Clapham, Sydney, NSW
| | - | -------------------------

| | · | Simon Burt, Sydney, NSW
| | - | -----------------------





BREEAM® - United Kingdom

In the UK, the Building Research Establishment
Environmental Assessment Method (BREEAM®) is the governing program to certify sustainable building credentials, comparable
to LEED in North America. In 2010, Brookfield made its initial investment in the United Kingdom with a joint-venture acquisition
of the 100 Bishopsgate development in London’s Financial District. In June 2012, Brookfield acquired a portfolio of four
premier office buildings and two development sites in the City of London.



BREEAM®began in 1990 and currently has 200,000 buildings with BREEAM-certified assessment ratings. Nearly one million are registered for
assessment. The program sets the standard for best practice in sustainable building design, construction and operation. It has
become one of the most comprehensive and widely recognized measures of a building's environmental performance.  It assesses
performance set against established benchmarks to evaluate a building’s specification, design, construction and use. The
measures used represent a broad range of categories and criteria from energy to ecology. They include aspects related to energy
and water use, the internal environment (health and well-being), pollution, transport, materials, waste, ecology and management
processes.







110







Buildings can achieve ratings in five categories
and are awarded stars:



Pass – 1 star

Good – 2 stars

Very Good – 3 stars

Excellent – 4 stars

Outstanding – 5 stars



In 2012, one property and three development
sites have achieved or are targeting BREEAM® Excellent:



Existing

| | · | 99 Bishopsgate – BREEAM® Excellent, 4 stars
| | - | -------------------------------------------



In Development

| | · | 100 Bishopsgate
| | - | ---------------

| | · | Principal Place
| | - | ---------------

| | · | London Wall Place
| | - | -----------------



Energy Efficiency Innovations

Brookfield sets rigorous energy efficiency
standards at our properties around the globe. We continue to lower energy consumption through the research, procurement and implementation
of advanced products and systems, as well as through workplace initiatives. The company is in the industry vanguard of utilizing
innovative and effective tools and metrics to curtail energy use and carbon emissions. Our goal is to meet the dual objectives
of sustainable energy use and lower operating costs, without compromising our tenants’ comfort and business operations. Following
are examples of these initiatives:



Alternative Transportation

Brookfield recognizes that a
commitment to environmental excellence must extend beyond the walls of our office buildings. To that end, we have expanded programs
to offer a variety of transportation options – such as carpooling, public transportation, biking, and electric-vehicle parking
– for our employees and tenants as they travel to and from work. We hope that by working to change traditional car commuting
habits, we will reduce traffic congestion, improve air quality and lower greenhouse gas emissions in the communities in which we
operate.



A recent survey of our properties
across Canada indicated that 90% of our occupants are now using commuting alternatives to single-occupant automobiles on a routine
basis. One of our most successful transportation programs is our Alternative Transportation program, available in Toronto, Calgary
and Vancouver, which offers online carpool zones and ride-matching services for our tenants.



Electric Vehicle Charging
Stations

After the success of our first
electric vehicle charging stations in our Houston parking garages, we continued to expand the program in 2012, installing 18 charging
stations throughout North America this year to reach 35 in total. We plan to install another 10 stations in 2013.



Charging stations are available
at the following properties:

| | · | 200 Liberty St., New York, NY
| | - | -----------------------------

| | · | Victoria Building, Washington, DC
| | - | ---------------------------------

| | · | Bethesda Crescent, Bethesda, MD
| | - | -------------------------------

| | · | Allen Center, Houston, TX
| | - | -------------------------

| | · | Metropolitan Center Parking Facility, Houston, TX
| | - | -------------------------------------------------

| | · | 1600 Smith Street, Houston, TX
| | - | ------------------------------

| | · | 500 Jefferson Street, Houston, TX
| | - | ---------------------------------

| | · | 600 Jefferson Street, Houston, TX
| | - | ---------------------------------

| | · | Bank of America Plaza, Los Angeles, CA
| | - | --------------------------------------

| | · | Figueroa at Wilshire, Los Angeles, CA
| | - | -------------------------------------

| | · | Ernst & Young Plaza, Los Angeles, CA
| | - | ------------------------------------

| | · | FIGat7th, Los Angeles, CA
| | - | -------------------------

| | · | 75 State Street, Boston, MA
| | - | ---------------------------

| | · | Republic Plaza, Denver, CO
| | - | --------------------------

| | · | Brookfield Place, Toronto, ON
| | - | -----------------------------



Charging stations promote the
use of hybrid and fully electric cars, which consume less fuel and reduce dependency on fossil fuels. Tenants who own electric
cars are able to recharge their vehicles during work hours.





