Management’s Discussion and Analysis of Financial Results

March 4, 2014



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, 2013, includes material information up to March
4, 2014. 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 70 of this report. In Part II – Financial
Statement Analysis of this MD&A, beginning on page 22, we review our operating performance and financial position as presented
in our financial statements prepared in accordance with IFRS followed by a discussion of non-IFRS measures and corresponding reconciliations
to comparable IFRS measures.



Additional information, including our Annual
Information Form, is available on our website 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 own,
develop and manage premier office properties in the United States, Canada, Australia and the United Kingdom. The portfolio consists
of 114 properties totaling 85 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.



FINANCIAL HIGHLIGHTS

Brookfield Office Properties’ financial
results are as follows:





|(Millions, except per share information)                                                      |  | 2013 |               |  | 2012 |   |               | 2011 | 
|--------------------------------------------------------------------------------------------- |  | ---- | ------------- |  | ---- | - | ------------- | ---- | 
|Results of operations                                                                         |  |      |               |  |      |   |               |      | 
|Commercial property revenue                                                                   |  | $    | 2,304         |  |      | $ | 2,195         |      | 
|Net income from continuing operations attributable to shareholders                            |  |      | 1,091         |  |      |   | 1,275         |      | 
|Net income attributable to shareholders                                                       |  |      | 1,091         |  |      |   | 1,287         |      | 
|Net income from continuing operations per share attributable to common shareholders – basic   |  |      | 2.00          |  |      |   | 2.39          |      | 
|Net income from continuing operations per share attributable to common shareholders – diluted |  |      | 1.89          |  |      |   | 2.23          |      | 
|Net income per share attributable to common shareholders – basic                              |  |      | 2.00          |  |      |   | 2.42          |      | 
|Net income per share attributable to common shareholders – diluted                            |  |      | 1.89          |  |      |   | 2.25          |      | 
|Common share dividends paid per share                                                         |  |      | 0.56          |  |      |   | 0.56          |      | 
|                                                                                              |  |      | Dec. 31, 2013 |  |      |   | Dec. 31, 2012 |      | 
|Balance sheet                                                                                 |  |      |               |  |      |   |               |      | 
|Total assets                                                                                  |  | $    | 30,891        |  |      | $ | 27,479        |      | 
|Commercial properties(1)                                                                      |  |      | 25,152        |  |      |   | 22,579        |      | 
|Commercial property debt(1)                                                                   |  |      | 13,785        |  |      |   | 11,512        |      | 
|Total non-current financial liabilities                                                       |  |      | 12,739        |  |      |   | 10,853        |      | 
|Total shareholders’ equity                                                                    |  |      | 12,333        |  |      |   | 11,431        |      | 
|Common equity per share – diluted                                                             |  |      | 19.49         |  |      |   | 17.87         |      | 













| | (1) | Includes commercial properties held for sale and associated commercial property debt
| | --- | ------------------------------------------------------------------------------------



10







COMMERCIAL PROPERTY OPERATIONS

Our commercial property portfolio consists
of interests in 114 properties totaling 85 million square feet, including 15 million square feet of parking and other. Our development
portfolio comprises interests in 20 sites totaling 18 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 investment properties through proactive leasing and select redevelopment initiatives;                                
|- | ----------------------------------------------------------------------------------------------------------------------------------------------
|• | Prudent capital management, including the refinancing of mature investment 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 or, in the case of joint operations, by recording our share of the assets and liabilities. 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 Olympia & York Properties Corporation and O&Y Real Estate Investment Trust (“REIT”).
In 2006 we formed our U.S. Office Fund to consummate the acquisition of Trizec Properties, Inc. and Trizec Canada Inc. In 2009
we co-sponsored with our ultimate 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. In 2013, a newly created fund, Brookfield DTLA Holdings LLC (“DTLA”),
that we control closed on the acquisition of MPG Office Trust, Inc. (“MPG”). As a result we now hold a 47.3% interest
in seven class A office properties in downtown Los Angeles, as well as the FIGat7th retail center and a strategically located development
site. Our participation in these funds is focused only on investments in the office sector. Of our 114 commercial office properties,
40 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.



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, CIBC World Markets, Suncor Energy Inc.,
Morgan Stanley, Bank of Montreal and Bank of America/Merrill Lynch. A detailed list of major tenants is included in Part III –
Risks and Uncertainties of this MD&A, beginning on page 53.



Our strategy is to sign long term leases
in order to mitigate risk and reduce our overall re-tenanting 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 seven percent of our leases, on average,
mature annually up to 2018.

11







Our average remaining lease term is eight years. The following
is a breakdown of lease maturities by region with associated expiring net rents as of December 31, 2013:





|                                  | Current     | 2014        | 2015         | 2016        | 2017        
|--------------------------------- | ----------- | ----------- | ------------ | ----------- | ------------
|(Square Feet in Thousands)        | Square Feet | Square Feet | Net
    Rent | Square Feet | Net
    Rent
|Consolidated Properties           |             |             |              |             |             
|U.S. Properties                   |             |             |              |             |             
|Midtown New York                  | —           | —           | $—           | —           | $—          
|Downtown New York                 | 2,714       | 406         | 32           | 836         | 22          
|Washington, D.C.                  | 614         | 762         | 27           | 367         | 30          
|Los Angeles                       | 1,358       | 548         | 25           | 293         | 24          
|Houston                           | 546         | 247         | 19           | 657         | 19          
|Boston                            | 182         | 13          | 37           | 9           | 33          
|Denver                            | 604         | 153         | 17           | 107         | 21          
|Seattle                           | 75          | 17          | 23           | 85          | 19          
|San Francisco                     | 48          | 10          | 23           | 13          | 11          
|                                  | 6,141       | 2,156       | $26          | 2,367       | $22         
|Canadian Properties               |             |             |              |             |             
|Toronto                           | 506         | 272         | $26          | 501         | $30         
|Calgary                           | 24          | 49          | 37           | 215         | 29          
|Ottawa                            | 64          | 1,099       | 22           | 543         | 12          
|Vancouver
    and other           | 71          | 8           | 27           | 35          | 26          
|                                  | 665         | 1,428       | $24          | 1,294       | $22         
|Australian Properties             |             |             |              |             |             
|Sydney                            | 9           | 41          | $92          | 41          | $121        
|Melbourne                         | —           | 9           | 104          | 4           | 102         
|Perth                             | 7           | 263         | 59           | 9           | 73          
|                                  | 16          | 313         | $65          | 54          | $112        
|U.K. Properties                   |             |             |              |             |             
|London                            | 68          | 133         | $109         | 6           | $23         
|                                  | 68          | 133         | $109         | 6           | $23         
|Total
    Consolidated Properties | 6,890       | 4,030       | $31          | 3,721       | $23         









|                                  | 2018        | 2019         | 2020        | Beyond       | Total      
|--------------------------------- | ----------- | ------------ | ----------- | ------------ | -----------
|(Square
    Feet in Thousands)    | Square Feet | Net
    Rent | Square Feet | Net
    Rent | Square Feet
|Consolidated Properties           |             |              |             |              |            
|U.S. Properties                   |             |              |             |              |            
|Midtown New York                  | —           | $—           | —           | $—           | —          
|Downtown New York                 | 78          | 26           | 7           | 36           | 621        
|Washington, D.C.                  | 1,551       | 36           | 322         | 36           | 560        
|Los Angeles                       | 998         | 25           | 587         | 31           | 326        
|Houston                           | 803         | 21           | 445         | 23           | 1,656      
|Boston                            | 254         | 23           | 24          | 32           | 15         
|Denver                            | 100         | 23           | 513         | 22           | 58         
|Seattle                           | 93          | 24           | 68          | 25           | 26         
|San Francisco                     | 95          | 23           | 4           | 18           | 17         
|                                  | 3,972       | $28          | 1,970       | $27          | 3,279      
|Canadian Properties               |             |              |             |              |            
|Toronto                           | 504         | $28          | 653         | $26          | 971        
|Calgary                           | 227         | 35           | 100         | 41           | 242        
|Ottawa                            | 3           | 19           | —           | —            | 9          
|Other                             | 27          | 35           | 36          | 25           | 49         
|                                  | 761         | $31          | 789         | $28          | 1,271      
|Australian Properties             |             |              |             |              |            
|Sydney                            | 166         | $64          | 17          | $54          | 23         
|Melbourne                         | 3           | 102          | 499         | 40           | 2          
|Perth                             | 14          | 77           | 217         | 60           | 1          
|                                  | 183         | $66          | 733         | $46          | 26         
|U.K. Properties                   |             |              |             |              |            
|London                            | —           | $—           | 93          | $73          | 17         
|                                  | —           | $—           | 93          | $73          | 17         
|Total
    Consolidated Properties | 4,916       | $30          | 3,585       | $32          | 4,593      



12









|                                       | Current     | 2014        | 2015         | 2016        | 2017        
|-------------------------------------- | ----------- | ----------- | ------------ | ----------- | ------------
|(Square
    Feet in Thousands)         | Square Feet | Square Feet | Net
    Rent | Square Feet | Net
    Rent
|Equity Accounted
    Investments       |             |             |              |             |             
|U.S. Properties                        |             |             |              |             |             
|Midtown New York                       | 659         | 58          | $47          | 370         | $27         
|Los Angeles                            | 25          | 20          | 27           | 26          | 29          
|                                       | 684         | 78          | $42          | 396         | $27         
|Australian Properties                  |             |             |              |             |             
|Sydney                                 | 114         | 79          | $61          | 538         | $51         
|Melbourne                              | 13          | 86          | 40           | 148         | 41          
|                                       | 127         | 165         | $50          | 686         | $49         
|Total
    Equity Accounted Investments | 811         | 243         | $47          | 1,082       | $41         





|                                       | 2018        | 2019         | 2020        | Beyond       | Total      
|-------------------------------------- | ----------- | ------------ | ----------- | ------------ | -----------
|(Square
    Feet in Thousands)         | Square Feet | Net
    Rent | Square Feet | Net
    Rent | Square Feet
|Equity Accounted
    Investments       |             |              |             |              |            
|U.S. Properties                        |             |              |             |              |            
|Midtown New York                       | 271         | $29          | 834         | $41          | 130        
|Los Angeles                            | 28          | 28           | 3           | 30           | 23         
|                                       | 299         | $29          | 837         | $41          | 153        
|Australian Properties                  |             |              |             |              |            
|Sydney                                 | 522         | $62          | 60          | $107         | 477        
|Melbourne                              | 34          | 44           | 14          | 54           | 72         
|                                       | 556         | $61          | 74          | $97          | 549        
|Total
    Equity Accounted Investments | 855         | $50          | 911         | $46          | 702        





|                               | Current     | 2014        | 2015         | 2016        | 2017        
|------------------------------ | ----------- | ----------- | ------------ | ----------- | ------------
|(Square
    Feet in Thousands) | Square Feet | Square Feet | Net
    Rent | Square Feet | Net
    Rent
|Total                          | 7,701       | 4,273       | $32          | 4,803       | $28         
|Total Percent Expiring         | 10.9%       | 6.1%        |              | 6.8%        |             
|Beginning of Year              | 18.4%       | 5.5%        |              | 7.7%        |             
|Difference                     | -7.5%       | 0.6%        |              | -0.9%       |             



|                               | 2018        | 2019         | 2020        | Beyond       | Total      
|------------------------------ | ----------- | ------------ | ----------- | ------------ | -----------
|(Square
    Feet in Thousands) | Square Feet | Net
    Rent | Square Feet | Net
    Rent | Square Feet
|Total                          | 5,771       | $33          | 4,496       | $35          | 5,295      
|Total Percent Expiring         | 8.2%        |              | 6.4%        |              | 7.5%       
|Beginning of Year              | 6.2%        |              | 5.8%        |              | 7.7%       
|Difference                     | 2.0%        |              | 0.6%        |              | -0.2%      



Our Canadian Office Fund, which consists
of 9 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 arrangements 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 account for our
interest in this fund by recognizing our share of the assets, liabilities and results of operations of the properties.



Our U.S. Office Fund, which consists of
30 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 which is reflected as a consolidated
subsidiary in our consolidated financial statements.



DTLA,
which consists of 7 properties in Los Angeles, and a 0.8 million square foot development site, 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. We have a 47.3% interest in DTLA
which is reflected as a consolidated subsidiary in our consolidated financial statements.



13







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 or joint control over the property
subsidiaries and are consolidated or equity accounted as joint ventures, accordingly. 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 Prime, an entity that holds direct ownership interest in 5 properties
in the Australian portfolio, and we have recognized the non-controlling interests in the net assets of Prime in equity.



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 London. The operating property located at 99 Bishopsgate and
a group of smaller assets closed on September 28, 2012. The remaining assets, including a 50% interest in 125 Old Broad Street,
Leadenhall Court and Principal Place, closed in June 2013. In the third quarter of 2013, we disposed of 50% of the residential
portion of Principal Place and in the fourth quarter of 2013, we acquired the remaining 50% interest in 125 Old Broad Street.



On
October 15, 2013, we, through DTLA, completed the acquisition of MPG, an owner and operator of office properties in Los Angeles.
DTLA is a fund established to invest in downtown Los Angeles office properties that is controlled by us through our 47.3% equity
interest and the powers we have as manager of the fund. The remaining equity in the fund of 52.7% is held by institutional partners.
Together with the institutional investors, we contributed cash and the Los Angeles assets previously held by our U.S. Office Fund
to DTLA. DTLA now indirectly owns both the company’s existing downtown Los Angeles office assets, with the exception of Marina
Towers, and all of the assets of MPG.



On
February 12, 2014, Brookfield Property Partners, L.P. (“BPY”) announced the commencement of its exchange offer to acquire
any or all of the common shares of Brookfield Office Properties that it does not currently own. Under the terms of the offer, each
Brookfield Office Properties’ common shareholder can elect to receive 1.0 BPY limited partnership unit (67% of offer) or
$20.34 in cash (33% of offer) per Brookfield Office Properties share. The board of directors of Brookfield Office Properties (excluding
interested directors) has unanimously recommended that Brookfield Office Properties’ shareholders accept the offer.



14







COMMERCIAL DEVELOPMENT

We hold interests in 18 million square
feet of high-quality, centrally-located development sites. With the exception of Manhattan West in New York, Bay Adelaide East
in Toronto, Brookfield Place East Tower in Calgary and Brookfield Place Tower 2 in Perth, 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, 2013:



|                                   |                  |                                                                                                    |           |            |                  |              | Proportionate
|---------------------------------- | ---------------- | -------------------------------------------------------------------------------------------------- | --------- | ---------- | ---------------- | ------------ | -------------
|                                   |                  |                                                                                                    |           |            |                  |              | net of Non-  
|(Square Feet
    in 
Thousands)    |                  |                                                                                                    | Number    |            | Assets Under     |              | Controlling  
|Region                             | Location         | of Sites                                                                                           | Ownership | Management | Proportionate(1) | Interests(2)
|Active Developments                |                  |                                                                                                    |           |            |                  |             
|U.S. Developments                  |                  |                                                                                                    |           |            |                  |             
|Manhattan West                     | Midtown, NY      | Between 31st and 33rd Street across from Moynihan
    train station                                | 1         | 100%       | 5,000            | 5,000        | 5,000        
|Canadian Developments              |                  |                                                                                                    |           |            |                  |             
|Bay Adelaide East                  | Toronto          | Bay and Adelaide Streets                                                                           | 1         | 83%        | 980              | 980          | 816          
|Brookfield Place East Tower        | Calgary          | Within one block of Fifth Avenue Place,
    Bankers Hall and Suncor Energy Centre                  | 1         | 100%       | 1,400            | 1,400        | 1,400        
|Australian Developments            |                  |                                                                                                    |           |            |                  |             
|Brookfield Place Tower 2           | Perth            | 16-story tower block adjacent to Brookfield Place                                                  | 1         | 100%       | 366              | 366          | 366          
|Total
    Active Developments      |                  | 4                                                                                                  |           | 7,746      | 7,746            | 7,582       
|Developments in Planning           |                  |                                                                                                    |           |            |                  |             
|U.S. Developments                  |                  |                                                                                                    |           |            |                  |             
|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, D.C. | 36-acre landscaped campus adjacent to Reston,
    Virginia                                         | 1         | 84%        | 724              | 610          | 610          
|755 Figueroa(4)                    | Los Angeles      | Located adjacent to 777 Tower and Ernst & Young Tower                                              | 1         | 47%        | 792              | 375          | 375          
|1500 Smith Street(3)               | Houston          | Between 1600 and 1400 Smith Street                                                                 | 1         | 84%        | 500              | 422          | 422          
|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          
|Canadian Developments              |                  |                                                                                                    |           |            |                  |             
|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          
|Brookfield Place West Tower        | Calgary          | Within one block of Fifth Avenue Place,
    Bankers Hall and Suncor Energy Centre                  | 1         | 100%       | 1,000            | 1,000        | 1,000        
|300 Queen Street(5)                | Ottawa           | Third phase of Place de Ville project                                                              | 1         | 25%        | 577              | 144          | 144          
|U.K. Developments                  |                  |                                                                                                    |           |            |                  |             
|100 Bishopsgate                    | London           | Located in the central core of the City of London                                                  | 1         | 88%        | 950              | 950          | 831          
|London Wall Place(6,7)             | 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 – Commercial       | London           | Located on the City of London/Shoreditch border                                                    | 1         | 100%       | 625              | 625          | 625          
|Principal Place – Residential(6)   | London           | Located on the City of London/Shoreditch border                                                    | 1         | 50%        | 255              | 128          | 128          
|Total
    Developments in Planning |                  | 16                                                                                                 |           | 10,426     | 8,247            | 8,128       
|Total Commercial
    Developments  |                  | 20                                                                                                 |           | 18,172     | 15,993           | 15,710      

| | (1) | Represents Brookfield Office Properties’ interest before considering non-controlling interest in subsidiaries including,
BFP of 0.6%, BOX of 16.7% and The 100 Bishopsgate Partnership (“100 Bishopsgate”) of 12.5%. U.S. Office Fund and DTLA
assets are presented net of non-controlling interests held by co-investors in the fund
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | (4) | Represents DTLA asset
| | --- | ---------------------

| | (5) | Represents Canadian Office Fund asset
| | --- | -------------------------------------

| | (6) | Represents jointly controlled interest
| | --- | --------------------------------------

| | (7) | Pre-let agreement signed for the entirety of 1 London Wall Place in January 2014. Construction is expected to commence in
the first half of 2014
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------



15







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 49, a reconciliation of net income attributable to shareholders to funds from operations as well as total return
on page 50 and a reconciliation of shareholders’ equity to common equity per share on page 49 of this MD&A.



Net Income Attributable to Common Shareholders

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



KEY PERFORMANCE DRIVERS

In addition to monitoring and analyzing
performance in terms of net income attributable to common shareholders, 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 operating 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.
| | - | ------------------------------------------------------------





16







PART II – FINANCIAL STATEMENT
ANALYSIS



ASSET PROFILE

Our total asset carrying value was $30,891
million at December 31, 2013, an increase of $3,412 million from the balance at December 31, 2012.



The following is a summary of our assets:



|(Millions)                                                    |  |  |  |  | Dec. 31, 2013 | Dec. 31, 2012
|------------------------------------------------------------- |  |  |  |  | ------------- | -------------
|Assets                                                        |  |  |  |  |               |              
|Non-current assets                                            |  |  |  |  |               |              
|Investment properties                                         |  |  |  |  |               |              
|Commercial properties                                         |  |  |  |  | $             | 25,152       
|Commercial developments                                       |  |  |  |  |               | 1,673        
|Equity accounted investments and participating loan interests |  |  |  |  |               |              
|Investments in joint ventures                                 |  |  |  |  |               | 1,902        
|Investments in associates                                     |  |  |  |  |               | 157          
|Participating loan interests                                  |  |  |  |  |               | 550          
|Other non-current financial assets                            |  |  |  |  |               | 220          
|                                                              |  |  |  |  |               | 29,654       
|Current assets                                                |  |  |  |  |               |              
|Receivables and other assets                                  |  |  |  |  |               | 382          
|Restricted cash and deposits                                  |  |  |  |  |               | 142          
|Cash and cash equivalents                                     |  |  |  |  |               | 713          
|                                                              |  |  |  |  |               | 1,237        
|Assets held for sale                                          |  |  |  |  |               | ―            
|Total assets                                                  |  |  |  |  | $             | 30,891       



COMMERCIAL PROPERTIES

Commercial properties comprise our direct
and indirect interests in wholly owned commercial properties, as well as our share of commercial properties held through joint
operations.



The fair value of our commercial properties
was $25,152 million at December 31, 2013, an increase of $2,710 million from the balance at December 31, 2012. The increase is
primarily attributable to the acquisitions of One North End Avenue in Downtown New York; the Victor Building in Washington, D.C.;
Wells Fargo Center – North & South Towers, The Gas Company Tower and 777 Tower in Los Angeles; 685 Market Street in San
Francisco as well as Leadenhall Court and 125 Old Broad Street in London. In addition to the acquisitions, the recognition of valuation
gains and capital expenditures contributed to the increase, which was offset by a weakening Canadian and Australian dollar relative
to the U.S. dollar and the dispositions of 2000 L Street in Washington, D.C., Landmark Square in Los Angeles and 500 Jefferson
Street in Houston. The consolidated fair value of our commercial properties in the United States, Canada, Australia and the United
Kingdom at December 31, 2013, is approximately $389 per square foot.



A breakdown of our consolidated commercial
properties is as follows:



|                                       |  | Dec.
    31, 2013 |        |                   | Dec.
    31, 2012
|-------------------------------------- |  | ----------------- | ------ | ----------------- | -----------------
|(Millions, except per
    square feet) |  |                   | Value  | 000’s Sq.
    Ft. |                  
|United States                          |  | $                 | 16,351 | 48,301            |                  
|Canada                                 |  |                   | 4,856  | 11,796            |                  
|Australia                              |  |                   | 2,914  | 3,822             |                  
|United Kingdom                         |  |                   | 1,031  | 802               |                  
|Total                                  |  | $                 | 25,152 | 64,721            |                  

| | (1) | Restated for re-measurements performed during the first quarter of 2013
| | --- | -----------------------------------------------------------------------



17







The key valuation metrics for commercial properties are as follows:



|                           | Dec. 31, 2013 |         |                  | Dec. 31, 2012
|-------------------------- | ------------- | ------- | ---------------- | -------------
|                           | Maximum       | Minimum | Weighted Average |              
|Consolidated Properties    |               |         |                  |              
|United States              |               |         |                  |              
|Discount rate              | 10.00%        | 6.25%   | 7.44%            |              
|Terminal cap rate          | 8.75%         | 5.03%   | 6.23%            |              
|Investment horizon (years) | 20            | 4       | 11               |              
|Canada                     |               |         |                  |              
|Discount rate              | 8.00%         | 6.00%   | 6.43%            |              
|Terminal cap rate          | 7.00%         | 5.25%   | 5.66%            |              
|Investment horizon (years) | 13            | 10      | 11               |              
|Australia                  |               |         |                  |              
|Discount rate              | 9.00%         | 8.00%   | 8.27%            |              
|Terminal cap rate          | 9.00%         | 7.00%   | 7.08%            |              
|Investment horizon (years) | 10            | 10      | 10               |              
|United Kingdom             |               |         |                  |              
|Discount rate              | 7.00%         | 7.00%   | 7.00%            |              
|Terminal cap rate          | 5.50%         | 5.25%   | 5.37%            |              
|Investment horizon (years) | 10            | 10      | 10               |              



|                             | Dec. 31, 2013 |         |                  | Dec. 31, 2012
|---------------------------- | ------------- | ------- | ---------------- | -------------
|                             | Maximum       | Minimum | Weighted Average |              
|Equity Accounted Investments |               |         |                  |              
|United States                |               |         |                  |              
|Discount rate                | 8.00%         | 6.00%   | 6.44%            |              
|Terminal cap rate            | 7.25%         | 5.50%   | 5.69%            |              
|Investment horizon (years)   | 11            | 9       | 9                |              
|Australia                    |               |         |                  |              
|Discount rate                | 9.00%         | 8.15%   | 8.53%            |              
|Terminal cap rate            | 8.50%         | 7.00%   | 7.22%            |              
|Investment horizon (years)   | 10            | 10      | 10               |              







Fair values are most sensitive to changes
in discount rates and timing or variability of cashflows. A 25 basis point decrease in the discount and terminal capitalization
rates will impact the fair value of commercial properties by $509 million and $719 million or 2.0% and 2.9%, respectively at December
31, 2013.