111







Retro-Commissioning

Retro-commissioning is a process
undertaken to improve how building equipment and systems function together. In all, retro-commissioning improves a building’s
operations and maintenance procedures to enhance overall building performance through four objectives: 1) produce a building that
meets the unique needs of its owner and occupants, 2) operate as efficiently as possible, 3) provide a safe, comfortable work environment,
and 4) a well-trained staff or service contractor operates and maintains these goals.



In Brookfield’s U.S. portfolio,
24 buildings are eligible for retro-commissioning and 56% have been completed. In Canada, 89% of 13 buildings eligible for this
program have been retro-commissioned. In Australia, the retro-commissioning of 108 St. Georges Terrace is currently underway.



Water

Since 2008, Brookfield’s Canadian portfolio
has reduced its water usage by 15%. Brookfield is currently in discussion with water auditing firms in the U.S. and is planning
to commission a pilot program in New York.



Featured Property: Ernst & Young
Plaza, Los Angeles

Ernst & Young Plaza holds its own in
the downtown Los Angeles skyline at 41 stories and 1.2 million square feet. In 2012, the building achieved LEED EB: O&M Platinum
status and ranks 2nd in the United States and 8th worldwide for the number of LEED points earned. E&Y
Plaza was built in 1985, proving that older buildings can attain the highest levels of sustainable excellence.



Initially, in 2010, the property achieved
Silver Certification and during this exercise many energy conservation measures (ECMs) were identified.



Brookfield Engineering/Operations had already
established a comprehensive 10-year plan to restore the asset. Engineering initially focused on lowering building-wide energy use.
The property team identified short-term and long-term ECMs and prioritized the deployment of efficiency upgrades based on findings
from its first LEED certification. In addition, Brookfield actively engaged the property's tenants to participate in the advanced
level of certification efforts, which proved to be a key factor in achieving LEED Platinum.



Sustainable measures Brookfield undertook to achieve LEED Platinum
at Ernst & Young Plaza include:

-       Lighting Control
& Lighting Retrofits

-       HVAC Chiller
Plant Variable Frequency Drives (VFDs)

-       HVAC Air Distribution
VFD reset features on Outdoor Air, Exhaust, Supply & Return Air

-       Condenser Water
System upgrade

-       Chilled Water
Production Setback

-       HVAC Direct
Digital Control upgrades

-       Utility distribution
Sub-Metering

-       Plumbing Efficiency
upgrades including new and existing fixture retrofits to reduce water consumption, new high efficiency pumping system, HVAC Water

-       Treatment Chemistry
control

-       Cool roof deck
sealant extending life reducing the urban heat island effect

-       Green cleaning
product usage



Featured Property: Brookfield Place
Perth

Opening in September 2012, Brookfield
Place Perth, a new landmark premium-grade development with associated heritage buildings created a vibrant, new commercial district
in the heart of the city. Brookfield Place is Perth’s premier business address with sophisticated restaurants, cocktail lounges
and retail. Brookfield Place Perth was awarded ‘Australian Excellence” with a 5 Green Star – Office Design v2
Certified Rating by the Green Building Council of Australia.

Sustainable features include:

| | - | Water
| | - | -----

| | o | Greywater system (irrigation for landscaping) designed to recycle up to 2,640 gallons (or 10,000 litres) or water daily
| | - | -----------------------------------------------------------------------------------------------------------------------

| | o | Rainwater harvesting directed to the greywater system
| | - | -----------------------------------------------------

| | o | Waterless urinals
| | - | -----------------

| | - | Energy
| | - | ------

| | o | Double-glazed façade
| | - | --------------------

| | o | Zoned lighting with two control panels per floor and motion sensors throughout
| | - | ------------------------------------------------------------------------------

| | o | T4 light fixtures and LED lighting
| | - | ----------------------------------

| | o | Variable speed drives on all mechanical pumps and air handling units
| | - | --------------------------------------------------------------------

| | - | Indoor environment
| | - | ------------------

| | o | Low temperature, low volume variable air volume and distribution with partitioned control with numerous zones per floor
| | - | -----------------------------------------------------------------------------------------------------------------------

| | o | Carbon dioxide monitoring facilities to maximize Indoor Environment Quality in the parking lots and nominated locations within
the tenancy tower
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Facilities for 550 bike spaces, 900 lockers and 55 showers
| | - | ----------------------------------------------------------

The office tower is 100% leased to
blue chip tenants BHP Billiton, PricewaterhouseCoopers and Barrick Gold.

112







Featured Property: First Canadian Place,
Toronto

After three years of construction, First
Canadian Place, one of Toronto’s iconic business landmarks and Canada’s tallest building at 72 stories and 2.8-million
square feet, redefined itself in 2012 through a $100-million renovation and emerged with LEED Gold EB: O&M certification.



First Canadian Place’s revitalization
included:

| | · | Exterior re-cladding from Carrera marble to unique glass spandrel panels, which optimize natural
light
| | - | ------------------------------------------------------------------------------------------------------

| | · | 26% reduction in energy use
| | - | ---------------------------

| | o | 23M kWh of electricity and 30,000 m3 of gas – the amount enough to heat and light
about 800 homes for one year
| | - | --------------------------------------------------------------------------------------------------------------

| | § | One-third of light bulbs were removed from the building
| | - | -------------------------------------------------------

| | o | GHG emissions were reduced by 16,000 metric tons of carbon dioxide – the equivalent to the
use of 180,000 drums of oil or taking 1,400 cars off the road for one year
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | 30% reduction in water use
| | - | --------------------------

| | · | Paper recycling program has saved more than 30,000 trees (11 acres of forest) and 48 million liters
of water
| | - | ------------------------------------------------------------------------------------------------------------

| | · | 2,700 lbs. of electronic waste was recycled or sent to facilities for proper disposal
| | - | -------------------------------------------------------------------------------------

| | · | Refurbished main entrance and office building lobby
| | - | ---------------------------------------------------

| | · | Creation of new marketplace with gourmet food and destination eateries
| | - | ----------------------------------------------------------------------



The property meets all ten prerequisites
of LEED EB: O&M:



| | · | Energy efficiency best management practices: planning, documentation and opportunity assessment
| | - | -----------------------------------------------------------------------------------------------

| | · | Minimum energy efficiency performance
| | - | -------------------------------------

| | · | Refrigerant management: ozone protection
| | - | ----------------------------------------

| | · | Sustainable purchasing policy
| | - | -----------------------------

| | · | Solid waste management policy
| | - | -----------------------------

| | · | Minimum IAQ performance
| | - | -----------------------

| | · | Environmental tobacco smoke (ETS) Control
| | - | -----------------------------------------

| | · | Green cleaning policy
| | - | ---------------------

| | · | Water metering and minimum indoor plumbing fixture and fitting efficiency
| | - | -------------------------------------------------------------------------



In addition to the many LEED-required actions,
First Canadian Place’s former exterior cladding was recycled and repurposed. The property has also implemented other policies
and programs such as enhanced green cleaning procedures and a multifaceted alternative transportation program available to all
occupants.



The Alternative Transportation program
has aided the property in determining that 84% of building occupants use sustainable modes of travel (e.g. bicycling, carpooling,
public transit) when commuting to and from the workplace. Furthermore, the property has verified and registered its carbon emissions
under an accredited voluntary program, and it ranks in approximately the 85th percentile in energy performance among all buildings
in North America based on Energy Star guidelines.



Energy Star

Brookfield utilizes the U.S. Environmental
Protection Agency’s (EPA) Energy Star program to measure and monitor energy performance as well as to ensure continual progress
in limiting emissions of greenhouse gases.



At the end of 2012, 49 of Brookfield’s
U.S. properties are registered in the Energy Star program and 40 have achieved the certification.