The aggregate fair value of $25,152 million
at December 31, 2013 (December 31, 2012 – $22,442 million) implies a going-in capitalization rate of 4.6% (December 31, 2012
– 5.6%) based on 2013 commercial property revenue and direct commercial property expense, 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. The implied going-in capitalization rate for the fourth quarter of 2013 includes the impact of the Bank of America/Merrill
Lynch expiry.



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, 2013, expenditures for these tenant installation costs
totaled $250 million, compared with $156 million expended in 2012.



18







We also invest in ongoing 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, 2013 totaled $164 million, compared with $141 million during 2012. 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 period over period based on required and planned expenditures on our properties. In the current
year, we incurred costs related to elevator modifications, lobby and retail renovations and restroom upgrades at various properties.
Capital expenditures include recoverable capital expenditures, which represent improvements to an asset or reconfiguration of space
to increase rentable area or increase current rental rates, and non-recoverable expenditures, which are those required to extend
the service life of an asset. During 2013, $26 million of our total capital expenditures were recoverable, compared with $35 million
in the prior year.



The following table summarizes the changes
in value of our commercial properties for the year ended December 31, 2013:



|(Millions)                                                |  |  |  |  |  | Dec. 31, 2013
|--------------------------------------------------------- |  |  |  |  |  | -------------
|Commercial properties, beginning of period                |  |  |  |  |  |              
|Fair value gains (losses)                                 |  |  |  |  |  |              
|Acquisitions                                              |  |  |  |  |  |              
|Dispositions and reclassification to assets held for sale |  |  |  |  |  |              
|Expenditures and other                                    |  |  |  |  |  |              
|Foreign currency translation                              |  |  |  |  |  |              
|Commercial properties, end of period                      |  |  |  |  |  |              



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 $1,673 million at December 31, 2013, an increase of $535 million from the balance at December 31, 2012. The increase is primarily
attributable to the acquisition of Principal Place in London and 755 Figueroa in Los Angeles, the recognition of valuation gains
as well as capital expenditures, offset by a weakening Canadian and Australian dollar relative to the U.S. dollar and the subsequent
disposition of 50% of the residential portion of Principal Place in London. Based on 18 million square feet of commercial developments,
the fair value at December 31, 2013 represents approximately $92 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 18 million square feet of high-quality,
centrally-located development properties in New York, Denver, Washington, D.C., Los Angeles, 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 $353 million in 2013 as compared with $258 million in 2012. The increase is primarily attributable to construction
costs associated with our active development sites, Manhattan West in New York, Bay Adelaide East in Toronto, Brookfield Place
East Tower in Calgary and Brookfield Place Tower 2 in Perth, offset by construction costs at Brookfield Place Tower 1 in Perth,
which was under construction throughout the first quarter of 2012 and completed in the second quarter of 2012, as well as a decrease
in the associated borrowing costs and property taxes and other.



The details of development and redevelopment
expenditures are as follows:



|(Millions)                                       |  |  |  |  |   | 2013 |   | 2012
|------------------------------------------------ |  |  |  |  | - | ---- | - | ----
|Construction costs                               |  |  |  |  | $ | 290  | $ | 169 
|Capitalized borrowing costs                      |  |  |  |  |   | 48   |   | 64  
|Property taxes and other                         |  |  |  |  |   | 15   |   | 25  
|Total development and redevelopment expenditures |  |  |  |  | $ | 353  | $ | 258 



The following table summarizes the changes
in value of our commercial developments for the year ended December 31, 2013:



|(Millions)                                   |  |  |  |  |  | Dec. 31, 2013
|-------------------------------------------- |  |  |  |  |  | -------------
|Commercial developments, beginning of period |  |  |  |  |  |              
|Fair value gains (losses)                    |  |  |  |  |  |              
|Acquisitions                                 |  |  |  |  |  |              
|Dispositions                                 |  |  |  |  |  |              
|Expenditures and other                       |  |  |  |  |  |              
|Foreign currency translation                 |  |  |  |  |  |              
|Commercial developments, end of period       |  |  |  |  |  |              



19







The following table summarizes the anticipated
completion date, the scope of the development, costs incurred to date and budgeted costs for active developments:



|                                            |                                               |                                              |                            | Cost  | Construction
    Loan
|------------------------------------------- | --------------------------------------------- | -------------------------------------------- | -------------------------- | ----- | ---------------------
|(Millions, except square feet in thousands) | Square Feet Currently
    
Under Construction | Planned Construction
    
Period (in months) | Percent
        Pre-Leased | Total | To Date              
|Active developments:                        |                                               |                                              |                            |       |                      
|Manhattan West, Midtown New York(2)         | ―                                             | 24                                           | ―                          | $680  | $504                 
|Bay Adelaide East, Toronto(3)               | 980                                           | 54                                           | 60%                        | C$490 | C$174                
|Brookfield Place East Tower, Calgary(4)     | 1,400                                         | 58                                           | 71%                        | C$798 | C$125                
|Brookfield
    Place Tower 2, Perth         | 366                                           | 29                                           | 40%                        | A$326 | A$62                 
|                                            | 2,746                                         | 52                                           | 63%                        |       |                      

| | (1) | Includes $13 million of transaction costs
| | --- | -----------------------------------------

| | (2) | Represents the platform upon which the 5 million square foot Manhattan West development will
be constructed. Construction loan has a 3-year term with two 1-year extension options at an interest rate of LIBOR plus 250 bps
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Construction loan has a 3-year term with two 1-year extension options once certain pre-leasing
hurdles are met at an interest rate of BA plus 185 bps
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Construction loan has a 4-year term with a 1-year extension option once certain pre-leasing
hurdles are met at an interest rate of BA plus 170 bps
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------



INVESTMENTS IN JOINT VENTURES

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



Details of our investments in joint ventures,
which have been accounted for following the equity method, are as follows:



|                              |                  |  |  |  |  | Ownership Interest
|----------------------------- | ---------------- |  |  |  |  | ------------------
|                              | Location         |  |  |  |  | Dec. 31, 2013     
|Commercial properties:        |                  |  |  |  |  |                   
|The Grace Building            | Midtown New York |  |  |  |  |                   
|Victor Building               | Washington, D.C. |  |  |  |  |                   
|Marina Towers                 | Los Angeles      |  |  |  |  |                   
|245 Park Avenue               | Midtown New York |  |  |  |  |                   
|450 West 33rd Street          | Midtown New York |  |  |  |  |                   
|E&Y Centre                    | Sydney           |  |  |  |  |                   
|Commercial developments:      |                  |  |  |  |  |                   
|London Wall Place             | London           |  |  |  |  |                   
|Principal Place – Residential | London           |  |  |  |  |                   



During the fourth quarter of 2013, we acquired
an additional 50% interest in 125 Old Broad Street in London resulting in acquisition of control of the commercial development.
As a result, we have consolidated our interest in the property. We previously acquired a 50% interest in 125 Old Broad Street in
London for £79 million, net of £64 million in commercial property debt, during the second quarter of 2013.



During the third quarter of 2013, we sold
a 50% interest in the residential portion of Principal Place, a commercial development in London, for £21 million. As a result,
we equity accounted the residential portion of Principal Place and recognized a $32 million addition to investments in joint ventures.
Prior to the sale, the residential portion of Principal Place was consolidated within commercial developments.



Also during the third quarter of 2013,
we acquired an additional 50% interest in the Victor Building in Washington, D.C. resulting in acquisition of control of the commercial
property. As a result, we have consolidated our interest in the property.



20







Summarized financial information in respect
of our investments in these joint ventures is set out below:



|(Millions)                  |  |  |  |  | Dec. 31, 2013 | Dec. 31, 2012
|--------------------------- |  |  |  |  | ------------- | -------------
|Non-current assets          |  |  |  |  |               |              
|Commercial properties       |  |  |  |  | $             | 5,035        
|Commercial developments     |  |  |  |  |               | 208          
|Current assets              |  |  |  |  |               | 111          
|Total assets                |  |  |  |  |               | 5,354        
|Non-current liabilities     |  |  |  |  |               |              
|Commercial property debt(1) |  |  |  |  |               | 829          
|Current liabilities         |  |  |  |  |               | 875          
|Total liabilities           |  |  |  |  |               | 1,704        
|Net assets                  |  |  |  |  | $             | 3,650        
|Our share of net assets     |  |  |  |  | $             | 1,902        

| | (1) | Refer to page 32 for details of commercial property debt of our equity accounted investments
| | --- | --------------------------------------------------------------------------------------------



|(Millions)                                |  |  |  |  |   | 2013  |   | 2012 
|----------------------------------------- |  |  |  |  | - | ----- | - | -----
|Revenue                                   |  |  |  |  | $ | 369   | $ | 393  
|Expense                                   |  |  |  |  |   | (198) |   | (250)
|Earnings before fair value gains (losses) |  |  |  |  |   | 171   |   | 188  
|Fair value gains (losses)                 |  |  |  |  |   | 273   |   | 30   
|Net earnings                              |  |  |  |  | $ | 444   | $ | 218  
|Our share of net earnings                 |  |  |  |  | $ | 245   | $ | 123  



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,
    2013      | Dec. 31, 2012
|BSREP Australia Trust                    | Investment properties   | 31.5%                  | 41.2%        
|Brookfield Global FM Limited Partnership | Facilities management   | 42.1%                  | ―            
|Brookfield Johnson Controls Canada       | Facilities management   | ―                      | 39.9%        
|Oakridges                                | Residential development | 23.8%                  | 23.8%        
|Our net
    investment                   |                         |                        |              



On March 1, 2013, we sold a portion of
our ownership interest in BSREP Australia Trust, the entity that owns the outstanding shares of the Wynyard Properties Holding
Group, to a fund that is controlled by a subsidiary of BAM for cash proceeds of $8 million. The sale decreased our ownership interest
in the associate from 41.2% to 38.8%. During the second and third quarters of 2013, we sold incremental interests in BSREP Australia
Trust to the fund for cash proceeds of $25 million. The sales further decreased our ownership interest in the associate to 31.5%.



Included in investments in associates is
our interest in Brookfield Global FM Limited Partnership (“FM Co.”) which was created on October 1, 2013 through the
consolidation of four core facilities management businesses. As a result of the restructuring, we acquired an interest in Brookfield
Johnson Controls Australia and certain Middle East and Asia facilities management businesses in exchange for the transfer of a
portion of our interest in Brookfield Johnson Controls Canada (“BJCC”) and Brookfield Residential Services Ltd. (“BRSL”).
Our ownership interest in FM Co. is 42.1% with a subsidiary of BAM acquiring a 57.9% interest. The difference between the carrying
value of FM Co. and the interests transferred was recorded in contributed surplus. Previously, BJCC, formerly Brookfield LePage
Johnson Controls, one of the largest facilities management operations in Canada, was a partnership between us and Johnson Controls.
On February 1, 2013, BJCC was restructured. Our ownership interest in the associate effectively decreased from 39.9% to 33.1% and
a subsidiary of BAM acquired a 16.8% ownership interest in the associate.



Investments in associates also includes
our 23.8% investment in Oakridges, which is a residential development project in Toronto.



21







PARTICIPATING LOAN INTERESTS

Participating loan interests, which represent
interests in certain properties in Australia that do not provide us with control over the entity that owns the underlying property,
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 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 outstanding principal of the participating
loan interests relates to the following commercial properties:



|(Millions)                         |                        |  |  |  |  |               |              
|---------------------------------- | ---------------------- |  |  |  |  | ------------- | -------------
|Name of Property                   | Participation Interest |  |  |  |  | Dec. 31, 2013 | Dec. 31, 2012
|Darling Park Complex, Sydney       | 30%                    |  |  |  |  | $             | 161          
|IAG House, Sydney                  | 50%                    |  |  |  |  |               | 110          
|NAB House, Sydney                  | 25%                    |  |  |  |  |               | 105          
|Bourke Place Trust, Melbourne      | 43%                    |  |  |  |  |               | 174          
|Total participating loan interests |                        |  |  |  |  | $             | 550          



Participating loan interests were $550
million at December 31, 2013, a decrease of $78 million from the balance at December 31, 2012. The decrease is primarily attributable
to a weakening Australian dollar relative to the U.S. dollar, offset by valuation gains and repayments on commercial property debt
associated with the underlying properties, which in turn increased the value of our participating loan interests in the underlying
properties.



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, 2013 is $56 million (December 31, 2012 – $48 million). For
the year ended December 31, 2013, we recognized interest income of $37 million (2012 – $32 million) on the participating
loan interests and fair value gains (losses) on the associated embedded derivative of $21 million (2012 –$2 million).



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



|(Millions)              |  |  |  |  | Dec. 31, 2013 | Dec. 31, 2012
|----------------------- |  |  |  |  | ------------- | -------------
|Non-current assets      |  |  |  |  | $             | 2,282        
|Current assets          |  |  |  |  |               | 53           
|Total assets            |  |  |  |  |               | 2,335        
|Non-current liabilities |  |  |  |  |               | 166          
|Current liabilities     |  |  |  |  |               | 660          
|Total liabilities       |  |  |  |  |               | 826          
|Net assets              |  |  |  |  | $             | 1,509        



|(Millions)                |  |  |  |  |   | 2013  |   | 2012 
|------------------------- |  |  |  |  | - | ----- | - | -----
|Revenue                   |  |  |  |  | $ | 202   | $ | 219  
|Expense                   |  |  |  |  |   | (101) |   | (126)
|Fair value gains (losses) |  |  |  |  |   | 54    |   | 15   
|Net earnings              |  |  |  |  | $ | 155   | $ | 108  



22







OTHER NON-CURRENT FINANCIAL ASSETS

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



|(Millions)                                                 |  |  |  |  | Dec. 31, 2013 | Dec. 31, 2012
|---------------------------------------------------------- |  |  |  |  | ------------- | -------------
|Equity securities designated as available-for-sale (“AFS”) |  |  |  |  | $             | 105          
|Other loans receivable                                     |  |  |  |  |               | 89           
|Other financial assets                                     |  |  |  |  |               | 26           
|Total other non-current financial assets                   |  |  |  |  | $             | 220          



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

Equity securities designated as AFS include
$105 million (December 31, 2012 – $105 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, 2012 – $92 million) recognized in other non-current financial liabilities.



| | b) | Other loans receivable
| | -- | ----------------------

Other loans receivable includes a $89 million
(December 31, 2012 – $104 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. The decrease
of $15 million from the balance at December 31, 2012 is entirely attributable to a weakening Australian dollar relative to the
U.S. dollar.



| | c) | Other financial assets
| | -- | ----------------------

Included in other financial assets are
derivative assets with a carrying amount of $26 million (December 31, 2012 – nil).



RECEIVABLES AND OTHER ASSETS

Receivables and other assets was $382 million
at December 31, 2013, a decrease of $143 million from the balance at December 31, 2012. The decrease is primarily attributable
to the reclassification of the contribution previously made in relation to Principal Place in London to commercial developments
upon acquisition of the investment property in addition to the repayment of a loan receivable from a subsidiary of BAM.



The components of receivables and other
assets are as follows:



|(Millions)                         |  |  |  |  | Dec. 31, 2013 | Dec. 31, 2012
|---------------------------------- |  |  |  |  | ------------- | -------------
|Accounts receivable                |  |  |  |  | $             | 235          
|Loan receivable from affiliate     |  |  |  |  |               | ―            
|Prepaid expenses and other assets  |  |  |  |  |               | 147          
|Total receivables and other assets |  |  |  |  | $             | 382          



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 $142
million at December 31, 2013, an increase of $39 million from the balance at December 31, 2012. The increase is primarily attributable
to commercial property acquisitions during the year and the timing of restricted cash and deposits.



CASH AND CASH EQUIVALENTS

We endeavor to maintain high levels of
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 $713 million
at December 31, 2013, an increase of $351 million from the balance at December 31, 2012. The increase is primarily attributable
to proceeds from refinancings as well as the dispositions of RBC Plaza in Minneapolis, Landmark Square in Los Angeles, 2000 L Street
in Washington, D.C., and 500 Jefferson Street in Houston, offset by the redemption of Class AAA Series F capital securities –
corporate and the acquisitions of portfolios of assets in London and Los Angeles.



23







ASSETS AND ASSOCIATED LIABILITIES HELD
FOR SALE

During the second quarter of 2013, we reclassified
Landmark Square in Los Angeles to assets held for sale upon entering into an agreement to dispose of the commercial property. On
August 8, 2013, we sold Landmark Square in Los Angeles for approximately $136 million, resulting in net proceeds of approximately
$61 million.



On January 31, 2013, we sold RBC Plaza
in Minneapolis for $127 million, generating net proceeds of $53 million. RBC Plaza was presented in assets held for sale at December
31, 2012.



At December 31, 2012, the properties that
comprise our Minneapolis portfolio were presented in assets held for sale. These properties were part of our U.S. commercial segment.



|(Millions)                                       |  |  |  |  | Dec. 31, 2013 | Dec. 31, 2012
|------------------------------------------------ |  |  |  |  | ------------- | -------------
|Assets                                           |  |  |  |  |               |              
|Commercial properties                            |  |  |  |  | $             | ―            
|Receivables and other assets                     |  |  |  |  |               | ―            
|Assets held for sale                             |  |  |  |  | $             | ―            
|Liabilities                                      |  |  |  |  |               |              
|Commercial property debt                         |  |  |  |  | $             | ―            
|Accounts payable and accrued liabilities         |  |  |  |  |               | ―            
|Liabilities associated with assets held for sale |  |  |  |  | $             | ―            



24







LIABILITIES AND EQUITY

Our asset base of $30,891 million at December
31, 2013 is financed with a combination of debt, capital securities and equity. The following is a summary of our liabilities and
equity:



|(Millions)                                       |  |  |  |  | Dec. 31, 2013 | Dec. 31, 2012
|------------------------------------------------ |  |  |  |  | ------------- | -------------
|Liabilities                                      |  |  |  |  |               |              
|Non-current liabilities                          |  |  |  |  |               |              
|Commercial property debt                         |  |  |  |  | $             | 11,655       
|Capital securities – corporate                   |  |  |  |  |               | 440          
|Capital securities – fund subsidiaries           |  |  |  |  |               | 491          
|Other non-current financial liabilities          |  |  |  |  |               | 153          
|Deferred tax liabilities                         |  |  |  |  |               | 970          
|                                                 |  |  |  |  |               | 13,709       
|Current liabilities                              |  |  |  |  |               |              
|Commercial property debt                         |  |  |  |  |               | 2,130        
|Capital securities – corporate                   |  |  |  |  |               | 188          
|Accounts payable and accrued liabilities         |  |  |  |  |               | 1,046        
|                                                 |  |  |  |  |               | 3,364        
|Liabilities associated with assets held for sale |  |  |  |  |               | ―            
|Total liabilities                                |  |  |  |  | $             | 17,073       
|                                                 |  |  |  |  |               |              
|Equity                                           |  |  |  |  |               |              
|Preferred equity – corporate                     |  |  |  |  | $             | 1,542        
|Common equity                                    |  |  |  |  |               | 10,791       
|Total shareholder’s equity                       |  |  |  |  |               | 12,333       
|Preferred equity – subsidiaries                  |  |  |  |  |               | 243          
|Other non-controlling interests                  |  |  |  |  |               | 1,242        
|Total equity                                     |  |  |  |  | $             | 13,818       
|Total liabilities and equity                     |  |  |  |  | $             | 30,891       



COMMERCIAL PROPERTY DEBT

Commercial property debt totaled $13,785
million at December 31, 2013, an increase of $2,337 million from the balance at December 31, 2012. The increase is primarily attributable
to the acquisitions of One North End Avenue in Downtown New York; the Victor Building in Washington, D.C.; Wells Fargo Center –
North & South Towers, The Gas Company Tower and 777 Tower in Los Angeles; 685 Market Street in San Francisco and 125 Old Broad
Street in London in addition to various refinancings and draws on our corporate revolving credit facility. This is partially offset
by the dispositions of 2000 L Street in Washington, D.C., Landmark Square in Los Angeles and 500 Jefferson Street in Houston, repayment
of the U.S. Office Fund acquisition financing, principal amortization payments, as well as a weakening Canadian and Australian
dollar relative to the U.S. dollar. Commercial property debt at December 31, 2013 had a weighted average interest rate of 4.50%
(December 31, 2012 – 5.31%). Debt on our investment properties are mainly non-recourse, thereby reducing overall financial
risk to the company.



We attempt to match the maturity of our
commercial property debt portfolio with the lease term of our properties. At December 31, 2013, the average remaining term to maturity
of our commercial property debt was five years, compared to the average remaining lease term of eight years. In Australia, the
market for property debt tends to only extend to three to five year terms at most and as a result it is difficult to match to lease
term. In the U.S., we have executed a number of shorter term financings on properties that are being repositioned. Once these properties
stabilize, we expect to put in place long term financings that are more in line with lease term.





|          |  | Years                                                                             
|--------- |  | ----------------------------------------------------------------------------------
|          |  | Average Remaining Term to
        Maturity of our Commercial
        Property Debt
|U.S.      |  | 4                                                                                 
|Canada    |  | 8                                                                                 
|Australia |  | 3                                                                                 
|U.K.      |  | 4                                                                                 
|Total     |  | 5                                                                                 





We have $883 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 BOX, our 83.3% owned subsidiary, and a number of Canadian chartered
banks. At December 31, 2013, the balance drawn on these facilities was $336 million (December 31, 2012 – $68 million). We
incurred $16 million in interest expense related to the balance on the corporate credit facilities for the year ended December
31, 2013 (2012 – $16 million). Subsequent to year end, we increased our committed corporate credit facilities to $1.2 billion
with the closing of a new $1 billion revolving credit facility to replace the existing $695 million facility.



25







The details of commercial property debt
at December 31, 2013, are as follows:



|($ in Millions)                              |  | Location         | Rate  |  | Maturity
    Date |      | Dec. 31, 2013(1,2) | Mortgage
    Details(3)
|-------------------------------------------- |  | ---------------- | ----- |  | ----------------- | ---- | ------------------ | -----------------------
|Commercial property debt                     |  |                  |       |  |                   |      |                    |                        
|1550 &
    1560 Wilson Boulevard(4)          |  | Washington, D.C. | 2.75% |  | January           | 2014 |                    |                        
|650 Massachusetts Avenue                     |  | Washington, D.C. | 2.92% |  | March             | 2014 |                    |                        
|1600 Smith Street(4)                         |  | Houston          | 4.39% |  | May               | 2014 |                    |                        
|2401 Pennsylvania Avenue(4)                  |  | Washington, D.C. | 2.37% |  | May               | 2014 |                    |                        
|Continental Center II(4)                     |  | Houston          | 4.39% |  | May               | 2014 |                    |                        
|One Allen Center(4)                          |  | Houston          | 4.39% |  | May               | 2014 |                    |                        
|Two Ballston Plaza(4)                        |  | Washington, D.C. | 4.39% |  | May               | 2014 |                    |                        
|151 Yonge Street(5)                          |  | Toronto          | 2.92% |  | July              | 2014 |                    |                        
|Brookfield Prime Property
    Fund pool debt |  | Various          | 4.80% |  | July              | 2014 |                    |                        
|235 St Georges Terrace(6)                    |  | Perth            | 6.04% |  | September         | 2014 |                    |                        
|Bank of America Plaza(7)                     |  | Los Angeles      | 5.31% |  | September         | 2014 |                    |                        
|Silver Spring Metro Plaza(4)                 |  | Washington, D.C. | 2.32% |  | September         | 2014 |                    |                        
|1801 California Street                       |  | Denver           | 3.42% |  | December          | 2014 |                    |                        
|200 Vesey Street                             |  | New York         | 2.94% |  | December          | 2014 |                    |                        
|2001 M Street(4)                             |  | Washington, D.C. | 5.25% |  | December          | 2014 |                    |                        
|First Canadian Place(5)                      |  | Toronto          | 5.37% |  | December          | 2014 |                    |                        
|Mezzanine Loan                               |  | Various          | 5.67% |  | January           | 2015 |                    |                        
|Leadenhall Court                             |  | London           | 2.77% |  | April             | 2015 |                    |                        
|Hudson's Bay Centre                          |  | Toronto          | 2.99% |  | May               | 2015 |                    |                        
|Royal Centre                                 |  | Vancouver        | 3.33% |  | June              | 2015 |                    |                        
|Southern Cross East Tower(6,8)               |  | Melbourne        | 4.70% |  | June              | 2015 |                    |                        
|75 State Street                              |  | Boston           | 1.97% |  | September         | 2015 |                    |                        
|799 9th Street                               |  | Washington, D.C. | 3.39% |  | December          | 2015 |                    |                        
|One & Two Reston Crescent(4)                 |  | Washington, D.C. | 1.94% |  | December          | 2015 |                    |                        
|1250 Connecticut Avenue(4)                   |  | Washington, D.C. | 5.86% |  | January           | 2016 |                    |                        
|Manhattan West(9)                            |  | New York         | 2.67% |  | January           | 2016 |                    |                        
|One Shelley Street(6)                        |  | Sydney           | 6.99% |  | January           | 2016 |                    |                        
|Victor Building(4)                           |  | Washington, D.C. | 5.39% |  | February          | 2016 |                    |                        
|KPMG Tower(6,8)                              |  | Sydney           | 4.60% |  | March             | 2016 |                    |                        
|One New York Plaza(4)                        |  | New York         | 5.50% |  | March             | 2016 |                    |                        
|Brookfield Place(9)                          |  | Calgary          | 3.07% |  | May               | 2016 |                    |                        
|Three Allen Center(4)                        |  | Houston          | 6.12% |  | May               | 2016 |                    |                        
|225 Liberty Street                           |  | New York         | 3.42% |  | June              | 2016 |                    |                        
|250 Vesey Street                             |  | New York         | 3.42% |  | June              | 2016 |                    |                        
|Metropolitan Park East
    & West            |  | Seattle          | 3.75% |  | June              | 2016 |                    |                        
|The Gas Company Tower(7)                     |  | Los Angeles      | 5.10% |  | August            | 2016 |                    |                        
|685 Market Street                            |  | San Francisco    | 2.47% |  | October           | 2016 |                    |                        
|Bay Adelaide North and East                  |  | Toronto          | 3.15% |  | December          | 2016 |                    |                        
|Wells Fargo Center
    - South Tower(7)      |  | Los Angeles      | 1.97% |  | December          | 2016 |                    |                        
|200 Liberty Street                           |  | New York         | 5.83% |  | February          | 2017 |                    |                        
|Wells Fargo Center
    - North Tower(7)      |  | Los Angeles      | 5.70% |  | April             | 2017 |                    |                        
|52 Goulburn Street(6)                        |  | Sydney           | 5.43% |  | July              | 2017 |                    |                        
|99 Bishopsgate                               |  | London           | 4.27% |  | September         | 2017 |                    |                        
|One Liberty Plaza                            |  | New York         | 6.14% |  | September         | 2017 |                    |                        
|Southern Cross West Tower                    |  | Melbourne        | 4.90% |  | November          | 2017 |                    |                        
|2 Queen Street East(5)                       |  | Toronto          | 5.64% |  | December          | 2017 |                    |                        
|One North End Avenue                         |  | New York         | 2.92% |  | December          | 2017 |                    |                        
|1400 K Street(4)                             |  | Washington, D.C. | 5.30% |  | February          | 2018 |                    |                        
|Manhattan West(9)                            |  | New York         | 5.90% |  | April             | 2018 |                    |                        
|Two Allen Center(4)                          |  | Houston          | 6.45% |  | May               | 2018 |                    |                        
|Three Bethesda Metro Center                  |  | Washington, D.C. | 1.77% |  | June              | 2018 |                    |                        
|Brookfield Place                             |  | Perth            | 4.28% |  | July              | 2018 |                    |                        
|1201 Louisiana Street                        |  | Houston          | 4.65% |  | November          | 2018 |                    |                        
|601 South 12th Street                        |  | Washington, D.C. | 2.27% |  | November          | 2018 |                    |                        
|701 South 12th Street                        |  | Washington, D.C. | 2.27% |  | November          | 2018 |                    |                        
|777 Tower(7)                                 |  | Los Angeles      | 1.87% |  | November          | 2018 |                    |                        
|Potomac Tower                                |  | Washington, D.C. | 4.50% |  | January           | 2019 |                    |                        
|Bay Wellington Tower                         |  | Toronto          | 3.24% |  | January           | 2020 |                    |                        
|125 Old Broad Street                         |  | London           | 4.71% |  | October           | 2020 |                    |                        
|22 Front Street                              |  | Toronto          | 6.24% |  | October           | 2020 |                    |                        
|Bankers Court                                |  | Calgary          | 4.96% |  | November          | 2020 |                    |                        
|Ernst & Young Tower(7)                       |  | Los Angeles      | 3.93% |  | November          | 2020 |                    |                        
|1200 K Street(4)                             |  | Washington, D.C. | 5.88% |  | February          | 2021 |                    |                        



26







|($ in Millions)                    |       | Location         | Rate  |  | Maturity
    Date |      | Dec.
    31, 2013(1,2) | Mortgage
    Details(3)
|---------------------------------- | ----- | ---------------- | ----- |  | ----------------- | ---- | ---------------------- | -----------------------
|Commercial property debt continued |       |                  |       |  |                   |      |                        |                        
|Bethesda Crescent(4)               |       | Washington, D.C. | 5.58% |  | February          | 2021 |                        |                        
|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 |                        |                        
|Heritage Plaza                     |       | Houston          | 4.97% |  | January           | 2023 |                        |                        
|HSBC Building                      |       | Toronto          | 4.06% |  | January           | 2023 |                        |                        
|105 Adelaide                       |       | Toronto          | 3.87% |  | May               | 2023 |                        |                        
|601 Figueroa(7)                    |       | Los Angeles      | 3.49% |  | July              | 2023 |                        |                        
|Sunrise Tech Park(4)               |       | Washington, D.C. | 3.70% |  | July              | 2023 |                        |                        
|Bankers Hall                       |       | Calgary          | 4.38% |  | November          | 2023 |                        |                        
|Jean Edmonds Towers(5)             |       | Ottawa           | 6.79% |  | January           | 2024 |                        |                        
|701 9th Street                     |       | Washington, D.C. | 6.73% |  | December          | 2028 |                        |                        
|300 Madison Avenue                 |       | New York         | 7.26% |  | April             | 2032 |                        |                        
|Suncor Energy Centre               |       | Calgary          | 5.19% |  | August            | 2033 |                        |                        
|Total commercial property debt     | 4.54% |                  |       |  |                   |      | $                      | 13,122                 
|Corporate debt                     |       |                  |       |  |                   |      |                        |                        
|$695M Corporate Revolver(10)       |       | —                | 3.45% |  | March             | 2014 |                        |                        
|Senior Notes                       |       | —                | 4.30% |  | January           | 2017 |                        |                        
|Senior Notes                       |       | —                | 4.00% |  | April             | 2018 |                        |                        
|Total corporate
    debt           | 3.81% |                  |       |  |                   |      |                        | 663                    
|Total
    commercial property debt | 4.50% |                  |       |  |                   |      | $                      | 13,785                 

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

| | (2) | Net of $115 million of transaction costs
| | --- | ----------------------------------------

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

| | (4) | U.S. Office Fund debt
| | --- | ---------------------

| | (5) | Canadian Office Fund debt
| | --- | -------------------------

| | (6) | These debt balances are floating, but a portion of each balance has interest rate swaps in place
to fix the interest rate through maturity
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------

| | (7) | DTLA debt
| | --- | ---------

| | (8) | Represents liability payable to a subsidiary of BAM
| | --- | ---------------------------------------------------

| | (9) | Development debt
| | --- | ----------------

| | (10) | Increased to $1 billion subsequent to year end with a term of four years with two six-month
extension options and a spread of 170 bps
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------



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, 2013   
|2014                           | $ | 97                | $ | 2,033      | $ | 2,130    |  | 4.12%           
|2015                           |   | 97                |   | 924        |   | 1,021    |  | 3.73%           
|2016                           |   | 99                |   | 2,840      |   | 2,939    |  | 4.27%           
|2017                           |   | 96                |   | 2,328      |   | 2,424    |  | 5.42%           
|2018                           |   | 92                |   | 1,564      |   | 1,656    |  | 4.15%           
|2019 and thereafter            |   | 695               |   | 2,920      |   | 3,615    |  | 4.67%           
|Total commercial property debt | $ | 1,176             | $ | 12,609     | $ | 13,785   |  | 4.50%           

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

| | (2) | Net of $115 million of transaction costs
| | --- | ----------------------------------------

| | (3) | Commercial property debt maturities, contained in this table, take into consideration the timing
of payments
| | --- | ------------------------------------------------------------------------------------------------------------



Commercial property debt – equity
accounted investments

The details of commercial property debt
of our equity accounted investments at December 31, 2013, are as follows:



|                                                                       |             | Dec.
    31, 2013
|---------------------------------------------------------------------- | ----------- | -----------------
|($ in Millions)                                                        | Location    | Rate             
|450 West 33rd Street                                                   | New York    | 5.27%            
|The Grace Building(3)                                                  | New York    | 5.54%            
|Marina Towers(3)                                                       | Los Angeles | 5.84%            
|245 Park Avenue                                                        | New York    | 3.88%            
|Total
    commercial property debt of our equity accounted investments | 4.67%       |                  

| | (1) | Net of $11 million of transaction costs
| | --- | ---------------------------------------

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

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



27







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(1,2) |   | Maturities |   | Total(3) |  | Dec. 31, 2013   
|2014                                                               | $ | ―                 | $ | 810        | $ | 810      |  | 5.37%           
|2015                                                               |   | ―                 |   | ―          |   | ―        |  | ―               
|2016                                                               |   | ―                 |   | 35         |   | 35       |  | 5.99%           
|2017                                                               |   | ―                 |   | 793        |   | 793      |  | 3.88%           
|2018                                                               |   | ―                 |   | ―          |   | ―        |  | ―               
|2019 and thereafter                                                |   | ―                 |   | ―          |   | ―        |  | ―               
|Total commercial property debt of our equity accounted investments | $ | ―                 | $ | 1,638      | $ | 1,638    |  | 4.67%           

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

| | (2) | Net of $11 million of transaction costs
| | --- | ---------------------------------------

| | (3) | Commercial property debt maturities, contained in this table, take into consideration the timing
of payments
| | --- | ------------------------------------------------------------------------------------------------------------



CONTRACTUAL
OBLIGATIONS

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



|                                          |   |        | Payments Due by Period
|----------------------------------------- | - | ------ | ----------------------
|(Millions)                                |   | Total  |                       
|Commercial property debt(1)               | $ | 13,785 | $                     
|Capital securities – corporate            |   | 628    |                       
|Capital securities – fund subsidiaries    |   | 491    |                       
|Interest expense(2)                       |   |        |                       
|Commercial property debt                  |   | 2,967  |                       
|Capital securities - corporate            |   | 63     |                       
|Minimum rental payments– ground leases(3) |   | 1,594  |                       
|Other non-current financial liabilities   |   | 153    |                       
|Accounts payable and accrued liabilities  |   | 853    |                       

| | (1) | Net of $115 million of transaction costs
| | --- | ----------------------------------------

| | (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 38 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,
increased development, 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, DBRS Limited (“DBRS”) and Standard & Poor’s Rating Service (“S&P”). We are committed
to arranging our affairs to maintain these ratings and improve them further over time. S&P downgraded our corporate rating
to BBB- from BBB during the year ended December 31, 2013 to reflect their concerns that due to the pace of leasing in lower Manhattan
previously expected; accordingly improvements to coverage ratios will take longer to occur. In addition, S&P placed our credit
ratings on CreditWatch as a result of the proposed acquisition by BPY of the 49% stake in us that it does not already own through
a tender offer. 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, 2013
and at the date of this report were as follows:



|                 |  |  | DBRS   | S&P        
|---------------- |  |  | ------ | -----------
|Corporate rating |  |  | BBB    | BBB-       
|Preferred shares |  |  | Pfd-3  | P-3        
|Trend/Outlook    |  |  | Stable | CreditWatch



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.



28







Corporate Guarantees and Contingent
Obligations

We conduct our operations through entities
that are fully consolidated in our financial statements or through joint operations for which we present our share of assets and
liabilities in the financial statements, except for our investment in certain commercial properties held through joint ventures
or participating loan notes, and our investments in associates.



We and our operating subsidiaries may be
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, with a judgment amount of $56 million (A$63 million), is being pursued against one of our subsidiaries related
to security on a defaulted loan. Management has determined that the most probable cash outflow related to the litigation being
pursued against us is $24 million (A$27 million), which has been fully provided for in our financial statements. We anticipate
this specific litigation will be settled in 2014.



We, through our 50% interest in London
Wall Place LP, have a £125 million commitment in respect of obligations under an agreement for underlease relating to 1 London
Wall Place at December 31, 2013.



At December 31, 2013, we have commitments
totaling approximately C$200 million for the development of Bay Adelaide East in Toronto and Brookfield Place East Tower in Calgary
and approximately A$250 million for the development of Brookfield Place Perth Tower 2.



In addition, we may execute agreements
that provide for indemnifications and guarantees to third parties. Disclosure of guarantees, commitments and contingencies can
be found in Note 26, Guarantees, Contingencies and Other, to our consolidated financial statements.



CAPITAL SECURITIES – CORPORATE

We have the following capital securities
– corporate outstanding:



|                                     | Shares      | Cumulative        |               |              
|------------------------------------ | ----------- | ----------------- | ------------- | -------------
|(Millions, except share information) | Outstanding | Dividend Rate     | Dec. 31, 2013 | Dec. 31, 2012
|Class AAA Series E(1)                | 8,000,000   | 70% of bank prime | $             | ―            
|Class AAA Series F                   | ―           | 6.00%             |               | ―            
|Class AAA Series G                   | 4,400,000   | 5.25%             |               | 110          
|Class AAA Series H                   | 8,000,000   | 5.75%             |               | 188          
|Class AAA Series J                   | 8,000,000   | 5.00%             |               | 188          
|Class AAA Series K                   | 6,000,000   | 5.20%             |               | 142          
|Total capital securities – corporate |             |                   | $             | 628          

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

| | (1) | Class AAA, Series E capital securities – corporate are owned by BPY, our parent. We have
an offsetting loan receivable against these securities earning interest at 108% of bank prime
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On January 31, 2013, we redeemed 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.



CAPITAL SECURITIES – FUND SUBSIDIARIES

We have $491 million of capital securities
– fund subsidiaries outstanding at December 31, 2013 (December 31, 2012 – nil). Capital securities – fund subsidiaries
represent the equity interests in DTLA held by our co-investors in the Fund which have been classified as a liability, rather than
as non-controlling interest, due to the fact that on October 15, 2023, and on every fifth anniversary thereafter, the holders of
these interests can cause DTLA to redeem their interests in the Fund for cash equivalent to the fair value of the interests. Capital
securities – fund subsidiaries are measured at redemption amount with changes in redemption amount reflected in the statement
of income. Earnings attributable to the equity interests presented as capital securities – fund subsidiaries are recognized
as interest expense in the statement of income.



29







OTHER NON-CURRENT FINANCIAL LIABILITIES

Other non-current financial liabilities
were $153 million at December 31, 2013, a decrease of $320 million from the balance at December 31, 2012. The components of other
non-current financial liabilities are as follows:



|(Millions)                                    |  |  |  |  | Dec. 31, 2013 | Dec. 31, 2012
|--------------------------------------------- |  |  |  |  | ------------- | -------------
|Loan payable                                  |  |  |  |  | $             | 92           
|Note payable                                  |  |  |  |  |               | ―            
|Other financial liabilities                   |  |  |  |  |               | 61           
|Total other non-current financial liabilities |  |  |  |  | $             | 153          



Included in other non-current financial
liabilities is a loan payable of $92 million (December 31, 2012 – $92 million) maturing in 2019, bearing interest at 7% and
secured by our preferred equity interest in 1625 Eye Street in Washington, D.C.



Included in other non-current financial
liabilities is a note payable of $90 million at December 31, 2012 issued to the non-controlling shareholders of the U.S. Office
Fund in connection with a distribution declared in 2012 which was payable in the fourth quarter of 2016 was repaid during the fourth
quarter of 2013.



Other financial liabilities includes derivative
liabilities with a carrying amount of $32 million (December 31, 2012 – $222 million). The year ended December 31, 2012 included
$25 million in other financial liabilities representing the present value of an amount payable to the non-controlling shareholders
of 100 Bishopsgate 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 which has been reclassified to current in accounts payable and accrued liabilities
during the fourth quarter of 2013.



DEFERRED INCOME TAXES

At December 31, 2013, we had a net deferred
tax liability of $970 million (December 31, 2012 – $732 million). The sources and movements of deferred income tax balances
are as follows:



|(Millions)                          |  | Dec. 31, 2013 | Dec. 31, 2012
|----------------------------------- |  | ------------- | -------------
|Deferred income tax assets          |  |               |              
|Loss carry forwards                 |  |               | $            
|Deferred financing costs            |  |               |              
|Foreign currency                    |  |               |              
|Other                               |  |               |              
|                                    |  |               |              
|Deferred income tax liabilities     |  |               |              
|Properties                          |  |               |              
|Other                               |  |               |              
|Net deferred income tax liabilities |  |               | $            



|(Millions)                                                                     | Dec.
    31, 2012 |         |        | Recognized
    in |   |              |   |     | Dec.
    31, 2013
|------------------------------------------------------------------------------ | ----------------- | ------- | ------ | ----------------- | - | ------------ | - | --- | -----------------
|                                                                               |                   | Income  | Equity | OCI               |   | Reclassified |   |    
|Deferred
    tax assets related to non-capital losses and capital losses       | $                 | 280     |        |                   | $ | (52)         | $ | ―   | $                
|Deferred
    tax liabilities related to differences in tax and book basis, net |                   | (1,012) |        |                   |   | (183)        |   | (4) |                  
|Net deferred tax liabilities                                                   | $                 | (732)   |        |                   | $ | (235)        | $ | (4) | $                



|(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           | $ | 2 | $                
|Deferred tax
    liabilities related to differences in tax and book basis, net |                   | (767)  |        |                   |   | (250)        |   | ― |                  
|Net deferred tax liabilities                                                   | $                 | (547)  |        |                   | $ | (216)        | $ | 2 | $                



Together with our Canadian subsidiaries,
we have deferred tax assets of $96 million (December 31, 2012 – $115 million) related to non-capital losses that expire over
the next 20 years, and $100 million (December 31, 2012 – $127 million) related to capital losses that have no expiry. Our
U.S. subsidiaries have deferred tax assets of $18 million (December 31, 2012 – $38 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.



30







ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities
was $1,046 million at December 31, 2013, an increase of $120 million from the balance at December 31, 2012. Included in accounts
payable and accrued liabilities are derivative liabilities with a carrying amount of $56 million (December 31, 2012 – $13
million).



Also included in accounts payable and accrued
liabilities is $25 million representing the present value of an amount payable to the non-controlling shareholders of 100 Bishopsgate
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.



PREFERRED EQUITY – CORPORATE

At December 31, 2013, we had $1,542 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, 2013 | Dec. 31, 2012
|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          
|Class AAA Series V                   | 1,805,489   | 70% of bank prime |               | 25           
|Class AAA Series W                   | 3,816,527   | 70% of bank prime |               | 55           
|Class AAA Series X                   | 300         | 30-day BA + 0.4%  |               | 66           
|Class AAA Series Y                   | 2,847,711   | 70% of bank prime |               | 42           
|Class AAA Series Z                   | 800,000     | 30-day BA + 0.4%  |               | 9            
|Total preferred equity               |             |                   | $             | 1,542        

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



On April 30, 2013, the existing preferred
shares of BPO Properties Ltd. (“BPP”), a subsidiary of ours, were exchanged for new class AAA preferred shares of Brookfield
Office Properties with substantially the same terms and conditions. The class AAA preferred shares series V, W and Y replaced the
series G, J and M preferred shares of BPP and began trading on the Toronto Stock Exchange under the stock symbols “BPO.PR.X”,
“BPO.PR.W” and “BPO.PR.Y”, respectively. The new class AAA preferred shares were recorded at fair value
upon initial recognition. The difference between the carrying value of the BPP preferred shares, which were previously recognized
as non-controlling interests, and the new class AAA preferred shares resulted in an increase to equity.



For the year ended December 31, 2013, we
paid preferred dividends of $81 million compared with $70 million in 2012. The increase is attributable to the issuance of Class
AAA series T preferred shares in the third quarter of 2012 and Class AAA series V, W, X, Y and Z preferred shares in the second
quarter of 2013.



COMMON EQUITY

At December 31, 2013, we had 506,701,648
issued and outstanding common shares. Taking into consideration potential common shares from options, restricted stock and conversion
of capital securities – corporate, we had 569,771,391 common shares outstanding, calculated as follows:



|                                             |  |  |  |  | Dec. 31, 2013 | Dec. 31, 2012
|-------------------------------------------- |  |  |  |  | ------------- | -------------
|Common shares issued and outstanding         |  |  |  |  | 506,701,648   | 504,720,629  
|Unexercised options and restricted stock(1)  |  |  |  |  | 20,616,322    | 20,149,403   
|Conversion of capital securities – corporate |  |  |  |  | 42,453,421    | 56,749,374   
|Potential common shares                      |  |  |  |  | 569,771,391   | 581,619,406  

| | (1) | Includes 4.1 million options that are dilutive for purposes of calculating earnings per share
for the year ended December 31, 2013
| | --- | ----------------------------------------------------------------------------------------------------------------------------------



We did not repurchase any shares during
the year ended December 31, 2013, except 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, 2013, the book value of
our common equity was $10.8 billion, compared with a market equity capitalization of approximately $9.8 billion, calculated as
total common shares outstanding multiplied by $19.25, the closing price per common share on the New York Stock Exchange on December
31, 2013.



31







Our common equity per share is calculated
as follows:



|(Millions, except per share information)  |  |  |  |  | Dec. 31, 2013 | Dec. 31, 2012
|----------------------------------------- |  |  |  |  | ------------- | -------------
|Shareholders’ equity                      |  |  |  |  | $             | 12,333       
|Less: preferred equity                    |  |  |  |  |               | (1,542)      
|                                          |  |  |  |  |               | 10,791       
|Add: option proceeds(1)                   |  |  |  |  |               | 316          
|Fully diluted common shareholders’ equity |  |  |  |  |               | 11,107       
|Potential common shares                   |  |  |  |  |               | 569.8        
|Common equity per share – diluted         |  |  |  |  | $             | 19.49        

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



PREFERRED EQUITY – SUBSIDIARIES

In addition to the preferred equity –
corporate and preferred equity classified as capital securities, we previously had preferred equity issued by our subsidiary BPP.
Refer to preferred equity – corporate for discussion of exchange of preferred equity – subsidiaries for our Class AAA
preferred shares. These preferred shares represented low-cost capital to us without dilution to our common equity base. Dividends
paid on these preferred shares were a component of the non-controlling interest in our net income.