Although Energy Star certifications are
currently only given out in the U.S., Brookfield's goal in Canada is to maintain all Energy Star scores above the LEED threshold
of 69 by running routine energy audits and identifying areas for major upgrades. Currently, 89% of our buildings in Canada have
achieved a score above this threshold.



Tenant Energy Reporting Portals

For more than a decade, Brookfield has
continued to expand its tenant sub-metering program throughout its North American properties. Sub-meters isolate tenant-specific
electricity use, enabling them to understand and better control and monitor individual electrical load profiles. Utility data reports
are sent to tenants to assist them in gauging their energy consumption. With this data, we partner with our tenants to review strategies
for lowering usage and realizing tangible cost savings. Brookfield now provides tenants with an Energy Reporting Portal that provides
real-time electricity usage, costs and carbon emissions in a tenant’s space by hour, day, month and by load type (lighting,
HVAC, etc.) with day and night comparisons.



The program is available to all tenants
in Brookfield’s North American portfolio. In Australia, utilities are often purchased by tenants directly and Brookfield
is working with interested groups to develop energy monitoring programs.



Excellence in Property Management: BOMA
360 Program (US)

Operating our buildings in energy-efficient
ways is just one facet of our comprehensive property-management program. Through our participation in the BOMA 360 Program –
a comprehensive review and appraisal of property operations and management in office and industrial buildings – we have further
established Brookfield as an industry leader in property management and the landlord of choice for tenants around the globe.

113







Since its inception in 2009, more than
300 buildings in the U.S. have been BOMA 360 certified – 44 of which are owned and managed by Brookfield. BOMA 360 evaluates
six major criteria: 1) building operations and management; 2) life safety/security/risk management; 3) training and education;
4) energy; 5) environment and sustainability; and 6) tenant relations/community involvement.



With 44 designations, Brookfield is the
industry leader among owners who operate and manage their buildings. To date, no other landlord/manager has reached even 20 BOMA
360 certifications.



In 2012, 11 Brookfield buildings received
BOMA 360 designation for 44 in total or 88% of the eligible North American properties:

| | · | One Allen Center, Houston, TX
| | - | -----------------------------

| | · | Two Allen Center, Houston, TX
| | - | -----------------------------

| | · | Three Allen Center, Houston, TX
| | - | -------------------------------

| | · | Total Plaza, Houston, TX
| | - | ------------------------

| | · | Heritage Plaza, Houston, TX
| | - | ---------------------------

| | · | 1600 Smith Street, Houston, TX
| | - | ------------------------------

| | · | 500 Jefferson Street, Houston, TX
| | - | ---------------------------------

| | · | KBR Tower, Houston, TX
| | - | ----------------------

| | · | 601 Jefferson Street, Houston, TX
| | - | ---------------------------------

| | · | Bank of America, Los Angeles, CA
| | - | --------------------------------

| | · | Ernst & Young Plaza, Los Angeles, CA
| | - | ------------------------------------



In March 2012, 1625 Eye Street in Washington,
DC, earned BOMA’s highest honor: the Grand Outstanding Building of the Year (TOBY) award for commercial real estate buildings
worldwide between 250,000 square feet and 499,999 square feet. The award signifies the highest mark of excellence for office building
management and is the most all-inclusive program in the commercial real estate industry.



Stakeholder Communications

Brookfield recognizes the importance of
communicating our various corporate responsibility initiatives to tenants, investors, employees, government officials and other
valued stakeholders. We include updates on our practices and programs on our corporate website (www.brookfieldofficeproperties.com),
in our annual report, in presentations to investors, in correspondence with tenants, in press releases, and in marketing and other
promotional materials. In 2012, Brookfield received NAREIT’s Investor CARE Gold Award for the industry’s best web site.
This annual award honors excellence in communications and reporting to shareholders.



Our corporate website features a robust
sustainability section that is updated regularly with environmental achievements and certifications. The sustainability section
of the website can be accessed by clicking on "Our Green Portfolio" on the homepage.



Each time Brookfield achieves an environmental
milestone, the news is communicated both externally and internally through the company intranet. This continued discourse reiterates
our strong commitment to sustainability excellence and building upon our previous successes.