Through DTLA, we made a tender offer to
purchase MPG’s outstanding Series A preferred equity for cash of $25.00 per share and, for each share of MPG Series A preferred
equity that was not tendered on October 15, 2013, we exchanged the preferred equity for one share of Brookfield DTLA Fund Office
Trust Investor Inc. (“DTLA Investor”)Series A preferred equity.



Subsidiaries’ preferred shares outstanding
as of December 31, 2013 totaled $243 million (December 31, 2012 – $385 million) as follows:



|(Millions, except
    share information)  | Shares
    
    Outstanding |  | Preferred 
    Shares Series | Cumulative
Dividend Rate |  | Dec.
    31, 2013 | Dec.
    31, 2012
|----------------------------------------- | --------------------------- |  | ---------------------------- | ------------------------ |  | ----------------- | -----------------
|DTLA Investor                             | 9,357,469                   |  | Series A                     | 7.63%                    |  | $                 | 243              
|                                          |                             |  |                              |                          |  |                   |                  
|BPP                                       | 1,805,489                   |  | Series G                     | 70% of bank prime        |  |                   | ―                
|                                          | 3,816,527                   |  | Series J                     | 70% of bank prime        |  |                   | ―                
|                                          | 300                         |  | Series K                     | 30-day BA + 0.4%         |  |                   | ―                
|                                          | 2,847,711                   |  | Series M                     | 70% of bank prime        |  |                   | ―                
|                                          | 800,000                     |  | Series N                     | 30-day BA + 0.4%         |  |                   | ―                
|Total preferred equity
    – subsidiaries |                             |  |                              |                          |  | $                 | 243              



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, 2013 | Dec. 31, 2012
|------------------------------------------------------------------------- | ------------------------ | ------------- | -------------
|Units of BOX(1)                                                           | 16.7%                    | $             | 488          
|Limited partnership units of Brookfield Financial Properties L.P. (“BFP") | 0.6%                     |               | 40           
|Units of Prime(2)                                                         | 19.5%                    |               | 48           
|Partnership units of The 100 Bishopsgate Partnership(3)                   | 12.5%                    |               | 1            
|Members interest in Brookfield Heritage Partners LLC                      | 49.0%                    |               | 133          
|Interest in 1801 California Street                                        | 49.0%                    |               | 63           
|Members interest in BOP Met Park LLC                                      | 50.0%                    |               | 52           
|U.S. Office Fund                                                          | 15.7%                    |               | 417          
|Total other non-controlling interests                                     |                          | $             | 1,242        

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

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

| | (3) | British pound denominated
| | --- | -------------------------



32







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 twelve months 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 refinancings (including upward refinancings) of maturing indebtedness are our principal sources of capital used to pay operating
expenses, dividends, debt service, capital expenditures and leasing costs in our commercial property portfolio. We seek to increase
income from our existing properties by controlling operating expenses and by maintaining quality standards for our properties that
promote high occupancy rates and support increases in rental rates while reducing tenant turnover. 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 for our short-term
liquidity needs. However, material changes in the factors 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 the company. These investment-grade financings are typically structured on a loan-to-appraised-value
basis of between 50% 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 debt levels on any particular asset can typically be maintained throughout a business
cycle. This enables us to limit covenants and other performance requirements, thereby reducing the risk of early payment requirements
or restrictions on the distribution of cash from the assets being financed.



To help ensure we are able to react to
investment opportunities quickly and on a value basis, we attempt to maintain a level of liquidity. Our primary sources of liquidity
consists 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.



33







Commercial property debt maturities, with
corresponding loan-to-value, at December 31, 2013, for the next five years and thereafter are as follows:



|                    |  |  |  |  |   | Commercial 
Property Debt 
Maturities(1) |  | Loan-to-Value
|------------------- |  |  |  |  | - | ---------------------------------------- |  | -------------
|                    |  |  |  |  |   |                                         
|(Millions)          |  |  |  |  |   |                                         
|2014                |  |  |  |  | $ | 1,697                                    |  | 43%          
|2015                |  |  |  |  |   | 727                                      |  | 47%          
|2016                |  |  |  |  |   | 2,854                                    |  | 47%          
|2017                |  |  |  |  |   | 2,175                                    |  | 58%          
|2018                |  |  |  |  |   | 1,447                                    |  | 57%          
|2019 and thereafter |  |  |  |  |   | 4,023                                    |  | 51%          

| | (1) | Excludes corporate debt and Mezzanine Loan
| | --- | ------------------------------------------



At December 31, 2013, our available liquidity
consists of $713 million of cash on hand, and $547 million of undrawn capacity on our corporate credit facilities. Subsequent to
year end, we increased the undrawn capacity on our corporate credit facilities to $852 million with the closing of a new $1 billion
revolving credit facility to replace the existing $695 million facility.



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, 2013, cashflow from operating activities exceeded common share dividends paid by $84 million (2012
– $64 million). As of December 31, 2013, 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.



As of December 31, 2013, our weighted average
cost of capital, assuming a long term 12.00% return on common equity, was 6.92% (December 31, 2012 – 7.13%). Our cost of
capital is lower than many of our peers because of the greater 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 composes our portfolio. In determining
the long term 12.00% return on common equity, management considers various factors including a review of various financial models
such as dividend growth model and capital asset pricing model, as well as examination of market returns. Based on the calculation
of the financial models, market returns and historical returns achieved by Brookfield Office Properties, management believes that
the long term 12.00% return is an appropriate benchmark.



The following schedule details the capitalization
of the company and the related costs thereof:



|                                          | Cost of Capital(1) |               | Underlying Value(2)
|----------------------------------------- | ------------------ | ------------- | -------------------
|(Millions)                                | Dec. 31, 2013      | Dec. 31, 2012 |                    
|Liabilities                               |                    |               |                    
|Commercial property debt                  |                    | 4.50%         |                    
|Capital securities – corporate            |                    | 5.31%         |                    
|Capital securities – fund subsidiaries(3) |                    | 12.00%        |                    
|Shareholders’ equity                      |                    |               |                    
|Preferred equity – corporate              |                    | 5.30%         |                    
|Common equity(2)                          |                    | 12.00%        |                    
|Non-controlling interests                 |                    |               |                    
|Preferred equity – subsidiaries           |                    | 7.63%         |                    
|Other non-controlling interests(3)        |                    | 12.00%        |                    
|Total(4)                                  |                    | 6.92%         |                    

| | (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 long term 12.00% return on co-invested capital
| | --- | ---------------------------------------------------------

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



34







OPERATING RESULTS



NET INCOME ATTRIBUTABLE TO SHAREHOLDERS

Our net income attributable to shareholders
for the year ended December 31, 2013, was $1,091 million ($1.89 per diluted common share), compared to $1,287 million ($2.25 per
diluted common share) in 2012. The decrease in net income attributable to shareholders year over year is largely the result of
a decrease of $442 million ($0.78 per diluted common share) in fair value gains, to $562 million, mostly attributable to the stabilization
of valuation parameters and property cash flows during the year.



Other variances in net income attributable
to common shareholders year over year include:

| | · | An increase of $131 million ($0.23 per diluted common share) in our share of net earnings from
equity accounted investments as a result of:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| | o | higher valuation gains recognized in the current year from joint ventures; and
| | - | ------------------------------------------------------------------------------

| | o | the acquisition of 125 Old Broad Street in London in the second quarter of 2013 prior to its consolidation
in the fourth quarter of 2013, offset by the disposition of KBR Tower in Houston in the fourth quarter of 2012 and the consolidation
of the Victor Building in Washington, D.C. in the third quarter of 2013
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | An increase of $109 million ($0.20 per diluted common share) in commercial property revenue primarily
due to:
| | - | -------------------------------------------------------------------------------------------------------------

| | o | single property acquisitions completed in 2012 including Metropolitan Park East & West in Seattle,
799 9th Street in Washington, D.C. and 99 Bishopsgate in London;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | acquisitions completed in the current year including Leadenhall Court in London, the Victor Building
in Washington, D.C.; 125 Old Board Street in London and Wells Fargo Center – North & South Towers, The Gas Company Tower
and 777 Tower in Los Angeles, offset by the dispositions of 2000 L Street in Washington, D.C., Landmark Square in Los Angeles and
500 Jefferson Street in Houston;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | the completion of Brookfield Place in Perth, which was reclassified from commercial developments
to commercial properties in May of 2012; offset by
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | o | an increase of $90 million ($0.16 per diluted common share) in direct commercial property expense
for similar reasons
| | - | ---------------------------------------------------------------------------------------------------------------------

| | · | A decrease of $60 million ($0.10 per diluted common share) in income taxes as a result of a decrease
in deferred tax expense recorded related to lower fair value gains recognized in the current year
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | A decrease of $50 million ($0.09 per diluted common share) in net income attributable to non-controlling
interests as a result of lower fair value gains in subsidiaries that are not wholly-owned
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | A decrease of $14 million ($0.03 per diluted common share) in interest expense due primarily to
the redemption of our Class AAA Series F shares on January 31, 2013 and Class AAA Series I shares on March 30, 2012, as well as
a weakening Canadian dollar relative to the U.S. dollar
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | An increase of $3 million ($0.01 per diluted common share) in interest and other income primarily
due to:
| | - | ---------------------------------------------------------------------------------------------------------

| | o | a gain recognized as a result of a modification to the terms of a mortgage payable which was accounted
for as a refinancing during the first quarter of 2013;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | a gain on the sale of an interest in an investment in our London portfolio; offset by
| | - | -------------------------------------------------------------------------------------

| | o | a decrease in interest income on a residential note receivable from Brookfield Residential Properties
Inc. (“BRPI”) which was repaid during the fourth quarter of 2012
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | A decrease of $12 million ($0.02 per diluted common share) in income from discontinued operations
due to the successful disposition of 33 South Sixth Street in Minneapolis in the fourth quarter of 2012 and of RBC Plaza in Minneapolis
in the first quarter of 2013
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | An increase of $19 million ($0.04 per diluted common share) in administrative costs primarily attributable
to:
| | - | --------------------------------------------------------------------------------------------------------------

| | o | an accrual of a contingent payment in the second quarter of 2013 related to a litigation settlement;
| | - | ----------------------------------------------------------------------------------------------------

| | o | transaction costs incurred as a result of the acquisition of a portfolio of assets in Los Angeles
in the fourth quarter of 2013;
| | - | --------------------------------------------------------------------------------------------------------------------------------

| | o | an increase in depreciation of capitalized expenditures associated with company initiatives; offset
by
| | - | ------------------------------------------------------------------------------------------------------

| | o | transactions costs incurred in the prior year as a result of the acquisition of a portfolio of
assets in London.
| | - | ----------------------------------------------------------------------------------------------------------------



35







Included on the following pages is a discussion
of the various components of our operating results in accordance with IFRS followed by a discussion of non-IFRS measures and corresponding
reconciliations to comparable IFRS measures.



|(Millions)                                                   |  |  |  |  |   | 2013  |   | 2012 
|------------------------------------------------------------ |  |  |  |  | - | ----- | - | -----
|Commercial property revenue                                  |  |  |  |  | $ | 2,304 | $ | 2,195
|Direct commercial property expense                           |  |  |  |  |   | 940   |   | 850  
|Interest and other income                                    |  |  |  |  |   | 90    |   | 87   
|Interest expense                                             |  |  |  |  |   |       |   |      
|Commercial property debt                                     |  |  |  |  |   | 626   |   | 625  
|Capital securities – corporate                               |  |  |  |  |   | 35    |   | 50   
|Administrative expense                                       |  |  |  |  |   | 187   |   | 168  
|Fair value gains (losses), net                               |  |  |  |  |   | 562   |   | 1,004
|Share of net earnings from equity accounted investments      |  |  |  |  |   | 258   |   | 127  
|Income (loss) from continuing operations before income taxes |  |  |  |  |   | 1,426 |   | 1,720
|Income taxes                                                 |  |  |  |  |   | 204   |   | 264  
|Income (loss) from continuing operations                     |  |  |  |  |   | 1,222 |   | 1,456
|Income (loss) from discontinued operations                   |  |  |  |  |   | ―     |   | 12   
|Net income (loss)                                            |  |  |  |  |   | 1,222 |   | 1,468
|Net income (loss) attributable to non-controlling interests  |  |  |  |  |   | 131   |   | 181  
|Net income (loss) attributable to shareholders               |  |  |  |  | $ | 1,091 | $ | 1,287



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



|(Millions, except per share information)                                  |  |  |  |  |   | 2013  |   | 2012 
|------------------------------------------------------------------------- |  |  |  |  | - | ----- | - | -----
|Net income (loss) attributable to shareholders                            |  |  |  |  | $ | 1,091 | $ | 1,287
|Preferred share dividends                                                 |  |  |  |  |   | (81)  |   | (70) 
|Net income (loss) attributable to common shareholders–basic               |  |  |  |  |   | 1,010 |   | 1,217
|Dilutive effect of conversion of capital securities – corporate           |  |  |  |  |   | 35    |   | 50   
|Net income (loss) attributable to common shareholders – diluted           |  |  |  |  | $ | 1,045 | $ | 1,267
|                                                                          |  |  |  |  |   |       |   |      
|Weighted average common shares outstanding – basic                        |  |  |  |  |   | 505.1 |   | 503.8
|Unexercised options and restricted stock                                  |  |  |  |  |   | 4.1   |   | 3.1  
|                                                                          |  |  |  |  |   | 509.2 |   | 506.9
|Conversion of capital securities – corporate                              |  |  |  |  |   | 45.1  |   | 56.7 
|Weighted average common shares outstanding – diluted                      |  |  |  |  |   | 554.3 |   | 563.6
|                                                                          |  |  |  |  |   |       |   |      
|Net income (loss) per share attributable to common shareholders – basic   |  |  |  |  | $ | 2.00  | $ | 2.42 
|                                                                          |  |  |  |  |   |       |   |      
|Net income (loss) per share attributable to common shareholders – diluted |  |  |  |  | $ | 1.89  | $ | 2.25 



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



36







Commercial
property revenue

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, fee and other income. Commercial property revenue totaled
$2,304 million during the year ended December 31, 2013, compared with $2,195 million in 2012. The increase in commercial property
revenue year over year is attributable to the acquisitions of Metropolitan Park East & West in Seattle and 799 9th
Avenue in Washington, D.C. in the second quarter of 2012, the acquisition of a portfolio of assets in London in the third quarter
of 2012 as well as the acquisitions of Leadenhall Court in London in the second quarter of 2013, the Victor Building in Washington,
D.C. in the third quarter of 2013, and 125 Old Broad Street in London, Wells Fargo Center – North & South Towers, The
Gas Company Tower and 777 Tower in Los Angeles, all in the fourth quarter of 2013. The increase is offset by the dispositions of
2000 L Street in Washington, D.C. and Landmark Square in Los Angeles in the third quarter of 2013 as well as 500 Jefferson Street
in Houston in the fourth quarter of 2013. In addition, commercial property revenue was recognized for Brookfield Place in Perth,
which was reclassified from commercial developments to commercial properties in May of 2012.



The components of commercial property revenue
are as follows:



|(Millions)                              |  |  |  |  |   | 2013  |   | 2012 
|--------------------------------------- |  |  |  |  | - | ----- | - | -----
|Rental revenue                          |  |  |  |  | $ | 2,162 | $ | 2,046
|Straight-line rental income             |  |  |  |  |   | 86    |   | 79   
|Recurring fee income                    |  |  |  |  |   | 53    |   | 53   
|Lease termination, fee and other income |  |  |  |  |   | 3     |   | 17   
|Total commercial property revenue       |  |  |  |  | $ | 2,304 | $ | 2,195



Straight-line rental income

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, 2013, approximately 65% of our leases completed had rent escalation clauses. In the U.S., approximately 77%
of our leases executed during the period had rent escalation clauses that provide for periodic increases in base rent. Of these
leases, 54% provided for annual increases and 46% provided for increases at various times during the lease, generally for periods
ranging from 3 to 6 years after commencement. On average, these escalations will increase rent annually by 3.0% over the terms
of the respective leases. In Canada, approximately 35% 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 annually by 0.7% over the
terms of the respective leases. In Australia, all of our leases executed during the period had rent escalation clauses that typically
include a fixed rent increase annually, ranging from 3% 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, 2013, we recognized $86 million of straight-line
rental income compared with $79 million in 2012. This increase in straight-line rental income year over year is primarily due to
straight-line rental income recognized during the current year on a significant lease in Downtown New York.



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 earned fees through BRSL, the largest condominium property management company in Ontario,
Canada, which manages approximately 65,000 condominium units, prior to its consolidation into FM Co. during the fourth quarter
of 2013.



The details of our recurring fee income
are as follows:



|(Millions)                                                       |  |  |  |  |   | 2013 |   | 2012
|---------------------------------------------------------------- |  |  |  |  | - | ---- | - | ----
|Property management, leasing, project management, and other fees |  |  |  |  | $ | 33   | $ | 27  
|BRSL fees                                                        |  |  |  |  |   | 20   |   | 26  
|Total recurring fee income                                       |  |  |  |  | $ | 53   | $ | 53  



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. The increase in property management, leasing, project
management, and other fees is attributable to a leasing fee on a lease in Ottawa as well as fees earned on DTLA, offset by the
decrease in BRSL fees as a result of FM Co.



37







Direct
commercial property expense

Direct commercial property expense, which
includes real estate taxes, utilities, insurance, repairs and maintenance, cleaning and other property-related expenses, were $940
million for the year ended December 31, 2013, compared with $850 million in 2012. The increase in direct commercial property expense
year over year is attributable to the acquisitions of Metropolitan Park East & West in Seattle and 799 9th Avenue
in Washington, D.C. in the second quarter of 2012, the acquisition of a portfolio of assets in London in the third quarter of 2012
as well as the acquisitions of Leadenhall Court in London in the second quarter of 2013, the Victor Building in Washington, D.C.
in the third quarter of 2013, and 125 Old Broad Street in London, Wells Fargo Center – North & South Towers, The Gas
Company Tower and 777 Tower in Los Angeles, all in the fourth quarter of 2013. The increase is offset by the dispositions of 2000
L Street in Washington, D.C. and Landmark Square in Los Angeles in the third quarter of 2013 as well as 500 Jefferson Street in
Houston in the fourth quarter of 2013. In addition, direct commercial property expense was recognized for Brookfield Place in Perth,
which was reclassified from commercial developments to commercial properties in May of 2012.



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. We have relatively strong occupancy levels across our portfolio, outperforming market occupancy
levels across most of our portfolio. In addition, we continue to reduce our lease expiry profile for the upcoming years, and our
average in-place net rent is lower than the market net rent which is reflective of the fact that a portion of our leases were executed
at a point in time wherein market rents were lower. In a market of increasing rents, this below-market gap provides an earnings
growth opportunity for us as we replace lower in-place rents with higher market rents. Accordingly, we anticipate steady growth
in our commercial property revenue as the two rates converge over time.



More than 95% 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. After giving consideration to amounts recovered from tenants, the company’s responsibility for operating expenses
is limited to property operating expenses attributable to vacant space and operating costs specifically identified as non-recoverable
under certain leases, such as ground rent. Consequently, leasing activity, which affects both occupancy and average in-place net
rent, is the principal contributor to the change in same property commercial property revenue and direct commercial property expense.



Our total portfolio occupancy was 89.1%
at December 31, 2013 compared with 92.0% at December 31, 2012. Our total portfolio average in-place net rent was $30.56 per square
foot at December 31, 2013 compared with $30.93 per square foot at December 31, 2012. Our total portfolio occupancy decreased as
a result of the Bank of America/Merrill Lynch expiry at Brookfield Place in New York and opportunistic acquisitions of certain
assets at lower occupancy rates offset by new leases in Houston, Denver and London for square footage which was previously unoccupied.
Our average in-place net rent decreased due to the Bank of America/Merrill Lynch expiry at Brookfield Place in New York and a weakening
Canadian and Australian dollar relative to the U.S. dollar, offset by leasing at higher market rents compared to expiring net rents.



38







The following table shows the average remaining
lease term, in-place net rent and market net rent as at December 31, 2013, including our equity accounted investments and interests
in assets held through participating loan interests:



|                    | Avg. 
Remaining | Avg. In-Place   | Avg. Market    
|------------------- | --------------- | --------------- | ---------------
|Leasable Area(1,2)  | Lease Term      | Net Rent(3)     | Net Rent(4)    
|(000's Sq. Ft.)     | (Years)         | ($ per Sq. Ft.) | ($ per Sq. Ft.)
|New York            |                 |                 |                
|Midtown(5)          |                 | 6,243           |                
|Downtown            |                 | 12,814          |                
|Washington, D.C.    |                 | 6,216           |                
|Los Angeles         |                 | 8,945           |                
|Houston             |                 | 6,601           |                
|Boston              |                 | 796             |                
|Denver              |                 | 2,643           |                
|Seattle             |                 | 699             |                
|San Francisco       |                 | 199             |                
|Toronto             |                 | 8,750           |                
|Calgary             |                 | 5,635           |                
|Ottawa              |                 | 1,744           |                
|Vancouver and other |                 | 585             |                
|Sydney              |                 | 4,093           |                
|Melbourne           |                 | 2,072           |                
|Perth               |                 | 1,536           |                
|London              |                 | 788             |                
|Total               |                 | 70,359          |                

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

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

| | (3) | In-place net rent represents the cash rent as of a point in time on a per square foot basis
including tenant expense reimbursements, less operating expenses being incurred for that space
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Market net rent represents the year one leasing net rent that we expect to be able to achieve
on similar space based off of market asking rents
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Midtown New York includes 450 West 33rd Street. Excluding this commercial property, Midtown
New York in-place rent would be $49.87
| | --- | ----------------------------------------------------------------------------------------------------------------------------------



A summary of our current and historical
occupancy levels at December 31st for the past two years, including our equity accounted investments and interests in
assets held through participating loan interests, is as follows:



|                    | Dec. 31, 2013 | Dec. 31, 2012
|------------------- | ------------- | -------------
|                    | Leasable(1,2) | Percent      
|                    | Sq. Ft.       | Leased       
|New York            |               |              
|Midtown             |               | 6,243        
|Downtown            |               | 12,814       
|Total New York      |               | 19,057       
|Washington, D.C.    |               | 6,216        
|Los Angeles         |               | 8,945        
|Houston             |               | 6,601        
|Boston              |               | 796          
|Denver              |               | 2,643        
|Seattle             |               | 699          
|San Francisco       |               | 199          
|Minneapolis         |               | ―            
|Toronto             |               | 8,750        
|Calgary             |               | 5,635        
|Ottawa              |               | 1,744        
|Vancouver and other |               | 585          
|Sydney              |               | 4,093        
|Melbourne           |               | 2,072        
|Perth               |               | 1,536        
|London              |               | 788          
|Total               |               | 70,359       

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

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



39







During 2013, we leased 7.8 million square
feet of space, which included 4.3 million square feet of new leasing, 1.6 million square feet of renewals and 1.9 million square
feet of early renewals, compared to expiries of 9.3 million square feet. The average leasing net rent was $31.46 per square foot,
which is an increase of 11% over the average expiring net rent of $28.46 per square foot. At December 31, 2013, the average leasing
net rent related to new and renewed leases was $35.25 per square foot and $26.79 per square foot, respectively. In addition, since
the beginning of 2013, we have reduced our rollover exposure, which is the percentage of our total leasable space currently scheduled
to expire, for the current period through 2017 by 820 basis points.