Brookfield's primary marketing brochure
includes a dedicated section highlighting our commitment to sustainability and recent achievements in this area. This allows tenants,
investors and other stakeholders to view the sustainable practices we have incorporated into our office buildings. In addition,
we have built interactive marketing suites in all of our major operating cities, with a robust, engaging sustainability chapter
as part of the standard presentation to prospective tenants.



Likewise, we apprise tenants on the environmental
profile of their respective properties and host onsite events to celebrate milestones, such as LEED certifications, and further
educate them on green practices within the workplace.



NAREIT’s Leader in the LightProgram

Brookfield Office Properties was awarded NAREIT’s Leader
in the Light award for 2012 in the “Large Cap – Office” category.  Each year, this program honors NAREIT-member
companies which have demonstrated superior and sustained portfolio-wide energy use practices and sustainability initiatives. As
NAREIT states it, this is the “highest achievement for large-cap office REITs and real estate companies.”



In addition to a submitted written component, the “Leader
in the Light” award utilizes emissions and energy use data voluntarily disclosed by real estate companies to the GRESB (Global
Real Estate Sustainability Benchmark) survey.  Among other things, this survey measures a real estate portfolio’s energy
and water use, greenhouse gas emissions, recycling and waste management practices, and overall sustainability policies.



Global Real Estate Sustainability Benchmark
(GRESB)

Globally, Brookfield ranks 40 out of the 451 member companies
and 2out of 24 for its peer companies among all respondents to the GRESB survey.



Since 2009, Brookfield has reduced its portfolio-wide greenhouse
gas emissions by 10%—the equivalent to saving 1.4 million trees, 575 million gallons of water and two million gallons of
gasoline.







114







Additional Recognition

In 2012, Brookfield was once again included
in the FTSE4Good Index, which provides investors around the world the assurance that they are supporting companies with a strong
focus on environmental, social and governance (ESG) practices.



Brookfield also received the 2013 Sustainability
Leadership Pioneer Award from the Green Parking Council, a national organization that offers sustainability certification to parking
facilities.



We were named to the list of “Top
50 Most Socially Responsible Corporations in Canada” by Jantzi-Maclean’s for the fourth straight year.



All of our properties in Canada have received
the BOMA BEST Environmental Certification.



In two U.S. regions – Los Angeles,
CA, and Washington, DC – Brookfield was recognized by local business journals as among their cities “Best Places to
Work.”



Finally, Brookfield completed the BOMA
7-Point Challenge, a five-year program that aims to 1) reduce energy consumption by 30 percent by 2012, 2) benchmark energy performance
once a year, 3) educate building operations staff in energy performance and water usage, 4) perform energy audits and retro-commissioning,
5) improve building systems, 6) positively impact its communities and 7) position participants to be leaders and solution providers
to owners and tenants in the industry seeking environmental and operational excellence.



Community
Engagement and Brookfield’s Arts & Events Program

Brookfield's Corporate Responsibility strategy
goes beyond the development, ownership and operation of sustainable commercial real estate. We also take measures to enhance the
communities in which our buildings are located by developing and activating innovative architecture and creating inviting, grand
public spaces. Within those spaces Brookfield commissions public arts programs and events, enhancing experiences for both office
workers and visitors alike.



Arts Brookfield

Beyond our role as a commercial real estate
developer and manager, Brookfield Office Properties animates the public spaces at flagship properties in major cities across North
America and Australia with acclaimed free visual and performing arts. More than 400 world-class events including concerts, exhibitions,
theater, and installations are presented year-round and free to the public.



Artists are given the opportunity to work
in new and unexpected spaces to provide unique cultural and educational experiences for the public. Our award-winning arts &
events program, Arts Brookfield, has existed for nearly 25 years and attracts approximately 500,000 visitors per year in Toronto,
New York, Calgary, Los Angeles, Houston, Denver, and Perth. More information can be found at ArtsBrookfield.com.



In its 25-year history, Arts Brookfield
at Brookfield Place New York has presented world, U.S. and New York premieres, commissioned unique works and launched art and programs
that have gone on to other major New York City cultural venues. Exhibitions and installations from a diverse range of museums and
festivals have celebrated the arts of individual cities, countries, and cultures.



Annual events, including the Tribeca Film
Festival Drive-In, Canstruction®, and the Winter Garden Holiday Lighting draw thousands of visitors. Other signature events
include Brookfield’s Lowdown Hudson Blues Festival at the Brookfield Place waterfront, which featured Buddy Guy and Neko
Case in 2012, and the Silent Film/Live Music series, which featured a retrospective of acclaimed filmmaker Bill Morrison’s
work.



Other highlights from 2012 include The
Apollo Project as part of the New York Guitar Festival; a site-specific installation by internationally acclaimed artist Adrián
Villar Rojas; the EcstaticTM Summer concert series featuring Roomful of Teeth with Merrill Garbus, A Far Cry Orchestra with
Oneohtrix Point Never and Escort; and WNYC Public Radio’s Soundcheck Live! series with Antibalas, the Vijay Iyer Trio,
and the Brooklyn Philharmonic.



Brookfield’s Midtown Manhattan arts
programming at The Grace Building Plaza featured a salute to one of America’s greatest composers, George Gershwin, by the
renowned pianist Simon Mulligan, and the second year of Grace-ful Ice with live ice carving by Okamoto Studio, creating an Arctic
seascape of polar bears, penguins and a sea serpent.



Other notable 2012 events from around North America included
the internationally acclaimed performance artist Andre Philippe Gagnon – “The Man of 1000 Voices” – who
brought his Las Vegas show to Toronto where he was the featured entertainment at the re-launch of First Canadian Place; and Invisible
Streams,a neon light sculptural installation by artist Alfred Engerer as part of Nuit Blanche All Night Arts Festival. More
than 300,000 people visited the site throughout the night.



In Los Angeles, 2012 highlights featured Dualities, an
exhibition throughout Bank of America Plaza featuring the works of five artists presented concurrently, one project added per month
from May to October; Tap on the Plaza featured young tap dancers from the Debbie Allen Dance Academy’s LA Tap Festival
dancers, Colburn School of Performing Arts and Tap Con Sabor performing at Bank of America Plaza and Figueroa at Wilshire. The
Asphalt Orchestra marching band made its West Coast debut at FIGat7th retail center, Figueroa at Wilshire and Bank of America Plaza.





115







In Australia, arts and cultural events were supported with a
large focus on the launch of Brookfield Place Perth.  Free events and exhibitions for the public included Fashionably Loud
– an extravaganza featuring the musical styles of Perth Indie-Pop outfit San Cisco and West Australia’s leading fashion
designers, Awesome Kids Arts Festival for Bright Young Things, which showcased exciting contemporary arts from all over the world;
Six Seasons Indigenous Art Exhibition, which featured hand crafted artworks and didgeridoo performances from some of Western
Australia’s most regarded indigenous artists.



Two exhibitions that captured the hearts of the people of Perth
were the digital lighting exhibitions at Brookfield Place. A moving digital light exhibition transformed the heritage precinct
for 10 days during the launch celebrations of Brookfield Place. Also, static Christmas-themed digital light projections were showcased
at the front of the heritage buildings in December to celebrate the festive season. One building was lit up to look like a gingerbread
house. Another was lit up as a large colorfully wrapped Christmas present.



Through its arts and cultural programming,
as well as carefully selected pop culture and consumer-focused offerings, Arts Brookfield continues to provide lively and vibrant
free events in many of our core commercial markets, and we will continue to expand those programs.



Fostering
a Culture of Giving and Volunteerism

Brookfield instills a culture of philanthropy
and volunteerism among its workforce. In addition to our corporate giving programs supporting local organizations, the company
matches employee donations.



Brookfield employees are active volunteers
in their communities. We encourage and support this personal involvement by providing philanthropic outlets for our workforce,
both within and outside of the office. We have long-standing partnerships with organizations such as the Special Olympics, Habitat
for Humanity, and the Taronga Zoo (Australia). Brookfield's Canadian division alone has raised more than C$3 million for the United
Way in the last decade between employee donations and company matching funds. In the United Kingdom, Brookfield has raised over
£230,000 for the Sparks Charity, an organization that supports medical research for children.



Charitable Giving

We support impactful charitable organizations
in the communities in which we operate, especially those groups that are focused in the areas of education (including programs
that focus on the real estate sector), environmental protection, local healthcare, and arts and culture. The company proactively
seeks new organizations to partner with and provide financial and hands-on support.