The details of our leasing activity for
the year ended December 31, 2013, including our equity accounted investments and interests in assets held through participating
loan interests, are as follows:



|                       |                   |                    |              |                    |              |              | Year One           | Average            |                  |              |             
|---------------------- | ----------------- | ------------------ | ------------ | ------------------ | ------------ | ------------ | ------------------ | ------------------ | ---------------- | ------------ | ------------
|                       | Dec.
    31, 2012 |                    | Expiring     | Leasing            | Leasing      | Leasing      | Acq. /             | Dec. 31, 2013     
|                       | Leasable          | Leased             | Expiries     | Net Rent           | New          | Renewal      | 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.)(4) | Sq. Ft.(1,2) | Sq. Ft.(1,2) | ($ per Sq. Ft.)(5) | ($ per Sq. Ft.)(6) | Sq.
    Ft.(1,2) | Sq. Ft.(1,2) | Sq. Ft.(1,2)
|New York               |                   |                    |              |                    |              |              |                    |                    |                  |              |             
|Midtown                | 6,243             | 5,725              | (489)        | $                  | 36.48        | 286          | 62                 | $                  | 58.11            | $            | 62.51       
|Downtown               | 12,305            | 11,569             | (3,298)      |                    | 35.82        | 1,294        | 50                 |                    | 28.80            |              | 37.17       
|Washington, D.C.       | 6,592             | 5,988              | (1,268)      |                    | 26.43        | 383          | 862                |                    | 28.44            |              | 30.39       
|Los Angeles            | 4,492             | 3,964              | (578)        |                    | 20.81        | 254          | 397                |                    | 20.04            |              | 22.10       
|Houston                | 6,963             | 6,044              | (561)        |                    | 17.69        | 545          | 380                |                    | 22.52            |              | 24.54       
|Boston                 | 796               | 592                | ―            |                    | —            | 22           | —                  |                    | 26.94            |              | 29.61       
|Denver                 | 2,643             | 1,758              | (312)        |                    | 20.39        | 388          | 205                |                    | 23.20            |              | 25.06       
|Seattle                | 699               | 627                | (264)        |                    | 18.25        | 71           | 190                |                    | 22.10            |              | 23.89       
|San Francisco          | ―                 | ―                  | ―            |                    | ―            | ―            | ―                  |                    | —                |              | —           
|Minneapolis            | 1,052             | 984                | ―            |                    | ―            | ―            | ―                  |                    | —                |              | —           
|Toronto                | 8,750             | 8,262              | (559)        |                    | 27.41        | 372          | 169                |                    | 31.67            |              | 32.98       
|Calgary                | 5,635             | 5,609              | (612)        |                    | 23.25        | 494          | 120                |                    | 30.23            |              | 32.17       
|Ottawa                 | 1,744             | 1,739              | (1,103)      |                    | 16.86        | 8            | 1,036              |                    | 21.85            |              | 21.85       
|Vancouver/Other        | 585               | 577                | (73)         |                    | 14.92        | 8            | 2                  |                    | 33.08            |              | 34.81       
|Sydney                 | 4,093             | 4,032              | (164)        |                    | 66.66        | 74           | 28                 |                    | 72.86            |              | 86.04       
|Melbourne              | 2,072             | 2,041              | (19)         |                    | 49.85        | 37           | —                  |                    | 46.67            |              | 54.15       
|Perth                  | 1,536             | 1,532              | (15)         |                    | 58.62        | 12           | —                  |                    | 74.57            |              | 87.46       
|London                 | 360               | 218                | (16)         |                    | 56.66        | 80           | 10                 |                    | 63.34            |              | 63.39       
|Total                  | 66,560            | 61,261             | (9,331)      | $                  | 28.46        | 4,328        | 3,511              | $                  | 28.43            | $            | 31.46       

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

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

| | (3) | Restated for re-measurements performed during the first quarter of 2013
| | --- | -----------------------------------------------------------------------

| | (4) | Expiring net rent represents the escalated cash rent at the end of the lease term on a per square
foot basis including tenant expense reimbursements, less operating expenses being incurred for that space
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Year one leasing net rent represents the cash rent at the commencement of the lease term on
a per square foot basis including tenant expense reimbursements, less operating expenses being incurred for that space
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Average leasing net rent represents the average cash rent over the lease term on a per square
foot basis including tenant expense reimbursements, less operating expense being incurred for that space
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the year ended December 31, 2013,
tenant improvements and leasing costs related to leasing activity that occurred averaged $45.62 per square foot compared to $42.90
per square foot during the same period in 2012. Further, tenant improvements and leasing costs related to leasing activity that
occurred during the year ended December 31, 2013, averaged $73.26 per square foot and $11.55 per square foot related to new and
renewed leases, respectively.



INTEREST AND OTHER INCOME

Interest and other income increased to
$90 million for the year ended December 31, 2013, from $87 million in 2012. The increase year over year is primarily attributable
to a gain recognized as a result of a modification to the terms of a mortgage payable which was accounted for as a refinancing
during the first quarter of 2013 as well as a gain on the sale of an interest in an investment in our London portfolio in the second
quarter of 2013, offset by a decrease in interest income on a residential note receivable from BRPI which was repaid during the
fourth quarter of 2012.



The components of interest and other income
are as follows:



|(Millions)                                                                                               |  |  |  |  |   | 2013 |   | 2012
|-------------------------------------------------------------------------------------------------------- |  |  |  |  | - | ---- | - | ----
|Interest income on loans receivable from BAM                                                             |  |  |  |  | $ | 5    | $ | 3   
|Interest income on residential note receivable from BRPI                                                 |  |  |  |  |   | ―    |   | 29  
|Interest income on participating loan interests with subsidiaries of BAM                                 |  |  |  |  |   | 37   |   | 32  
|Interest and other income on loans receivable designated as fair value through profit and loss (“FVTPL”) |  |  |  |  |   | ―    |   | 8   
|Other interest income                                                                                    |  |  |  |  |   | 3    |   | 2   
|Other income(1)                                                                                          |  |  |  |  |   | 45   |   | 13  
|Total interest and other income                                                                          |  |  |  |  | $ | 90   | $ | 87  

| | (1) | Includes gain from amendment of mortgage terms for the year ended December 31, 2013
| | --- | -----------------------------------------------------------------------------------



40







INTEREST EXPENSE

Commercial Property Debt

Interest expense relating to commercial
property debt increased to $626 million for the year ended December 31, 2013, from $625 million in 2012. The increase year over
year is primarily attributable to 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, including that of the U.S. Office Fund acquisition financing during the fourth quarter of 2013, and property
dispositions in addition to a weakening Canadian and Australian dollar relative to the U.S. dollar.



Capital Securities – corporate

Interest expense relating to capital securities
– corporate decreased to $35 million for the year ended December 31, 2013, from $50 million in 2012. The decrease year over
year is primarily attributable to the redemption of our Class AAA Series F shares on January 31, 2013 and Class AAA Series I shares
on March 30, 2012, as well as a weakening Canadian dollar relative to the U.S. dollar. Interest expense recorded on capital securities
– corporate relates to preferred share dividends recorded as interest expense under IFRS.



ADMINISTRATIVE EXPENSE

Administrative expense increased to $187
million for the year ended December 31, 2013, from $168 million in 2012. The increase is largely attributable to an accrual of
a contingent payment in the second quarter of 2013 related to a litigation settlement, transaction costs incurred as a result of
the acquisition of a portfolio of assets in Los Angeles in the fourth quarter of 2013 as well as an increase in depreciation of
capitalized expenditures associated with company initiatives, offset by transactions costs incurred in the prior year as a result
of the acquisition of a portfolio of assets in London. Refer to Corporate Guarantees and Contingent Obligations on page 34 for
litigation settlement.



The components of administrative expense
are as follows:



|(Millions)                         |  |  | 2013 | 2012
|---------------------------------- |  |  | ---- | ----
|General and administrative expense |  |  |      |     
|Transaction costs                  |  |  |      |     
|Depreciation                       |  |  |      |     
|Total administrative expense       |  |  |      |     



FAIR VALUE GAINS (LOSSES), NET

During the year ended December 31, 2013,
the company recognized fair value gains of $562 million (2012 – $1,004 million). Fair value adjustments are determined based
on the movement of various parameters on a quarterly basis, including changes in projected cash flows as a result of leasing and
timing, discount rates and terminal capitalization rates. The decrease in fair value gains recognized compared to the prior year
is primarily attributable to changes in projected cash flows as a result of timing and leasing in properties in all four regions
in addition to changes in discount rates on properties in the United States and Australia as well as changes in terminal capitalization
rates on properties in the United States.



|(Millions)                                      |  |  |  |  |   | 2013 |   | 2012 
|----------------------------------------------- |  |  |  |  | - | ---- | - | -----
|Investment properties                           |  |  |  |  |   |      |   |      
|Commercial properties                           |  |  |  |  | $ | 430  | $ | 897  
|Commercial developments                         |  |  |  |  |   | 122  |   | 82   
|                                                |  |  |  |  |   | 552  |   | 979  
|Financial instruments                           |  |  |  |  |   |      |   |      
|Participating loan interests                    |  |  |  |  |   | 21   |   | 2    
|Other financial instruments designated as FVTPL |  |  |  |  |   | (11) |   | 23   
|                                                |  |  |  |  |   | 10   |   | 25   
|Total fair value gains (losses), net            |  |  |  |  | $ | 562  | $ | 1,004



SHARE OF NET EARNINGS FROM EQUITY ACCOUNTED
INVESTMENTS



|                                                              | Fair Value Adjustments
        and Other |      |   | Share of Earnings
|------------------------------------------------------------- | ---------------------------------------- | ---- | - | -----------------
|(Millions)                                                    |                                          | 2013 |   | 2012             
|Total share of net earnings from equity accounted investments | $                                        | 158  | $ | 22               



Share of net earnings from equity accounted
investments increased to $258 million for the year ended December 31, 2013, from $127 million in 2012. The increase is primarily
attributable to a higher amount of valuation gains of $158 million recognized in the current year from joint ventures and from
the acquisition of 125 Old Broad Street in London in the second quarter of 2013 prior to its consolidation in the fourth quarter
of 2013, offset by the disposition of KBR Tower in Houston in the fourth quarter of 2012 and the consolidation of the Victor Building
in Washington, D.C. in the third quarter of 2013.



41







INCOME TAXES

Income tax expense for year ended December
31, 2013 was $204 million, as compared with $264 million in 2012. The decrease year over year is primarily attributable to a decrease
in current tax expense related to a reversal of reserves in the second quarter of 2013.



The major components of income tax expense
include the following:



|(Millions)                     |  |  |  |  |   | 2013 |   | 2012
|------------------------------ |  |  |  |  | - | ---- | - | ----
|Current tax expense (recovery) |  |  |  |  | $ | (28) | $ | 48  
|Deferred tax expense(1)        |  |  |  |  |   | 232  |   | 216 
|Total income taxes             |  |  |  |  | $ | 204  | $ | 264 

| | (1) | Includes $3 million of amortization of the tax benefit recorded in accumulated other comprehensive
income (loss) related to losses on derivatives designated as cash flow hedges for the year ended December 31, 2013 (2012 –
nil)
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



DISCONTINUED OPERATIONS

Discontinued operations included our Minneapolis
portfolio, a specific geographic market that was held for sale, which we exited in the first quarter of 2013. The following table
summarizes income from discontinued operations:



|(Millions, except per share information)   |  |  |  |  |   | 2013 |   | 2012
|------------------------------------------ |  |  |  |  | - | ---- | - | ----
|Commercial property revenue                |  |  |  |  | $ | 3    | $ | 54  
|Direct commercial property expense         |  |  |  |  |   | 3    |   | 29  
|Interest expense                           |  |  |  |  |   | ―    |   | 6   
|Fair value gains (losses), net             |  |  |  |  |   | ―    |   | (7) 
|Income (loss) from discontinued operations |  |  |  |  | $ | ―    | $ | 12  



NON-CONTROLLING INTERESTS

The following table outlines income attributable
to non-controlling interests:



|(Millions)                      |  |  |  |  |   | 2013 |   | 2012
|------------------------------- |  |  |  |  | - | ---- | - | ----
|Preferred shares – subsidiaries |  |  |  |  | $ | 6    | $ | 7   
|Other non-controlling interests |  |  |  |  |   | 125  |   | 174 
|Total non-controlling interests |  |  |  |  | $ | 131  | $ | 181 



Preferred Shares – Subsidiaries

Preferred
shares – subsidiaries consists of dividends on preferred shares issued by BPP andDTLA Investor.



For the year ended December 31, 2013, dividends
of $2 million were paid on preferred shares issued by BPP, compared to $7 million in 2012 as a result of the exchange on April
30, 2013. Refer to preferred equity – corporate for discussion of exchange of preferred equity – subsidiaries for Class
AAA preferred shares of the company.



For the year
ended December 31, 2013, dividends of $4 million were accrued on preferred shares issued byDTLA Investor,
compared to nil in 2012 as a result of the exchange on October 15, 2013. Refer to preferred equity – subsidiaries for discussion
of exchange of each share of MPG Series A preferred equity that was not tendered for one share of DTLA Investor Series A preferred
equity.



Other Non-Controlling Interests

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



Non-controlling interests in subsidiary
earnings decreased to $125 million for the year ended December 31, 2013, from $174 million in 2012.



The following table outlines the earnings
attributable to other shareholders of our subsidiaries:



|(Millions)                            | Type                    |  |  |  |   | 2013 | 2012
|------------------------------------- | ----------------------- |  |  |  | - | ---- | ----
|BOX                                   | Participating interests |  |  |  |   | $    | 27  
|BFP                                   | Participating interests |  |  |  |   |      | 4   
|Prime                                 | Participating interests |  |  |  |   |      | 9   
|Brookfield Heritage Partners LLC      | Participating interests |  |  |  |   |      | 27  
|1801 California Street                | Participating interests |  |  |  |   |      | 28  
|BOP Met Park LLC                      | Participating interests |  |  |  |   |      | ―   
|U.S. Office Fund                      | Participating interests |  |  |  |   |      | 30  
|Total other non-controlling interests |                         |  |  |  | $ | 125  | $   



42











NON-IFRS MEASURES

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 commercial property net operating income, funds from operations and total return in addition to net income attributable
to common shareholders. Commercial property net operating income, funds from operations and total return do not have any standardized
meaning prescribed by IFRS, and are therefore unlikely to be comparable to similar measures presented by other companies.



Commercial Property Net Operating Income

Commercial property net operating income
is defined by us 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 period. Accordingly, same property results exclude properties
acquired, sold, or reclassified from commercial development to commercial properties during each period as well as 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 period.



Funds from Operations

Our definition of funds from operations
or “FFO” 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 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 common 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 common shareholders as we believe net income attributable to common 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.



Common Equity per Share – Diluted
(Adjusted)

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.



When calculating diluted funds from operations,
total return and common equity per share – diluted (adjusted) in this MD&A, we exclude the effects of settling our capital
securities – corporate through the issuance of common shares as our past practice has been to redeem our capital securities
– corporate 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.



43







COMMON
EQUITY PER SHARE – DILUTED (ADJUSTED)

|                                            |  |  |  |  | Dec. 31, 2013 | Dec. 31, 2012
|------------------------------------------- |  |  |  |  | ------------- | -------------
|Common shares issued and outstanding        |  |  |  |  | 506,701,648   | 504,720,629  
|Unexercised options and restricted stock(1) |  |  |  |  | 20,616,322    | 20,149,403   
|Potential common shares (adjusted)(2)       |  |  |  |  | 527,317,970   | 524,870,032  

| | (1) | Includes 3.8 million options that are dilutive for purposes of calculating earnings per share
for the year ended December 31, 2013
| | --- | ----------------------------------------------------------------------------------------------------------------------------------

| | (2) | Includes potential common shares at December 31, 2013, and December 31, 2012, from the exercise
of options and restricted stock but excludes the effects of settling our capital securities –corporate in common shares as
we intend to redeem our capital securities – corporate for cash prior to conversion
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our capital securities – corporate
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 International Accounting Standard (“IAS”) 33, “Earnings per
Share,” we are required to presume the capital securities – corporate 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
– corporate will be settled partially or wholly in cash.



Our common equity per share – diluted
(adjusted) is calculated as follows:



|(Millions, except per share information)     |  |  |  |  | Dec. 31, 2013 | Dec. 31, 2012
|-------------------------------------------- |  |  |  |  | ------------- | -------------
|Fully diluted common shareholders’ equity    |  |  |  |  | $             | 11,107       
|Potential common shares (adjusted)(1)        |  |  |  |  |               | 527.3        
|Common equity per share – diluted (adjusted) |  |  |  |  | $             | 21.06        

| | (1) | Includes potential common shares at December 31, 2013, and December 31, 2012, from the exercise
of options as well as restricted stock but excludes the effects of settling our capital securities – corporate in common
shares as we intend to redeem our capital securities – corporate for cash prior to conversion
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Commercial
property net operating income

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
$1,364 million for the year ended December 31, 2013, compared with $1,345 million in 2012. A reconciliation of commercial property
net operating income to the most directly comparable measure, net income, calculated in accordance with IFRS is as follows:



|(Millions)                                                   |  |  |  |  |   | 2013  |   | 2012 
|------------------------------------------------------------ |  |  |  |  | - | ----- | - | -----
|Commercial property revenue                                  |  |  |  |  | $ | 2,304 | $ | 2,195
|Direct commercial property expense                           |  |  |  |  |   | 940   |   | 850  
|Commercial property net operating income                     |  |  |  |  |   | 1,364 |   | 1,345
|Interest and other income                                    |  |  |  |  |   | 90    |   | 87   
|Interest expense                                             |  |  |  |  |   |       |   |      
|Commercial property debt                                     |  |  |  |  |   | 626   |   | 625  
|Capital securities – corporate                               |  |  |  |  |   | 35    |   | 50   
|Administrative expense                                       |  |  |  |  |   | 187   |   | 168  
|Fair value gains (losses), net                               |  |  |  |  |   | 562   |   | 1,004
|Share of net earnings from equity accounted investments      |  |  |  |  |   | 258   |   | 127  
|Income (loss) from continuing operations before income taxes |  |  |  |  |   | 1,426 |   | 1,720
|Income taxes                                                 |  |  |  |  |   | 204   |   | 264  
|Income (loss) from continuing operations                     |  |  |  |  |   | 1,222 |   | 1,456
|Income (loss) from discontinued operations                   |  |  |  |  |   | ―     |   | 12   
|Net income (loss)                                            |  |  |  |  | $ | 1,222 | $ | 1,468



In addition, we evaluate the performance
of management by comparing net operating income of the commercial property portfolio on a same property basis. Same property are
properties included in our consolidated results that we own and operate throughout both the current and prior period. Accordingly,
same property net operating income excludes properties acquired, sold, or reclassified from commercial development to commercial
properties during each period as well as 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 period. For the years ended December 31, 2013 and 2012,
we have not excluded any properties that are undergoing a redevelopment.



44







The following is a reconciliation from
same property commercial property net operating income to total commercial property net operating income for the year ended December
31, 2013 and 2012:



|(Millions)                                                             |  |  |  |  |               | 2013          |   | 2012 
|---------------------------------------------------------------------- |  |  |  |  | ------------- | ------------- | - | -----
|Same property commercial property net operating income                 |  |  |  |  | $             | 1,151         | $ | 1,186
|Lease terminations, fee and other income                               |  |  |  |  |               | 3             |   | 17   
|Recurring fee income                                                   |  |  |  |  |               | 53            |   | 53   
|Properties reclassified from commercial developments during the period |  |  |  |  |               | 76            |   | 46   
|Properties acquired during the period                                  |  |  |  |  |               | 63            |   | 15   
|Properties sold during the period                                      |  |  |  |  |               | 18            |   | 28   
|Commercial property net operating income                               |  |  |  |  | $             | 1,364         | $ | 1,345
|                                                                       |  |  |  |  |               |              
|                                                                       |  |  |  |  | Dec. 31, 2013 | Dec. 31, 2012
|Same property average in-place net rent                                |  |  |  |  | $             | 27.68         | $ | 28.29
|Same property occupancy                                                |  |  |  |  |               | 89.5%         |   | 91.8%



Same property commercial property net operating
income decreased by $35 million or 3.0% year over year as the result of the Bank of America/Merrill Lynch lease expiry at Brookfield
Place in New York in the fourth quarter of 2013 and a weaker Canadian and Australian dollar relative to the U.S. dollar during
the year. Absent the impact of this large lease expiration and weaker foreign currencies, same property net operating income increased
by $24 million or 2.5% in the year.



RECONCILIATION OF NET INCOME TO FUNDS FROM OPERATIONS AND
TOTAL RETURN



|(Millions)                                                               |  |  |  |  |   | 2013  |   | 2012   
|------------------------------------------------------------------------ |  |  |  |  | - | ----- | - | -------
|Net income attributable to shareholders                                  |  |  |  |  | $ | 1,091 | $ | 1,287  
|Add (deduct) non-cash and certain non-recurring items:                   |  |  |  |  |   |       |   |        
|Fair value gains, net                                                    |  |  |  |  |   | (562) |   | (1,004)
|Fair value adjustments in net earnings from equity accounted investments |  |  |  |  |   | (158) |   | (22)   
|Non-controlling interests in above items                                 |  |  |  |  |   | 78    |   | 118    
|Income taxes                                                             |  |  |  |  |   | 196   |   | 264    
|Amortization of lease incentives                                         |  |  |  |  |   | 7     |   | ―      
|Discontinued operations                                                  |  |  |  |  |   | ―     |   | 7      
|Funds from operations                                                    |  |  |  |  | $ | 652   | $ | 650    



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



|(Millions, except per share information)                |  |  |  |  |   | 2013 |   | 2012
|------------------------------------------------------- |  |  |  |  | - | ---- | - | ----
|Funds from operations                                   |  |  |  |  | $ | 652  | $ | 650 
|Preferred share dividends                               |  |  |  |  |   | (81) |   | (70)
|                                                        |  |  |  |  | $ | 571  | $ | 580 
|Funds from operations per share – diluted               |  |  |  |  | $ | 1.05 | $ | 1.02
|Funds from operations per share – diluted (adjusted)(1) |  |  |  |  | $ | 1.12 | $ | 1.14

| | (1) | The calculation of funds from operations per diluted share (adjusted) includes potential common
shares at December 31, 2013, and December 31, 2012, from the exercise of options as well as restricted stock but excludes the effects
of settling our capital securities- corporate in common shares as we intend to redeem our capital securities – corporate
for cash prior to conversion
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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)           |  |  |  |  |   | 2013  |   | 2012 
|-------------------------------------------------- |  |  |  |  | - | ----- | - | -----
|Funds from operations                              |  |  |  |  | $ | 652   | $ | 650  
|Fair value gains, net of non-controlling interests |  |  |  |  |   | 642   |   | 908  
|Preferred share dividends                          |  |  |  |  |   | (81)  |   | (70) 
|Total return                                       |  |  |  |  | $ | 1,213 | $ | 1,488
|Total return per share – diluted                   |  |  |  |  | $ | 2.20  | $ | 2.64 
|Total return per share – diluted (adjusted)(1)     |  |  |  |  | $ | 2.38  | $ | 2.93 

| | (1) | The calculation of total return per diluted share (adjusted) includes potential common shares
at December 31, 2013, and December 31, 2012, from the exercise of options as well as restricted stock but excludes the effects
of settling our capital securities – corporate in common shares as we intend to redeem our capital securities – corporate
for cash prior to conversion
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



45







SEGMENTED INFORMATION

We operate four reportable segments, the
United States, Canada, Australia and the United Kingdom, in 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 San Francisco 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, 2013, approximately
61% of our commercial property revenue is derived from the United States (2012– 62%) and at December 31, 2013, approximately
63% of our total assets are invested in the United States (December 31, 2012 – 60%).