Hurricane Sandy

Following Hurricane Sandy, Brookfield reported
minimal collateral damage to its Lower Manhattan office portfolio and all properties in Lower Manhattan were fully operational
by November 17. However, Sandy left a wake of destruction, leaving hundreds of thousands without homes and displacing businesses
throughout the Tri-State area.



Brookfield aided the Sandy Relief efforts
by:

| | · | Providing free office space in 250 Vesey Street to small businesses and nonprofits displaced by
Sandy
| | - | -----------------------------------------------------------------------------------------------------

| | · | Coordinating two volunteer days through the Stephen Siller Tunnel to Towers Foundation to facilitate
the relief efforts on Staten Island, attended by over 75 Brookfield employees.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | A $100,000 donation to the Mayor’s Fund to Advance New York City’s dedicated Sandy
relief fund.
| | - | -----------------------------------------------------------------------------------------------



Matching Gifts

To make individual employee contributions
more meaningful and to encourage employees to participate, we allocate a portion of our charitable giving budget to a matching
gift program. Qualified donations by our employees to non-profit organizations and educational institutions are eligible for a
dollar-for-dollar match from Brookfield.



An
Ongoing Commitment

We strive to build upon our successes and
identify new opportunities to implement corporate responsibility strategies.



Our goal is to be recognized as a leader
and innovator in the field of energy conservation as we operate and develop the most sustainable commercial properties in the United
States Canada, Australia and the United Kingdom.



We will continue to be active in enhancing
the communities we operate in through our arts program and through philanthropic efforts.



For more information about Brookfield's
sustainability programs and corporate responsibility practices, please visit our website at www.brookfieldofficeproperties.com/corporateresponsibility.

116







Corporate Governance



Brookfield Office Properties’ board
of directors is strongly committed to sound corporate governance practices. The board continuously reviews its policies and benchmarks
them against evolving governance legislation and the views of acknowledged leaders in the area. During 2012, the company continued
to further its commitment to prudent corporate governance, ensuring that investors’ interests are represented by a majority
of independent directors on the board.



Brookfield Office Properties has several
shareholder-friendly corporate governance policies:



| | · | The board has a majority of independent directors
| | - | -------------------------------------------------

| | · | The full board is elected annually; shareholders have cumulative voting rights in director elections
and the company has adopted a majority voting policy
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | The company has adopted a policy of giving shareholders the opportunity to cast an advisory vote
on the company’s approach to executive compensation
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | · | The company does not have a poison pill in place
| | - | ------------------------------------------------

| | · | The positions of CEO and Chairman are separated and a lead independent director is designated
| | - | ---------------------------------------------------------------------------------------------

| | · | The company has publicly disclosed board guidelines and the performance of the board is reviewed
annually
| | - | ---------------------------------------------------------------------------------------------------------

| | · | Independent directors routinely meet without the CEO or management present
| | - | --------------------------------------------------------------------------

| | · | The audit committee and the governance and nominating committee are composed solely of independent
directors
| | - | ------------------------------------------------------------------------------------------------------------

| | · | The company has a whistleblower hotline operated by an independent third party
| | - | ------------------------------------------------------------------------------



The charters for the board of directors
and each of the standing committees are in compliance with New York Stock Exchange rules on corporate governance, the provisions
of the Sarbanes-Oxley Act of 2002, and Canadian securities laws. The board believes that it has an appropriate mix of directors
on its committees to oversee the business plan and management’s performance effectively.



The board strives to keep informed on governance
developments as the regulatory and business climates continue to evolve, and to adopt measures as appropriate to ensure that the
company’s commitment to sound corporate governance remains intact.



Committee Membership



|Audit Committee                                                                                        | Governance & Nominating Committee                                          | Human Resources & Compensation Committee                                    
|------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------- | ----------------------------------------------------------------------------
|Christie J.B. Clark, Chair
        Michael Hegarty
        F. Allan McDonald
        Robert L. Stelzl* | Robert L. Stelzl, Chair*
        William T. Cahill
        Michael Hegarty | Richard B. Clark, Chair
        F. Allan McDonald
        Paul J. Massey Jr.

* Lead independent director



To learn more about Brookfield Office Properties’
corporate governance practices, please visit www.brookfieldofficeproperties.com and navigate to the Corporate Governance section.
In that section you will find – in addition to charters for each of the aforementioned committees – the company’s
bylaws, corporate governance guidelines, and policies on disclosure and business conduct and ethics.

117







|Board of Directors
|------------------
|                  
|                  
|                  

118







|Board
        of Directors
|--------------------------
|                          
|                          
|                          

119







Officers



|Corporate
        
        Dennis H. Friedrich
        Chief Executive Officer
        
        
        Bryan K. Davis
        Chief Financial Officer
        
        
        
        Melissa J. Coley
        Vice President
        Investor Relations
        & Communications
        
        
        
        Property Operations
        
        United States
        
        Mitchell E. Rudin
        President & Chief Executive Officer
        
        
        Paul L. Schulman
        Chief Operating Officer
        
        
        United Kingdom
        
        Martin C. Jepson
        President &
        Chief Operating Officer | Thomas F. Farley
        President & Global Chief Operating
        Officer
        
        
        Brett
        M. Fox
        General
        Counsel
        
        
        Dana E. Petitto
        Vice President
        
        
        
        
        
        
        Canada
        
        T. Jan Sucharda
        President & Chief Executive Officer | G. Mark Brown
        Global Chief Investment
        Officer
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Australia
        
        Kurt A. Wilkinson
        President &
        Chief Operating Officer
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



120















Brookfield Office
Properties	Corporate Information

Head Offices							Transfer
Agent

United States	Canada	Australia		United
Kingdom	CIBC Mellon Trust Company

Brookfield Place	Brookfield
Place	135 King Street		23 Hanover Square	P.O. Box 700

250 Vesey Street	181
Bay Street	Sydney, NSW 2000		London W1S 1JB	Station B

New York, NY 10281	Toronto,
Ontario M5J 2T3				England	Montreal, Quebec H3B 3K3

T	+1 212.417.7000	T	416.369.2300	T
+61 2 9322 2000		T +44 (0)20 7659 3500	T	416.682.3860 or 1.800.387.0825

F	+1 212.417.7214	F	416.369.2301	F
+61 2 9322 2001		F +44 (0)20 7659 3501	F	1.888.249.6189

inquiries@canstockta.com

www.canstockta.com

Stock Exchange Listings

Stock
Symbol	Exchange		Record Date		Payment Date



Common Shares		BPO		NYSE,
TSX	First day of March,		Last business day of

June,
September		March, June, September

and
December		and December

Class A Preferred
Shares

Series A		Not
listed		–		First day of March,		15th day of March

Series B		Not
listed		–		and September		and September

Class AA Preferred
Shares

Series E		Not
listed		–		15th day of March,		Last business day of

June,
September		March, June, September

and
December		and December

Class AAA Preferred
Shares

Series G		BPO.PR.U		TSX		15th
day of March,		Last business day of

Series H		BPO.PR.H		TSX		June,
September		March, June, September

Series J		BPO.PR.J		TSX		and
December		and December

Series K		BPO.PR.K		TSX

Series L		BPO.PR.L		TSX

Series N		BPO.PR.N		TSX

Series P		BPO.PR.P		TSX

Series R		BPO.PR.R		TSX

Series T		BPO.PR.T		TSX

Shareholder Information

brookfieldofficeproperties.com



Brookfield
Office Properties welcomes inquiries from shareholders, analysts, media representatives and other interested parties. Questions
relating to investor relations or media inquiries can be directed to Melissa Coley, Vice President, Investor Relations at 212.417.7215
or via e-mail at melissa.coley@brookfield.com.



Shareholder
questions relating to dividends, address changes and share certificates should be directed to the company’s Transfer Agent,
CIBC Mellon Trust, as listed above.





Annual General
Meeting Brookfield Place New York



The
Annual General Meeting of shareholders will be held in New York, NY at Brookfield Place, 250 Vesey Street, conference center at
11:00am on April 25, 2013. Shareholders may also participate in the meeting by webcast through Brookfield Office Properties’
website at brookfieldofficeproperties.com.