Information regarding the results of each
reportable segment is included below. Performance is measured based upon funds from operations, the measure used by management
in assessing segment profit or loss. While funds from operations is a non-IFRS measure on a total basis, it is an IFRS measure
on a segment basis because it is the measure of segment profit and loss.







|                                                                     | United
    States |       |   | Canada |  |  | Australia |       |   | United
    Kingdom |  |  | Total
|-------------------------------------------------------------------- | ----------------- | ----- | - | ------ |  |  | --------- | ----- | - | ------------------ |  |  | -----
|(Millions)                                                           |                   | 2013  |   | 2012   |  |  |           | 2013  |   | 2012               |  |  |      
|Commercial property revenue                                          | $                 | 1,411 | $ | 1,356  |  |  | $         | 552   | $ | 563                |  |  | $    
|Direct commercial property expense                                   |                   | (616) |   | (550)  |  |  |           | (233) |   | (237)              |  |  |      
|Interest and other income                                            |                   | 47    |   | 11     |  |  |           | 3     |   | 33                 |  |  |      
|Interest expense(1)                                                  |                   | (406) |   | (414)  |  |  |           | (143) |   | (155)              |  |  |      
|Administrative expense(2)                                            |                   | (104) |   | (84)   |  |  |           | (59)  |   | (65)               |  |  |      
|Other                                                                |                   | (6)   |   | —      |  |  |           | 3     |   | 1                  |  |  |      
|Funds from operations of equity accounted investments                |                   | 62    |   | 79     |  |  |           | 7     |   | 7                  |  |  |      
|Funds from discontinued operations                                   |                   | —     |   | 19     |  |  |           | —     |   | —                  |  |  |      
|Non-controlling
    interests                                        |                   | (28)  |   | (37)   |  |  |           | (23)  |   | (24)               |  |  |      
|Funds from operations                                                |                   | 360   |   | 380    |  |  |           | 107   |   | 123                |  |  |      
|Fair value gains (losses), net                                       |                   | 285   |   | 473    |  |  |           | 95    |   | 387                |  |  |      
|Fair value gains (losses), net from equity accounted
    investments |                   | 124   |   | 32     |  |  |           | —     |   | —                  |  |  |      
|Other                                                                |                   | 18    |   | 5      |  |  |           | (2)   |   | (1)                |  |  |      
|Income taxes                                                         |                   | (26)  |   | (56)   |  |  |           | (79)  |   | (128)              |  |  |      
|Funds from discontinued
    operations                               |                   | —     |   | (19)   |  |  |           |       |   | —                  |  |  |      
|Non-controlling
    interests                                        |                   | 28    |   | 37     |  |  |           | 23    |   | 24                 |  |  |      
|Income (loss) from continuing operations                             |                   | 789   |   | 852    |  |  |           | 144   |   | 405                |  |  |      
|Income (loss)
    from discontinued operations                       |                   | —     |   | 12     |  |  |           | —     |   | —                  |  |  |      
|Net income (loss)                                                    |                   | 789   |   | 864    |  |  |           | 144   |   | 405                |  |  |      
|Net income (loss)
    attributable to non-controlling interests      |                   | 94    |   | 81     |  |  |           | 28    |   | 96                 |  |  |      
|Net income
    (loss) attributable to shareholders                   | $                 | 695   | $ | 783    |  |  | $         | 116   | $ | 309                |  |  | $    



| | (1) | Includes allocation of interest expense on corporate debt and capital securities – corporate
of $16 million to United States and $52 million to Canada for year ended December 31, 2013 (2012 - $18 million to United States
and $60 million to Canada)
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Includes allocation of corporate level administrative expenses of $21 million to United States,
$7 million to Canada and $11 million to Australia for the year ended December 31, 2013 (2012 - $18 million to United States, $8
million to Canada and nil to Australia)
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                  | United
    States |          |   | Canada |          |          | Australia |       |          | United
    Kingdom |  |  | Total   
|------------------------------------------------- | ----------------- | -------- | - | ------ | -------- | -------- | --------- | ----- | -------- | ------------------ |  |  | --------
|                                                  | Dec. 31,          | Dec. 31, |   |        | Dec. 31, | Dec. 31, |           |       | Dec. 31, | Dec. 31,           |  |  | Dec. 31,
|(Millions)                                        |                   | 2013     |   | 2012   |          |          |           | 2013  |          | 2012               |  |  |         
|Non-current assets(1)                             | $                 | 18,769   | $ | 16,006 |          |          | $         | 5,364 | $        | 5,401              |  |  | $       
|Other assets                                      |                   | 833      |   | 528    |          |          |           | 235   |          | 112                |  |  |         
|Total assets                                      | $                 | 19,602   | $ | 16,534 |          |          | $         | 5,599 | $        | 5,513              |  |  | $       
|Total liabilities                                 | $                 | 10,559   | $ | 8,417  |          |          | $         | 3,929 | $        | 3,753              |  |  | $       
|Investment in commercial properties               | $                 | 2,350    | $ | 316    |          |          | $         | —     | $        | —                  |  |  | $       
|Investment in development properties              |                   | 5        |   | —      |          |          |           | —     |          | 91                 |  |  |         
|Investments in equity accounted investments       |                   | —        |   | —      |          |          |           | —     |          | —                  |  |  |         
|Capital expenditures – commercial properties      |                   | 296      |   | 203    |          |          |           | 34    |          | 51                 |  |  |         
|Capital expenditures
    – development properties |                   | 132      |   | 58     |          |          |           | 149   |          | 46                 |  |  |         

| | (1) | At December 31, 2013, non-current assets includes equity accounted investments in the United
States, Canada, Australia and the United Kingdom segments of $1,569 million, $53 million, $891 million and $96 million, respectively
(December 31, 2012 - $1,486 million, $16 million, $1,034 million and $26 million, respectively)
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



46







QUARTERLY RESULTS

The results by quarter are as follows:



|                                                                              |     | 2013 |      |      | 2012
|----------------------------------------------------------------------------- | --- | ---- | ---- | ---- | ----
|(Millions,
    except per share
information)                                  |     | Q4   | Q3   | Q2   | Q1  
|Commercial
    property revenue                                               | $   | 595  | $    | 574  | $   
|Net income from continuing operations
    attributable to shareholders        | 152 |      | 223  |      | 441 
|Net
    income attributable to shareholders                                   | 152 |      | 223  |      | 441 
|                                                                              |     |      |      |      |     
|Net income (loss) per share attributable
    to common shareholders – basic   |     |      |      |      |     
|Continuing operations                                                         | $   | 0.26 | $    | 0.40 | $   
|Discontinued
    operations                                                   |     | —    |      | —    |     
|                                                                              |     | $    | 0.26 | $    | 0.40
|                                                                              |     |      |      |      |     
|Net income (loss) per share attributable
    to common shareholders – diluted |     |      |      |      |     
|Continuing operations                                                         | $   | 0.25 | $    | 0.38 | $   
|Discontinued
    operations                                                   |     | —    |      | —    |     
|                                                                              |     | $    | 0.25 | $    | 0.38



Commercial property revenue varies quarter
to quarter due to acquisitions and dispositions of investment properties as well as new leases and renewals at market net 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.



47







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, as well as macro-economic factors such as economic growth, foreign exchange rates, inflation, 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 the company 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 at www.sedar.com or www.sec.gov.



PROPERTY RELATED RISKS

Our strategy is to invest in high-quality
office properties as defined by the physical characteristic of the asset and, more important, 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 core 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 of premier office properties,
lease rollovers 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 to “Lease Rollover Risk” on page 55
of this MD&A for further details.



INTEREST RATE AND FINANCING RISK

We attempt to stagger the maturities of
our mortgage portfolio evenly over a 10-year time horizon. We believe that this strategy will most effectively manage interest
rate risk.



As outlined under “Capital Resources
and Liquidity,” on page 38 of this MD&A, we have an ongoing 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, 2013, we had a floating
rate bank credit facility of $695 million which matures in March 2014. Subsequent to year end, we increased our floating rate bank
credit facility to $1 billion with a term of four years with two six-month extension options. 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 August 2017. At December 31, 2013, the balances drawn on these facilities were $336 million.



Approximately 33% of our outstanding commercial
property and corporate debt at December 31, 2013, is floating rate debt (December 31, 2012 – 29%) and subject to fluctuations
in interest rates. The effect of a 100-basis point increase in interest rates on interest expense relating to our floating rate
debt, up to 5% LIBOR, is an increase in interest expense of $45 million on an annual basis or $0.08 per diluted weighted average
share outstanding on an annualized basis. 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 exposure to interest rates on fixed rate
debt that is maturing in the near term, which we define as 3 years, totals $1,390 million based on the amount of debt at maturity.
We also have exposure to interest rates within our equity accounted investments. The effect of a 100-basis point increase in interest
rates on interest expense relating to our floating rate debt on equity accounted investments, up to 5% LIBOR, is a decrease in
share of earnings from equity accounted investments of $3 million on an annual basis.



As discussed in the Derivative Financial
Instruments section beginning on page 57, 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.



This analysis does not reflect the impact
a changing interest rate environment could have on our overall performance and, as a result, it does not reflect the actions management
may take in such an environment.



48







We currently have a level of indebtedness
for the company of 51% of the fair market value of our commercial properties based on December 31, 2013 commercial property valuations
(December 31, 2012 – 48%). This level of indebtedness is considered by the company to be conservative given the lending parameters
currently existing in the real estate marketplace and the fair market value of our commercial properties. Based on this, the company
believes that all debts will be financed or refinanced as they come due in the foreseeable future.



CREDIT RISK

Credit risk arises from the possibility
that tenants may be unable to fulfill their lease commitments. We mitigate this risk by ensuring that our tenant mix is diversified
and by limiting our exposure to any one tenant. We also maintain a portfolio that is diversified by property type so that exposure
to a business sector is lessened. Currently, government and government agencies represent 7.5% of total leasable area and no single
tenant represents more than this.



We attempt to mitigate our credit risk
by signing long term leases with tenants who have investment grade credit ratings. We direct special attention to credit quality
of our tenants in order to ensure long term sustainability of rental revenues through economic cycles. Once a lease has been signed,
we proactively monitor the financial performance of significant tenants on a regular basis and review the status of arrears. We
regularly monitor indicators of increased risk within our tenant portfolio and maintain a formalized tenant credit report to identify
changes in credit quality.



The following list shows our top 20 largest
tenants by leasable area in our portfolio and their respective lease commitments:



|   |                                     |                                |                 | 000’s
    Sq. Ft.(2) |       |       |      |     
|-- | ----------------------------------- | ------------------------------ | --------------- | -------------------- | ----- | ----- | ---- | ----
|   | Tenant                              | Primary
    Location           | CreditRating(1) | 2014                 | 2015  | 2016  | 2017 | 2018
|1  | Government & Government Agencies    | Various                        | AAA/AA+         | 1,389                | 827   | 275   |      | 580 
|2  | CIBC World Markets(4)               | Calgary/Houston/NY/Tor.        | A+              |                      |       | 7     |      |     
|3  | Suncor Energy Inc.                  | Calgary                        | BBB+            |                      |       |       |      |     
|4  | Morgan Stanley                      | Denver/NY/Toronto              | A-              |                      | 66    |       |      |     
|5  | Bank of Montreal                    | Calgary/Toronto                | A+              | 22                   |       | 17    |      | 27  
|6  | Bank of America/Merrill Lynch       | Denver/LA/NY/Tor./D.C.         | A-              |                      | 13    |       |      | 47  
|7  | Royal Bank of Canada                | Bos./Cal./LA/NY/Tor./Van./D.C. | AA-             |                      | 12    | 16    | 150  | 1   
|8  | PricewaterhouseCoopers              | Cal./Houston/LA/Sydney/Perth   | Not Rated       |                      | 237   | 424   |      |     
|9  | JPMorgan Chase & Co.                | Denver/Houston/LA/NY           | A               |                      | 18    |       | 8    |     
|10 | KPMG                                | LA/Perth/Sydney/Toronto        | Not Rated       | 183                  |       | 298   |      |     
|11 | Imperial Oil                        | Calgary                        | AAA             |                      |       | 718   |      |     
|12 | EnCana Corporation                  | Calgary/Denver                 | BBB             |                      | 241   |       |      |     
|13 | BHP Billiton                        | Perth                          | A+              |                      |       |       |      |     
|14 | Latham & Watkins LLP                | London/LA                      | Not Rated       |                      | 95    | 43    |      |     
|15 | Devon Energy                        | Houston                        | BBB+            |                      |       |       |      |     
|16 | Deloitte                            | Cal./Houston/Toronto           | Not Rated       |                      | 98    | 49    |      |     
|17 | Macquarie Group                     | Cal./Houston/Perth/Sydney/Tor. | BBB             | 79                   |       | 8     |      |     
|18 | Cadwalader, Wickersham & Taft LLP   | Houston/NY                     | Not Rated       |                      |       |       |      |     
|19 | Commonwealth Bank                   | Melbourne/Sydney               | AA-             |                      |       | 5     |      | 3   
|20 | Clearly, Gottlieb, Steen & Hamilton | New York                       | Not Rated       |                      |       |       |      |     
|   | Total                               |                                |                 | 1,673                | 1,607 | 1,860 | 158  | 658 
|   | Percent of Total                    |                                |                 | 7.9%                 | 7.5%  | 8.7%  | 0.7% | 3.1%

| | (1) | From S&P, Moody’s or DBRS
| | --- | -------------------------

| | (2) | Percentage of total leasable area, 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) | 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 and approximately 100,000 square feet to Sumitomo Corporation of America
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



49









LEASE ROLL-OVER RISK

Lease roll-over risk arises from the possibility
that we may experience difficulty renewing leases as they expire or in re-leasing space vacated by tenants upon early lease expiry.
We attempt to stagger the lease expiry profile so that we are not faced with disproportionate amounts of space expiring in any
one year. Approximately seven percent of our leases mature annually up to 2018. Our portfolio has a weighted average remaining
lease life of eight 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.



The following table sets out lease expiries,
by square footage, for our portfolio at December 31, 2013, including our equity accounted investments:



|(Square Feet in Thousands) |  | Current |       |  | 2014 |  |       | 2015 |  |  | 2016  |  |  | 2017 |       |  | 2018 |  |       | 2019 |  |  | 2020  |  |  | Beyond |       |  | Total | 
|-------------------------- |  | ------- | ----- |  | ---- |  | ----- | ---- |  |  | ----- |  |  | ---- | ----- |  | ---- |  | ----- | ---- |  |  | ----- |  |  | ------ | ----- |  | ----- | 
|Midtown New York           |  |         | 659   |  |      |  | 58    |      |  |  | 370   |  |  |      | 360   |  |      |  | 54    |      |  |  | 271   |  |  |        | 834   |  |       | 
|Downtown New York          |  |         | 2,714 |  |      |  | 406   |      |  |  | 836   |  |  |      | 680   |  |      |  | 646   |      |  |  | 78    |  |  |        | 7     |  |       | 
|Washington, D.C.           |  |         | 614   |  |      |  | 762   |      |  |  | 367   |  |  |      | 275   |  |      |  | 226   |      |  |  | 1,551 |  |  |        | 322   |  |       | 
|Los Angeles                |  |         | 1,383 |  |      |  | 568   |      |  |  | 319   |  |  |      | 630   |  |      |  | 756   |      |  |  | 1,026 |  |  |        | 590   |  |       | 
|Houston                    |  |         | 546   |  |      |  | 247   |      |  |  | 657   |  |  |      | 262   |  |      |  | 453   |      |  |  | 803   |  |  |        | 445   |  |       | 
|Boston                     |  |         | 182   |  |      |  | 13    |      |  |  | 9     |  |  |      | 5     |  |      |  | 16    |      |  |  | 254   |  |  |        | 24    |  |       | 
|Denver                     |  |         | 604   |  |      |  | 153   |      |  |  | 107   |  |  |      | 34    |  |      |  | 209   |      |  |  | 100   |  |  |        | 513   |  |       | 
|Seattle                    |  |         | 75    |  |      |  | 17    |      |  |  | 85    |  |  |      | 79    |  |      |  | 131   |      |  |  | 93    |  |  |        | 68    |  |       | 
|San Francisco              |  |         | 48    |  |      |  | 10    |      |  |  | 13    |  |  |      | 12    |  |      |  | ―     |      |  |  | 95    |  |  |        | 4     |  |       | 
|Toronto                    |  |         | 506   |  |      |  | 272   |      |  |  | 501   |  |  |      | 792   |  |      |  | 539   |      |  |  | 504   |  |  |        | 653   |  |       | 
|Calgary                    |  |         | 24    |  |      |  | 49    |      |  |  | 215   |  |  |      | 468   |  |      |  | 65    |      |  |  | 227   |  |  |        | 100   |  |       | 
|Ottawa                     |  |         | 64    |  |      |  | 1,099 |      |  |  | 543   |  |  |      | 8     |  |      |  | 5     |      |  |  | 3     |  |  |        | ―     |  |       | 
|Vancouver and other        |  |         | 71    |  |      |  | 8     |      |  |  | 35    |  |  |      | 77    |  |      |  | 20    |      |  |  | 27    |  |  |        | 36    |  |       | 
|Sydney                     |  |         | 123   |  |      |  | 120   |      |  |  | 579   |  |  |      | 787   |  |      |  | 122   |      |  |  | 688   |  |  |        | 77    |  |       | 
|Melbourne                  |  |         | 13    |  |      |  | 95    |      |  |  | 152   |  |  |      | 106   |  |      |  | 157   |      |  |  | 37    |  |  |        | 513   |  |       | 
|Perth                      |  |         | 7     |  |      |  | 263   |      |  |  | 9     |  |  |      | 12    |  |      |  | 88    |      |  |  | 14    |  |  |        | 217   |  |       | 
|London                     |  |         | 68    |  |      |  | 133   |      |  |  | 6     |  |  |      | 66    |  |      |  | ―     |      |  |  | ―     |  |  |        | 93    |  |       | 
|Total                      |  |         | 7,701 |  |      |  | 4,273 |      |  |  | 4,803 |  |  |      | 4,653 |  |      |  | 3,487 |      |  |  | 5,771 |  |  |        | 4,496 |  |       | 
|Total % expiring           |  |         | 10.9% |  |      |  | 6.1%  |      |  |  | 6.8%  |  |  |      | 6.6%  |  |      |  | 5.0%  |      |  |  | 8.2%  |  |  |        | 6.4%  |  |       | 



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 investment 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
eight years.



50







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 $2.5 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 five insurers that have a deductible equal to
5% of the total insured values subject to a minimum of $1 million and maximum of $5 million. 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 and DTLA), 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 II to recover 85% of its losses, less certain deductibles, from the United States government with the remaining 15% to
be funded by us.



As a result of the acquisition of MPG,
we assumed an all risk property insurance policy (including coverage for the perils of earthquake) which expires on April 19, 2014.
Our all risk policy limit for the MPG properties is $1.25 billion per occurrence subject to a deductible of $25,000. The earthquake
limit for these properties is $130 million per occurrence and in the annual aggregate subject to a deductible of 5% of the value
of the affected property.



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 with the
exception of 25% of the loss being subject to a C$500,000 deductible for Calgary only. 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.



51







FOREIGN EXCHANGE FLUCTUATIONS

Approximately 37% of our assets and 39%
of our revenues originate in Canada, Australia and the United Kingdom 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, 2013, 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, 2013, 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 $2 million on an annual basis. At December 31, 2013,
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. Over
the last two years, we may have 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;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Foreign currency forward contracts to hedge exposures to Canadian dollar, Australian dollar and
British pound denominated transactions;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| | • | 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, 2013, and December
31, 2012:



|(Millions)    |  | Hedging Item                                          |  | Notional |  | Rates        |  | Maturity Dates       |  | Fair Value
|------------- |  | ----------------------------------------------------- |  | -------- |  | ------------ |  | -------------------- |  | ----------
|Dec. 31, 2013 |  | Interest rate caps of US$ LIBOR debt                  |  | $2,005   |  | 3.0% to 5.8% |  | Jan 2014 to Oct 2018 |  | $2        
|              |  | Interest rate swaps of US$ LIBOR debt                 |  | $784     |  | 0.6% to 2.2% |  | May 2014 to Nov 2020 |  | ($1)      
|              |  | Interest rate swaps of £ LIBOR debt                   |  | £134     |  | 1.1%         |  | Sep 2017             |  | £2        
|              |  | Interest rate swaps of A$ BBSW/BBSY debt              |  | A$1,050  |  | 3.5% to 5.9% |  | Jan 2014 to Jul 2017 |  | (A$41)    
|              |  | Interest rate swaps on forecasted fixed rate debt     |  | $1,505   |  | 2.3% to 4.7% |  | Jun 2024 to Jun 2026 |  | ($32)     
|              |  | Interest rate swaps on forecasted
    fixed rate debt |  | C$50     |  | 2.8%         |  | Dec 2024             |  | C$3       
|Dec. 31, 2012 |  | Interest rate caps of US$ 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 5.7% |  | 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)     



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 year ended December 31, 2013 and
2012, the amount of hedge ineffectiveness recorded in earnings in connection with our interest rate hedging activities was not
significant. In the current year, the company settled interest rate hedges that hedged a notional of $470 million for a net gain
of $14 million of which $9 million 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.



52







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, 2013,
and December 31, 2012:



|(Millions)    |  | Hedging Item             |  | Hedged Currency    |  | Notional |  | Rate       |  | Fair Value |  | Maturity |  | Hedged Item                   
|------------- |  | ------------------------ |  | ------------------ |  | -------- |  | ---------- |  | ---------- |  | -------- |  | ------------------------------
|Dec. 31, 2013 |  | Foreign currency forward |  | Australian dollars |  | A$35     |  | A$1.07/US$ |  | A$2        |  | Mar 2014 |  | A$ denominated net investment 
|              |  | Foreign currency forward |  | Australian dollars |  | A$50     |  | A$1.12/US$ |  | A$1        |  | Aug 2014 |  | A$ denominated net investment 
|Dec. 31, 2012 |  | Foreign currency forward |  | British pounds     |  | £45      |  | £0.62/US$  |  | nil        |  | Mar 2013 |  | GBP denominated net investment



In addition, as of December 31, 2013, we
have designated C$900 million (December 31, 2012 – C$1,100 million) of our Canadian dollar financial liabilities as hedges
of the net investment in our Canadian operations.



For the year ended December 31, 2013 and
2012, 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, 2013, and December 31, 2012:



|(Millions)    |  | Derivative Type      |  | FairValue |  | Fair Value(Gain)/Loss |  | Classification of Gain/Loss
|------------- |  | -------------------- |  | --------- |  | --------------------- |  | ---------------------------
|Dec. 31, 2013 |  | Total return swap(1) |  | $1        |  | ($5)                  |  | Administrative expense     
|Dec. 31, 2012 |  | Total return swap(1) |  | $1        |  | ($1)                  |  | Administrative expense     



| | (1) | Relates to the total return swap on the company’s shares in connection with its 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.



53







PART IV – CRITICAL ACCOUNTING POLICIES AND ESTIMATES



CHANGES IN ACCOUNTING POLICY

The company adopted certain amendments
to IAS 1, “Presentation of Items of Other Comprehensive Income” (“Amendments to IAS 1”), effective January
1, 2013. The Amendments to IAS 1 require the company to present the items of other comprehensive income that may be reclassified
to profit or loss in the future, separately from those that would never be reclassified to profit or loss. The adoption of this
guidance has had no material impact on the disclosures or on the amounts recognized in the consolidated financial statements.



The company adopted certain amendments
to IFRS 7, “Financial Instruments: Disclosures” (“Amendments to IFRS 7”), effective January 1, 2013. The
Amendments to IFRS 7 require the company to disclose information about rights of offset and related arrangements for financial
instruments under an enforceable master netting agreement or similar arrangement. The adoption of this guidance had no material
impact on the amounts recognized in the consolidated financial statements, however additional disclosures have been reflected in
the company’s consolidated financial statements.



The company adopted IFRS 10, “Consolidated
Financial Statements” (“IFRS 10”), IFRS 11, “Joint Arrangements” (“IFRS 11”) and IFRS
12, “Disclosure of Interests in Other Entities” (“IFRS 12”), effective January 1, 2013.



| | (i) | As a result of the adoption of IFRS 10, the company has changed its accounting policy with respect
to determining whether it has control over and consequently whether it consolidates its investees. IFRS 10 introduces a new control
model that is applicable to all investees; among other things, it requires the consolidation of an investee if the company controls
the investee on the basis of de facto circumstances. In accordance with the transitional provisions of IFRS 10, the company re-assessed
the control conclusion for its investees at January 1, 2013. The adoption of this guidance had no material impact on the disclosures
or on the amounts recognized in the consolidated financial statements.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | As a result of the adoption of IFRS 11, the company has changed its accounting policy with respect
to its interests in joint arrangements. Under IFRS 11, the company classifies its interests in joint arrangements as either joint
operations or joint ventures, depending on the company’s rights to the assets and obligations for the liabilities of the
arrangements. When making this assessment, the company considers the structure of the arrangements, the legal form of any separate
vehicles, the contractual terms of the arrangements and other facts and circumstances. Previously, the structure of the arrangement
was the primary focus of classification. The company has re-evaluated its involvement in its joint arrangements. The company reports
its interests in joint ventures using the equity method of accounting and its interests in joint operations are reported by recognizing
the company’s share of assets, liabilities, revenues and expenses. The adoption of this guidance had no material impact on
the disclosures or on the amounts recognized in the consolidated financial statements.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | As a result of the adoption of IFRS 12, the company has disclosed information that enables users
of the consolidated financial statements to evaluate (i) the nature of, and risks associated with, the company’s interests
in other entities and (ii) the effects of those interests on the company’s financial position, financial performance and
cashflows. The adoption of this guidance had no material impact on the amounts recognized in the consolidated financial statements,
however additional disclosures have been reflected in the company’s consolidated financial statements.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The company also adopted IFRS 13, “Fair
Value Measurement” (“IFRS 13”), effective January 1, 2013. IFRS 13 establishes a single source for fair value
measurements and disclosures about fair value measurements. IFRS 13 defines fair value, establishes a framework for measuring fair
value, and requires disclosures about fair value measurements. IFRS 13 applies to both financial instruments and non-financial
instruments for which other IFRSs require or permit fair value measurements and disclosures about fair value measurements, except
in specified circumstances. The adoption of this guidance had no material impact on the amounts recognized in the consolidated
financial statements, however additional disclosures have been reflected in the company’s consolidated financial statements.



FUTURE
ACCOUNTING POLICY CHANGES

The following are the accounting policies that the company expects
to adopt in the future:



Levies

IFRIC 21, “Levies” (“IFRIC
21”) addresses when an entity should recognize a liability to pay a government levy other than income taxes. IFRIC 21 is
an interpretation of IAS 37, “Provisions, Contingent Liabilities and Contingent Assets” (“IAS 37”). IAS
37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation
as a result of a past event. IFRIC 21 clarifies that the obligating event that gives rise to a liability to pay a levy is the activity
described in the relevant legislation that triggers the payment of the levy. IFRIC 21 is effective for annual periods beginning
on or after January 1, 2014. Retrospective application of this interpretation is required. The company is currently evaluating
the impact of IFRIC 21 to its consolidated financial statements.



54







Financial Instruments

IFRS 9, “Financial Instruments”
(“IFRS 9”) was issued by the International Accounting Standards Board (“IASB”) on November 12, 2009 and
will replace IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9 uses a single
approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS
39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and
the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to
be used, replacing the multiple impairment methods in IAS 39. The IASB tentatively decided to defer the mandatory effective date
of IFRS 9, leaving the mandatory effective date open pending the finalization of the impairment, classification and measurement
requirements. The company is currently evaluating the impact of IFRS 9 to its consolidated financial statements.



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 3R, “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.



55







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.



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.



56







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.



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:





|(Millions)                                     |  | 2013 |               |   | 2012 |  
|---------------------------------------------- |  | ---- | ------------- | - | ---- | -
|Transactions with related parties              |  |      |               |   |      |  
|Commercial property revenue(1)                 |  | $    | 7             |   |      | $
|Interest and other income                      |  |      | 42            |   |      |  
|Interest expense on commercial property debt   |  |      | 12            |   |      |  
|Management fees paid                           |  |      | 12            |   |      |  
|Administrative expense(2)                      |  |      | 48            |   |      |  
|                                               |  |      | Dec. 31, 2013 |   |      |  
|Balances outstanding to (from) related parties |  |      |               |   |      |  
|Participating loan interests                   |  | $    | 550           |   |      | $
|Other non-current financial assets             |  |      | 89            |   |      |  
|Receivables and other assets                   |  |      | 48            |   |      |  
|Commercial property debt                       |  |      | (168          | ) |      |  



| | (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
| | --- | --------------------------------------------------------------------



In
the first three quarters of 2013, we sold a portion of the company’s ownership interest in an associate, at fair value, to
a subsidiary of BAM. Refer to page 26.



In
the second quarter of 2013, we entered into a contract to construct an investment property in Perth with a subsidiary of BAM.



In
the fourth quarter of 2013, through the consolidation of four core facilities management businesses, we acquired a 42.1% interest
in an associate with a subsidiary of BAM acquiring a 57.9% interest. Prior to this, in the first quarter of 2013, an associate
was restructured, with a subsidiary of BAM acquiring an ownership interest. Refer to page 26.



In
the fourth quarter of 2013, we entered into contracts to construct investment properties in London with a subsidiary of BAM.



57







PART
v – bUSINESS ENVIRONMENT AND OUTLOOK



OPERATING
ENVIRONMENT AND OUTLOOK

We entered 2013 with solid footing and
began seeing the positive effects of the pent-up leasing demand that was building over the last 12 months with an uptick in leasing
activity in our core U.S. markets, and we ended the year with one of our best years of leasing activity. We start 2014 with an
encouraging signal that tenant confidence and leasing fundamentals are improving in many of our operating markets. We are also
heavily invested in Canada and Australia, which are countries that 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. In addition, we recently invested in a portfolio of operating assets and
development sites in the United Kingdom and much like the U.S. are encouraged by the positive signals in that market. 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 2013, these efforts resulted
in an expansion in Los Angeles through the acquisition of a portfolio, entering a new market with our first acquisition in San
Francisco and continued efforts to focus on technology sector tenants. In 2014, we will continue with progressing on these efforts
as well as build on the positive leasing momentum we had in 2013.



In 2013, we leased 7.8 million square feet
globally. New leases accounted for 4.3 million square feet of the total, or about 55%. Of the remaining 45%, 1.6 million square
feet represented in-year renewals with the remaining 1.9 million square feet renewals related to out-year expiries. We also improved
our 5-year rollover exposure by 820 basis points. We ended 2013 with a portfolio occupancy of 89.1%. 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 San Francisco, 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, where a significant expiry took place in October of 2013. We made significant progress in 2013,
leasing over 1.2 million square feet in the complex during the year, and have a substantial amount of space currently in serious
discussions. In 2013, the Manhattan office market lowered overall vacancy and had the highest level of annual leasing volume since
the financial crisis. Lower Manhattan was one of the biggest beneficiaries of the improvement in office market fundamentals so
we are confident as we head into 2014. Further, we have made significant progress in the transformation of the complex, with the
redevelopment still underway. Leasing at the retail component is progressing well, and we expect to be fully leased by mid-year
2014. We will be opening our fast-casual dining component and our French marketplace during 2014, and our luxury retail shops shortly
thereafter. Our redevelopment efforts and those of our downtown partners have already begun to be recognized as the underground
transit connection to Brookfield Place became operational, as well as our new two-story lobby at 250 Vesey Street.



On the development front, we commenced
additional projects in New York, Calgary and Perth in 2013 and will commence a development in London in the first half of 2014.
Through 1.8 million square feet of leasing executed in 2013, we are 67% leased in aggregate on these projects well in advance of
their delivery to the market. In New York, the platform at Manhattan West, our five million square foot mixed development on the
west side, will be completed later this year and we look forward to commencing our residential component of the project in early
2015. We also commenced construction on Brookfield Place Calgary, which at 56 stories will be Western Canada’s tallest building
upon delivery. Bay Adelaide Centre East in Toronto is on track for delivery in late 2015. In addition, we commenced the second
phase of our signature Perth development, Brookfield Place Perth Tower 2, which is 40% pre-leased, and we are in advanced negotiations
with a number of additional tenants. Lastly, we plan to commence our first development in the United Kingdom at London Wall Place
in the first half of 2014 and have fully pre-leased this project. This pre-lease is an extremely positive sign for the London office
market.



On February 12, 2014, BPY announced the
commencement of its exchange offer to acquire any or all of the common shares of Brookfield Office Properties that it does not
currently own. Under the terms of the offer, each Brookfield Office Properties’ common shareholder can elect to receive 1.0
BPY limited partnership unit (67% of offer) or $20.34 in cash (33% of offer) per Brookfield Office Properties share. The board
of directors of Brookfield Office Properties (excluding interested directors) has unanimously recommended that Brookfield Office
Properties’ shareholders accept the offer. The full details of the offer and the method of acceptance of the offer are included
in the take-over bid circular and related materials. Completion of this transaction is expected to be in the first half of 2014.



We ended 2013 with $30.9 billion of assets
and a common equity per share of $21.06, which represents a 6% 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 $1.2 billion in
2013, or $2.38 per diluted share representing a 12% return on opening common equity per share, 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 an 18 million
square foot development pipeline, Brookfield Office Properties is well positioned to deliver on its commitments.



58







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, 2013. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that such disclosure controls and procedures were effective as of December 31, 2013.



INTERNAL
CONTROL OVER FINANCIAL REPORTING

There was no change in our company’s
internal control over financial reporting that occurred during 2013 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, 2013, 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 68 of this annual
report.



|/s/ Bryan K. Davis      | 
|----------------------- | 
|                        | 
|Bryan K. Davis          | 
|Chief Financial Officer | 
|March 4, 2014           | 



59







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 public accounting firm 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 public accounting firm 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.



|/s/ Dennis H. Friedrich     |  | /s/ Bryan K. Davis         
|--------------------------- |  | ---------------------------
|                            |  |                            
|Dennis H. Friedrich         |  | Bryan K. Davis             
|Chief Executive
    Officer |  | Chief Financial
    Officer
|March 4, 2014               |  |                            



60







Report
of Independent Registered Public Accounting Firm



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, 2013 and December 31, 2012, and the consolidated statements of income, consolidated statements
of comprehensive income, consolidated statements of changes in equity and consolidated 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 Brookfield Office Properties Inc. and subsidiaries
as at December 31, 2013 and December 31, 2012 and their financial performance and their cash flows for the years then ended in
accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.



Other Matter

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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2014 expressed an unqualified
opinion on the Company’s internal control over financial reporting.





|/s/ Deloitte LLP                                          | 
|--------------------------------------------------------- | 
|                                                          | 
|Chartered Professional Accountants, Chartered Accountants | 
|Licensed Public Accountants                               | 
|March 4, 2014                                             | 
|Toronto, Canada                                           | 



61







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, 2013, based on criteria
established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, management concluded that, as at December 31, 2013, Brookfield Office Properties
Inc.’s internal control over financial reporting is effective. There are no material weaknesses that have been identified
by Management. Management excluded from its assessment of internal control over financial reporting, MPG Office Trust, Inc. (“MPG”)
which was acquired during 2013, and whose total assets, total equity, commercial property revenue and net income attributable to
shareholders constitute approximately 7%, 4%, 2% and 1% of the consolidated financial statement amounts, respectively, as of and
for the year ended December 31, 2013.



Brookfield Office Properties Inc.'s internal
control over financial reporting as of December 31, 2013 has been audited by Deloitte LLP, independent registered public accounting
firm, who also audited Brookfield Office Properties Inc.’s consolidated financial statements for the year ended December
31, 2013, and as stated in the Report of Independent Registered Public Accounting Firm, Deloitte LLP, expressed an unqualified
opinion on the effectiveness of Brookfield Office Properties Inc.'s internal control over financial reporting.





|/s/ Dennis H. Friedrich |  | /s/ Bryan K. Davis     
|----------------------- |  | -----------------------
|                        |  |                        
|Dennis H. Friedrich     |  | Bryan K. Davis         
|Chief Executive Officer |  | Chief Financial Officer
|March 4, 2014           |  |                        



62







Report
of Independent Registered Public Accounting Firm



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, 2013,
based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As described in Management’s Report on Internal Control over Financial Reporting,
management excluded from its assessment the internal control over financial reporting at MPG Office Trust, Inc., which was acquired
during 2013, and whose total assets, total equity, commercial property revenue and net income attributable to shareholders constitute
approximately 7%, 4%, 2% and 1% of the consolidated financial statement amounts, respectively, as of and for the year ended December
31, 2013. Accordingly, our audit did not include the internal control over financial reporting at MPG Office Trust, Inc. 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 International Financial Reporting Standards as issued by the International Accounting Standards Board.
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 International Financial Reporting Standards as issued by the International Accounting Standards Board, 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, 2013, based on the criteria established
in Internal Control — Integrated Framework (1992) 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, 2013 of the Company and our report dated March
4, 2014 expressed an unqualified opinion on those financial statements.





|/s/ Deloitte LLP                                          | 
|--------------------------------------------------------- | 
|                                                          | 
|Chartered Professional Accountants, Chartered Accountants | 
|Licensed Public Accountants                               | 
|March 4, 2014                                             | 
|Toronto, Canada                                           | 



63







Consolidated
Balance Sheets



|(U.S. Millions)                                               |  | Note |    |  | Dec. 31, 2013 |   |        | Dec. 31, 2012 | 
|------------------------------------------------------------- |  | ---- | -- |  | ------------- | - | ------ | ------------- | 
|Assets                                                        |  |      |    |  |               |   |        |               | 
|Non-current assets                                            |  |      |    |  |               |   |        |               | 
|Investment properties                                         |  |      |    |  |               |   |        |               | 
|Commercial properties                                         |  |      | 5  |  |               | $ | 25,152 |               | 
|Commercial developments                                       |  |      | 5  |  |               |   | 1,673  |               | 
|Equity accounted investments and participating loan interests |  |      |    |  |               |   |        |               | 
|Investments in joint ventures                                 |  |      | 7  |  |               |   | 1,902  |               | 
|Investments in associates                                     |  |      | 9  |  |               |   | 157    |               | 
|Participating loan interests                                  |  |      | 10 |  |               |   | 550    |               | 
|Other non-current financial assets                            |  |      | 11 |  |               |   | 220    |               | 
|                                                              |  |      |    |  |               |   | 29,654 |               | 
|Current assets                                                |  |      |    |  |               |   |        |               | 
|Receivables and other assets                                  |  |      | 12 |  |               |   | 382    |               | 
|Restricted cash and deposits                                  |  |      | 13 |  |               |   | 142    |               | 
|Cash and cash equivalents                                     |  |      |    |  |               |   | 713    |               | 
|                                                              |  |      |    |  |               |   | 1,237  |               | 
|Assets held for sale                                          |  |      | 14 |  |               |   | ―      |               | 
|Total assets                                                  |  |      |    |  |               | $ | 30,891 |               | 
|                                                              |  |      |    |  |               |   |        |               | 
|Liabilities                                                   |  |      |    |  |               |   |        |               | 
|Non-current liabilities                                       |  |      |    |  |               |   |        |               | 
|Commercial property debt                                      |  |      | 15 |  |               | $ | 11,655 |               | 
|Capital securities – corporate                                |  |      | 16 |  |               |   | 440    |               | 
|Capital securities – fund subsidiaries                        |  |      | 17 |  |               |   | 491    |               | 
|Other non-current financial liabilities                       |  |      | 18 |  |               |   | 153    |               | 
|Deferred tax liabilities                                      |  |      | 20 |  |               |   | 970    |               | 
|                                                              |  |      |    |  |               |   | 13,709 |               | 
|Current liabilities                                           |  |      |    |  |               |   |        |               | 
|Commercial property debt                                      |  |      | 15 |  |               |   | 2,130  |               | 
|Capital securities – corporate                                |  |      | 16 |  |               |   | 188    |               | 
|Accounts payable and accrued liabilities                      |  |      | 19 |  |               |   | 1,046  |               | 
|                                                              |  |      |    |  |               |   | 3,364  |               | 
|Liabilities associated with assets held for sale              |  |      | 14 |  |               |   | ―      |               | 
|Total liabilities                                             |  |      |    |  |               |   | 17,073 |               | 
|                                                              |  |      |    |  |               |   |        |               | 
|Equity                                                        |  |      |    |  |               |   |        |               | 
|Preferred equity                                              |  |      | 21 |  |               |   | 1,542  |               | 
|Common equity                                                 |  |      | 21 |  |               |   | 10,791 |               | 
|Total shareholders’ equity                                    |  |      |    |  |               |   | 12,333 |               | 
|Non-controlling interests                                     |  |      | 21 |  |               |   | 1,485  |               | 
|Total equity                                                  |  |      |    |  |               |   | 13,818 |               | 
|Total liabilities and equity                                  |  |      |    |  |               | $ | 30,891 |               | 

See accompanying notes to the consolidated
financial statements



64







Consolidated
Statements of Income





|(U.S. Millions, except per share information)                             |  | Note |    |  | 2013 |   |       | 2012 | 
|------------------------------------------------------------------------- |  | ---- | -- |  | ---- | - | ----- | ---- | 
|Commercial property revenue                                               |  |      | 22 |  |      | $ | 2,304 |      | 
|Direct commercial property expense                                        |  |      | 22 |  |      |   | 940   |      | 
|Interest and other income                                                 |  |      | 22 |  |      |   | 90    |      | 
|Interest expense                                                          |  |      |    |  |      |   |       |      | 
|Commercial property debt                                                  |  |      | 22 |  |      |   | 626   |      | 
|Capital securities – corporate                                            |  |      | 22 |  |      |   | 35    |      | 
|Administrative expense                                                    |  |      | 22 |  |      |   | 187   |      | 
|Fair value gains (losses), net                                            |  |      | 23 |  |      |   | 562   |      | 
|Share of net earnings from equity accounted investments                   |  |      | 24 |  |      |   | 258   |      | 
|Income (loss) from continuing operations before income taxes              |  |      |    |  |      |   | 1,426 |      | 
|Income taxes                                                              |  |      | 20 |  |      |   | 204   |      | 
|Income (loss) from continuing operations                                  |  |      |    |  |      |   | 1,222 |      | 
|Income (loss) from discontinued operations                                |  |      | 14 |  |      |   | ―     |      | 
|Net income (loss)                                                         |  |      |    |  |      | $ | 1,222 |      | 
|                                                                          |  |      |    |  |      |   |       |      | 
|Net income (loss) attributable to                                         |  |      |    |  |      |   |       |      | 
|Shareholders                                                              |  |      |    |  |      | $ | 1,091 |      | 
|Non-controlling interests                                                 |  |      |    |  |      |   | 131   |      | 
|                                                                          |  |      |    |  |      | $ | 1,222 |      | 
|Net income (loss) per share attributable to common shareholders - basic   |  |      |    |  |      |   |       |      | 
|Continuing operations                                                     |  |      |    |  |      | $ | 2.00  |      | 
|Discontinued operations                                                   |  |      |    |  |      |   | ―     |      | 
|                                                                          |  |      |    |  |      | $ | 2.00  |      | 
|Net income (loss) per share attributable to common shareholders - diluted |  |      |    |  |      |   |       |      | 
|Continuing operations                                                     |  |      |    |  |      | $ | 1.89  |      | 
|Discontinued operations                                                   |  |      |    |  |      |   | ―     |      | 
|                                                                          |  |      |    |  |      | $ | 1.89  |      | 

See accompanying notes to the consolidated
financial statements



65







Consolidated
Statements of Comprehensive Income



|(U.S. Millions)                                                                                                                                                                          |  | 2013 |       |   | 2012 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | -
|Net income (loss)                                                                                                                                                                        |  | $    | 1,222 |   |      | $
|Foreign currency translation                                                                                                                                                             |  |      |       |   |      |  
|Unrealized foreign currency translation gains (losses) in respect of foreign operations                                                                                                  |  |      | (517  | ) |      |  
|Gains (losses) on hedges of net investments in foreign operations, net of income tax expense (benefit) for the year ended Dec. 31, 2013 of $3 million (2012 – $(1) million)              |  |      | 65    |   |      |  
|                                                                                                                                                                                         |  |      | (452  | ) |      |  
|Derivatives designated as cash flow hedges                                                                                                                                               |  |      |       |   |      |  
|Gains (losses) on derivatives designated as cash flow hedges, net of income tax expense (benefit) for the year ended Dec. 31, 2013 of $42 million (2012 – $(28) million)                 |  |      | 125   |   |      |  
|Reclassification of losses (gains) on derivatives designated as cash flow hedges, net of income tax expense (benefit) for the year ended Dec. 31, 2013 of $3 million (2012 – $3 million) |  |      | 11    |   |      |  
|                                                                                                                                                                                         |  |      | 136   |   |      |  
|Unrealized gains (losses) on equity securities designated as available-for-sale, net of income tax expense (benefit) for the year ended Dec. 31, 2013 of nil (2012 – nil)                |  |      | ―     |   |      |  
|Revaluation surplus, net of incomes tax expense (benefit) for the year end Dec. 31, 2013 of nil (2012 – nil)                                                                             |  |      | 7     |   |      |  
|Other comprehensive income (loss)                                                                                                                                                        |  |      | (309  | ) |      |  
|Comprehensive income (loss)                                                                                                                                                              |  | $    | 913   |   |      | $
|                                                                                                                                                                                         |  |      |       |   |      |  
|Comprehensive income (loss) attributable to                                                                                                                                              |  |      |       |   |      |  
|Shareholders                                                                                                                                                                             |  |      |       |   |      |  
|Net income                                                                                                                                                                               |  | $    | 1,091 |   |      | $
|Other comprehensive income (loss)                                                                                                                                                        |  |      | (264  | ) |      |  
|                                                                                                                                                                                         |  |      | 827   |   |      |  
|Non-controlling interests                                                                                                                                                                |  |      |       |   |      |  
|Net income                                                                                                                                                                               |  |      | 131   |   |      |  
|Other comprehensive income (loss)                                                                                                                                                        |  |      | (45   | ) |      |  
|                                                                                                                                                                                         |  | $    | 86    |   |      | $



See accompanying notes to the financial
statements



66







Consolidated
Statements of Changes in Equity





|(U.S. Millions)                   |  | Common
    Shares |   | Contributed
    Surplus |   | Retained
    Earnings |   | Accumulated
    Other
    Comprehensive
    Income (Loss) |   | TotalCommonEquity |   | Preferred
    Equity |  | Non-
    Controlling
    Interests      |   | TotalEquity  |  
|--------------------------------- |  | ----------------- | - | ----------------------- | - | --------------------- | - | --------------------------------------------------------- | - | ----------------- | - | -------------------- |  | --------------------------------------- | - | ------------ | -
|Balance at Dec. 31, 2012          |  | $ 3,342           |   | $ 193                   |   | $ 6,475               |   | $ 76                                                      |   | $ 10,086          |   | $ 1,345              |  | $ 1,533                                 |   | $ 12,964     |  
|Changes in period                 |  |                   |   |                         |   |                       |   |                                                           |   |                   |   |                      |  |                                         |   |              |  
|Net income (loss)                 |  | ―                 |   | ―                       |   | 1,091                 |   | ―                                                         |   | 1,091             |   | ―                    |  | 131                                     |   | 1,222        |  
|Other comprehensive income (loss) |  | ―                 |   | ―                       |   | ―                     |   | (264                                                      | ) | (264              | ) | ―                    |  | (45                                     | ) | (309         | )
|Comprehensive income (loss)       |  | ―                 |   | ―                       |   | 1,091                 |   | (264                                                      | ) | 827               |   | ―                    |  | 86                                      |   | 913          |  
|Shareholder distributions         |  |                   |   |                         |   |                       |   |                                                           |   |                   |   |                      |  |                                         |   |              |  
|Common equity                     |  | ―                 |   | ―                       |   | (283                  | ) | ―                                                         |   | (283              | ) | ―                    |  | ―                                       |   | (283         | )
|Preferred equity                  |  | ―                 |   | ―                       |   | (81                   | ) | ―                                                         |   | (81               | ) | ―                    |  | ―                                       |   | (81          | )
|Non-controlling interests         |  | ―                 |   | ―                       |   | ―                     |   | ―                                                         |   | ―                 |   | ―                    |  | (43                                     | ) | (43          | )
|Other items                       |  |                   |   |                         |   |                       |   |                                                           |   |                   |   |                      |  |                                         |   |              |  
|Equity issuances                  |  | 27                |   | 181                     |   | ―                     |   | ―                                                         |   | 208               |   | 197                  |  | 243                                     |   | 648          |  
|Equity redemptions                |  | ―                 |   | ―                       |   | ―                     |   | ―                                                         |   | ―                 |   | ―                    |  | (385                                    | ) | (385         | )
|Dividend reinvestment             |  | 2                 |   | ―                       |   | ―                     |   | ―                                                         |   | 2                 |   | ―                    |  | ―                                       |   | 2            |  
|Share-based compensation          |  | ―                 |   | 4                       |   | ―                     |   | ―                                                         |   | 4                 |   | ―                    |  | ―                                       |   | 4            |  
|Ownership changes, net            |  | ―                 |   | 35                      |   | (7                    | ) | ―                                                         |   | 28                |   | ―                    |  | 51                                      |   | 79           |  
|Change
    in period              |  | 29                |   | 220                     |   | 720                   |   | (264                                                      | ) | 705               |   | 197                  |  | (48                                     | ) | 854          |  
|Balance
    at Dec. 31, 2013      |  | $ 3,371           |   | $ 413                   |   | $ 7,195               |   | $ (188                                                    | ) | $
    10,791      |   | $ 1,542              |  | $ 1,485                                 |   | $
    13,818 |  
|                                  |  |                   |   |                         |   |                       |   |                                                           |   |                   |   |                      |  |                                         |   |              |  
|                                  |  |                   |   |                         |   |                       |   |                                                           |   |                   |   |                      |  |                                         |   |              |  
|(U.S. Millions)                   |  | Common
    Shares |   | Contributed
    Surplus |   | Retained
    Earnings |   | Accumulated
    Other
    Comprehensive
    Income (Loss) |   | TotalCommonEquity |   | Preferred
    Equity |  | Non-
    
    Controlling
    Interests |   | TotalEquity  |  
|Balance at Dec. 31, 2011          |  | $ 3,330           |   | $ 185                   |   | $ 5,540               |   | $ 25                                                      |   | $ 9,080           |   | $ 1,095              |  | $ 1,504                                 |   | $ 11,679     |  
|Changes in period                 |  |                   |   |                         |   |                       |   |                                                           |   |                   |   |                      |  |                                         |   |              |  
|Net income (loss)                 |  | ―                 |   | ―                       |   | 1,287                 |   | ―                                                         |   | 1,287             |   | ―                    |  | 181                                     |   | 1,468        |  
|Other comprehensive income (loss) |  | ―                 |   | ―                       |   | ―                     |   | 51                                                        |   | 51                |   | ―                    |  | 16                                      |   | 67           |  
|Comprehensive income (loss)       |  | ―                 |   | ―                       |   | 1,287                 |   | 51                                                        |   | 1,338             |   | ―                    |  | 197                                     |   | 1,535        |  
|Shareholder distributions         |  |                   |   |                         |   |                       |   |                                                           |   |                   |   |                      |  |                                         |   |              |  
|Common equity                     |  | ―                 |   | ―                       |   | (282                  | ) | ―                                                         |   | (282              | ) | ―                    |  | ―                                       |   | (282         | )
|Preferred equity                  |  | ―                 |   | ―                       |   | (70                   | ) | ―                                                         |   | (70               | ) | ―                    |  | ―                                       |   | (70          | )
|Non-controlling interests         |  | ―                 |   | ―                       |   | ―                     |   | ―                                                         |   | ―                 |   | ―                    |  | (150                                    | ) | (150         | )
|Other items                       |  |                   |   |                         |   |                       |   |                                                           |   |                   |   |                      |  |                                         |   |              |  
|Equity issuances                  |  | 12                |   | ―                       |   | ―                     |   | ―                                                         |   | 12                |   | 250                  |  | ―                                       |   | 262          |  
|Equity redemptions                |  | (3                | ) | (3                      | ) | ―                     |   | ―                                                         |   | (6                | ) | ―                    |  | ―                                       |   | (6           | )
|Dividend reinvestment             |  | 3                 |   | ―                       |   | ―                     |   | ―                                                         |   | 3                 |   | ―                    |  | ―                                       |   | 3            |  
|Share-based compensation          |  | ―                 |   | 8                       |   | ―                     |   | ―                                                         |   | 8                 |   | ―                    |  | ―                                       |   | 8            |  
|Ownership changes, net            |  | ―                 |   | 3                       |   | ―                     |   | ―                                                         |   | 3                 |   | ―                    |  | (18                                     | ) | (15          | )
|Change in period                  |  | 12                |   | 8                       |   | 935                   |   | 51                                                        |   | 1,006             |   | 250                  |  | 29                                      |   | 1,285        |  
|Balance at
    Dec. 31, 2012      |  | $ 3,342           |   | $ 193                   |   | $ 6,475               |   | $ 76                                                      |   | $ 10,086          |   | $ 1,345              |  | $ 1,533                                 |   | $ 12,964     |  



See accompanying notes to the
consolidated financial statements



67







Consolidated
Statements of Cashflow



|(U.S. Millions)                                                       |  | Note |    |  | 2013 |   |        | 2012 | 
|--------------------------------------------------------------------- |  | ---- | -- |  | ---- | - | ------ | ---- | 
|Operating activities                                                  |  |      |    |  |      |   |        |      | 
|Net income (loss)                                                     |  |      |    |  |      | $ | 1,222  |      | 
|Share of undistributed net earnings from equity accounted investments |  |      |    |  |      |   | (208   | )    | 
|Fair value (gains) losses, net                                        |  |      |    |  |      |   | (562   | )    | 
|Deferred income tax expense                                           |  |      | 20 |  |      |   | 232    |      | 
|Gain on modification of mortgage terms                                |  |      |    |  |      |   | (22    | )    | 
|Depreciation                                                          |  |      |    |  |      |   | 19     |      | 
|Accretion of debt discount and transaction costs                      |  |      |    |  |      |   | 24     |      | 
|Share-based compensation expense                                      |  |      | 25 |  |      |   | 9      |      | 
|Initial direct leasing costs                                          |  |      |    |  |      |   | (73    | )    | 
|Settlement of interest rate hedges on commercial property debt        |  |      |    |  |      |   | (11    | )    | 
|Working capital and other                                             |  |      |    |  |      |   | (263   | )    | 
|                                                                      |  |      |    |  |      |   | 367    |      | 
|Financing activities                                                  |  |      |    |  |      |   |        |      | 
|Commercial property debt arranged                                     |  |      |    |  |      |   | 4,543  |      | 
|Commercial property debt repaid                                       |  |      |    |  |      |   | (3,924 | )    | 
|Corporate credit facilities arranged                                  |  |      |    |  |      |   | 1,107  |      | 
|Corporate credit facilities repaid                                    |  |      |    |  |      |   | (826   | )    | 
|Capital securities – fund subsidiaries issued                         |  |      |    |  |      |   | 392    |      | 
|Capital securities – corporate redeemed                               |  |      |    |  |      |   | (201   | )    | 
|Non-controlling interests issued                                      |  |      |    |  |      |   | 46     |      | 
|Distributions to non-controlling interests                            |  |      |    |  |      |   | (34    | )    | 
|Preferred shares issued                                               |  |      |    |  |      |   | ―      |      | 
|Preferred share dividends                                             |  |      | 21 |  |      |   | (81    | )    | 
|Common shares issued                                                  |  |      |    |  |      |   | 27     |      | 
|Common shares repurchased                                             |  |      |    |  |      |   | ―      |      | 
|Common share dividends                                                |  |      | 21 |  |      |   | (283   | )    | 
|                                                                      |  |      |    |  |      |   | 766    |      | 
|Investing activities                                                  |  |      |    |  |      |   |        |      | 
|Acquisition of real estate                                            |  |      |    |  |      |   | (568   | )    | 
|Disposition of real estate                                            |  |      |    |  |      |   | 542    |      | 
|Other real estate investments                                         |  |      |    |  |      |   | ―      |      | 
|Acquisition of investment in joint venture                            |  |      |    |  |      |   | (138   | )    | 
|Disposition of investment in associate                                |  |      |    |  |      |   | 30     |      | 
|Investment in Brookfield DTLA Holdings LLC (“DTLA”)                   |  |      |    |  |      |   | (199   | )    | 
|Cash acquired in business combinations                                |  |      |    |  |      |   | 159    |      | 
|Foreign currency hedges of net investments                            |  |      |    |  |      |   | 8      |      | 
|Loans receivable from affiliate arranged                              |  |      |    |  |      |   | (160   | )    | 
|Loans receivable from affiliate repaid                                |  |      |    |  |      |   | 235    |      | 
|Restricted cash and deposits                                          |  |      |    |  |      |   | 2      |      | 
|Capital expenditures – development and redevelopment                  |  |      |    |  |      |   | (347   | )    | 
|Capital expenditures – commercial properties                          |  |      |    |  |      |   | (346   | )    | 
|                                                                      |  |      |    |  |      |   | (782   | )    | 
|(Decrease) increase in cash resources                                 |  |      |    |  |      |   | 351    |      | 
|Cash and cash equivalents, beginning of period                        |  |      |    |  |      |   | 362    |      | 
|Cash and cash equivalents, end of period                              |  |      |    |  |      | $ | 713    |      | 

See accompanying notes to the consolidated
financial statements



68







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
manages premier office properties in the United States (“U.S.”), Canada, Australia and the United Kingdom (“U.K.”).
The company is an indirect subsidiary of Brookfield Property Partners L.P. (“BPY”), which owns approximately 51% of
the company’s voting shares. Brookfield Asset Management Inc. (“BAM”) is the company’s ultimate parent.
The company’s common shares trade on the New York Stock Exchange and Toronto Stock Exchange under the symbol BPO. The registered
office of the company is P.O. Box 770, Suite 330, Brookfield Place, 181 Bay Street, Toronto, Ontario, M5J 2T3 and it operates head
offices in New York, Toronto, Sydney and London.



NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

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

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



The financial statements have been 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 incorporate
the financial statements of the company and entities controlled by the company and its subsidiaries. Control is achieved when the
company has power over the investee; is exposed, or has rights, to variable returns from its investment with the investee; and
has the ability to use its power to affect its returns. The company reassesses whether or not it controls an investee if facts
and circumstances indicate that there are changes to one or more of the three elements of control.



Profit or loss and each component of other
comprehensive income are attributable to the owners of the company and to the non-controlling interests.



All intercompany assets, liabilities, equity,
income, expenses and cash flows relating to transactions between members of the company are eliminated in full on consolidation.



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

A joint venture is a joint arrangement
whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control
is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities
require unanimous consent of the parties sharing control.



An associate is an entity over which the
company has significant influence. Significant influence is the power to participate in the financial and operating policy decisions
of the investee but is not control or joint control over those policies.



The results and assets and liabilities
of joint ventures and associates are incorporated in these consolidated financial statements using the equity method of accounting.
Under the equity method, an investment in a joint venture or an associate is initially recognized in the consolidated balance sheet
at cost and adjusted thereafter to recognize the company’s share of the profit or loss and other comprehensive income of
the joint venture or associate. When the company’s share of losses of a joint venture or associate exceeds the company’s
interest in that joint venture or associate, the company discontinues recognizing its share of further losses. Additional losses
are recognized only to the extent that the company has incurred legal or constructive obligations or made payments on behalf of
the joint venture or associate.



When a company entity transacts with a
joint venture or an associate of the company, profits and losses resulting from the transactions with the joint venture or associate
are recognized in the company’s consolidated financial statements only to the extent of interests in the joint venture or
associate that are not related to the company.



| | (d) | Investments in joint operations
| | --- | -------------------------------

A joint operation is a joint arrangement
whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities,
relating to the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only
when decisions about the relevant activities require unanimous consent of the parties sharing control. This usually results from
a direct interest rather than through the establishment of a separate entity.



The company accounts for its share of the
assets, liabilities, revenues and expenses of the joint operation in accordance with the IFRSs applicable to the particular assets,
liabilities, revenues and expenses.



69







When the company sells or contributes assets
to a joint operation in which it is a joint operator, the company is considered to be conducting the transaction with the other
parties to the joint operation, and gains and losses resulting from the transactions are recognized in the company’s consolidated
financial statements only to the extent of other parties’ interests in the joint operation. When the company purchases assets
from a joint operation in which it is a joint operator, the company does not recognize its share of the gains and losses until
it resells those assets to a third party.



| | (e) | Investment properties
| | --- | ---------------------

Investment properties
include commercial properties held to earn rental income and commercial developments that are being constructed or developed for
future use as commercial 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.



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.



| | (f) | 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”.



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.



| | (g) | 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.



| | (h) | 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.



70







| | (i) | 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,
joint ventures, associates or joint operations 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. Cumulative foreign currency translation
gains are recognized in net income when there is a disposition or partial disposition of the foreign subsidiary.



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.



| | (j) | 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.



| | (k) | 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 income 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.



71







| | (l) | 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 interests                               |  | Loans and receivables       |  | Amortized cost(2)
|Other non-current financial assets                         |  |                             |  |                  
|Equity securities designated as available-for-sale (“AFS”) |  | AFS                         |  | Fair value       
|Other loans receivable                                     |  | Loans and receivables       |  | Amortized cost   
|Other financial assets                                     |  | —                           |  | Fair value(3)    
|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 financial liabilities |  | Amortized cost(2)
|Capital securities – corporate                             |  | Other financial liabilities |  | Amortized cost   
|Capital securities – fund subsidiaries                     |  | Other financial liabilities |  | Amortized cost   
|Other non-current financial liabilities                    |  |                             |  |                  
|Loan payable                                               |  | Other financial liabilities |  | Amortized cost   
|Note payable                                               |  | Other financial liabilities |  | Amortized cost   
|Other financial liabilities                                |  | —                           |  | Fair value(3)    
|Accounts payable and accrued liabilities                   |  | Other financial liabilities |  | Amortized cost(2)



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

| | (2) | Except for embedded derivatives that are classified as FVTPL and derivatives in cash flow hedge
relationships
| | --- | -------------------------------------------------------------------------------------------------------------

| | (3) | Represents derivatives in cash flow hedge relationships
| | --- | -------------------------------------------------------



Certain of the company’s Class AAA
preferred shares are presented as financial liabilities within capital securities – corporate 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.



Common equity related to the non-controlling
interests in DTLA is presented as a financial liability within capital securities – fund subsidiaries on the basis that the
holders of the non-controlling interests can cause DTLA to redeem their equity interests for cash at fair value on October 15,
2023, and on every fifth anniversary thereafter.



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 other comprehensive income while the
ineffective portion is recognized in net income. Hedging gains and losses recognized in accumulated other comprehensive income
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 inother comprehensive incomeand the ineffective portion
is recognized in net income. The amounts recorded inaccumulated other comprehensive incomeare 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.



| | (m) | 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 3R, “Business
Combinations” (“IFRS 3R”) 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.



72







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.



| | (n) | Cash and cash equivalents
| | --- | -------------------------

Cash and cash equivalents include cash
and short-term investments with original maturities of three months or less.



| | (o) | 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) | Control or influence over investees
| | --- | -----------------------------------

When determining the appropriate
basis of accounting for the company’s investments, the company makes judgments and assumptions about the following: the degree
of control or influence that the company exerts directly or through an arrangement; the amount of potential voting rights which
provide the company or unrelated parties voting powers; the ability to appoint directors, the ability of other investors to remove
the company as a manager or general partner in a controlled partnership; and the amount of benefit that the company receives relative
to other investors. Also, the company makes judgements in respect of joint arrangements that are carried on through a separate
vehicle in determining whether the company’s interest represents an interest in the assets and liabilities of the arrangement
(a joint operation) or in its net assets (a joint venture).



| | (ii) | 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 or 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 10, Participating Loan Interests.



| | (iii) | 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.



73







| | (iv) | Leases
| | ---- | ------

The company’s policy for
revenue recognition on commercial properties is described in Note 2(k)(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.



| | (v) | Investment property
| | --- | -------------------

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



| | (vi) | Financial instruments
| | ---- | ---------------------

The company’s accounting
policies relating to financial instruments are described in Note 2(l), 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. Furthermore, the company exercises judgment
in applying criteria set out in IAS 32, “Financial Instruments: Presentation” to determine whether interests held by
other entities in the company’s subsidiaries should be classified as liabilities or as equity.



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

The company’s accounting
policies relating to assets held for sale are described in Note 2(f), Assets 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.



| | (viii) | 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.



| | (ix) | Business combinations
| | ---- | ---------------------

The company’s accounting
policies relating to business combinations are described in Note 2(m), 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.



| | (p) | 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.



74







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.



NOTE 3: Adoption
of Accounting Standards

The company adopted certain amendments
to IAS 1, “Presentation of Items of Other Comprehensive Income” (“Amendments to IAS 1”), effective January
1, 2013. The Amendments to IAS 1 require the company to present the items of other comprehensive income that may be reclassified
to profit or loss in the future, separately from those that would never be reclassified to profit or loss. The adoption of this
guidance has had no material impact on the disclosures or on the amounts recognized in the consolidated financial statements.



The company adopted certain amendments
to IFRS 7, “Financial Instruments: Disclosures” (“Amendments to IFRS 7”), effective January 1, 2013. The
Amendments to IFRS 7 require the company to disclose information about rights of offset and related arrangements for financial
instruments under an enforceable master netting agreement or similar arrangement. The adoption of this guidance had no material
impact on the amounts recognized in the consolidated financial statements, however additional disclosures have been reflected in
Note 28(a), Derivatives and Hedging Activities of the company’s consolidated financial statements.



The company adopted IFRS 10, “Consolidated
Financial Statements” (“IFRS 10”), IFRS 11, “Joint Arrangements” (“IFRS 11”) and IFRS
12, “Disclosure of Interests in Other Entities” (“IFRS 12”), effective January 1, 2013.



| | (i) | As a result of the adoption of IFRS 10, the company has changed its accounting policy with respect
to determining whether it has control over and consequently whether it consolidates its investees. IFRS 10 introduces a new control
model that is applicable to all investees; among other things, it requires the consolidation of an investee if the company controls
the investee on the basis of de facto circumstances. In accordance with the transitional provisions of IFRS 10, the company re-assessed
the control conclusion for its investees at January 1, 2013. The adoption of this guidance had no material impact on the disclosures
or on the amounts recognized in the consolidated financial statements.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | As a result of the adoption of IFRS 11, the company has changed its accounting policy with respect
to its interests in joint arrangements. Under IFRS 11, the company classifies its interests in joint arrangements as either joint
operations or joint ventures, depending on the company’s rights to the assets and obligations for the liabilities of the
arrangements. When making this assessment, the company considers the structure of the arrangements, the legal form of any separate
vehicles, the contractual terms of the arrangements and other facts and circumstances. Previously, the structure of the arrangement
was the primary focus of classification. The company has re-evaluated the reporting for its involvement in its joint arrangements.
The company reports its interests in joint ventures using the equity method of accounting and its interests in joint operations
are reported by recognizing the company’s share of assets, liabilities, revenues and expenses. The adoption of this guidance
had no material impact on the disclosures or on the amounts recognized in the consolidated financial statements.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | As a result of the adoption of IFRS 12, the company has disclosed information that enables users
of the consolidated financial statements to evaluate (i) the nature of, and risks associated with, the company’s interests
in other entities and (ii) the effects of those interests on the company’s financial position, financial performance and
cashflows. The adoption of this guidance had no material impact on the amounts recognized in the consolidated financial statements,
however additional disclosures have been reflected in Note 7, Investments in Joint Ventures, Note 8, Investments in Joint Operations,
Note 9, Investments in Associates, and Note 21(e), Non-Controlling Interests of the company’s consolidated financial statements.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The company also adopted IFRS 13, “Fair
Value Measurement” (“IFRS 13”), effective January 1, 2013. IFRS 13 establishes a single source for fair value
measurements and disclosures about fair value measurements. IFRS 13 defines fair value, establishes a framework for measuring fair
value, and requires disclosures about fair value measurements. IFRS 13 applies to both financial instruments and non-financial
instruments for which other IFRSs require or permit fair value measurements and disclosures about fair value measurements, except
in specified circumstances. The adoption of this guidance had no material impact on the amounts recognized in the consolidated
financial statements, however additional disclosures have been reflected in Note 5, Investment Properties and Note 28, Financial
Instruments of the company’s consolidated financial statements.



75







NOTE 4:
FUTURE ACCOUNTING POLICY CHANGES

The following are the accounting policies that the company expects
to adopt in the future:



Levies

IFRIC 21, “Levies” (“IFRIC
21”) addresses when an entity should recognize a liability to pay a government levy other than income taxes. IFRIC 21 is
an interpretation of IAS 37, “Provisions, Contingent Liabilities and Contingent Assets” (“IAS 37”). IAS
37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation
as a result of a past event. IFRIC 21 clarifies that the obligating event that gives rise to a liability to pay a levy is the activity
described in the relevant legislation that triggers the payment of the levy. IFRIC 21 is effective for annual periods beginning
on or after January 1, 2014. Retrospective application of this interpretation is required. The company is currently evaluating
the impact of IFRIC 21 to its consolidated financial statements.



Financial Instruments

IFRS 9, “Financial Instruments”
(“IFRS 9”) was issued by the International Accounting Standards Board (“IASB”) on November 12, 2009 and
will replace IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9 uses a single
approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS
39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and
the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to
be used, replacing the multiple impairment methods in IAS 39. The IASB tentatively decided to defer the mandatory effective date
of IFRS 9, leaving the mandatory effective date open pending the finalization of the impairment, classification and measurement
requirements. The company is currently evaluating the impact of IFRS 9 to its consolidated financial statements.



76







NOTE 5: INVESTMENT PROPERTIES



|                                                                       |  | Dec. 31, 2013 |        |   | Dec. 31, 2012 |  
|---------------------------------------------------------------------- |  | ------------- | ------ | - | ------------- | -
|                                                                       |  | Commercial    |        |   | Commercial    |  
|(Millions)                                                             |  | properties    |        |   | developments  |  
|Balance, beginning of period                                           |  | $             | 22,442 |   |               | $
|Additions                                                              |  |               |        |   |               |  
|Property acquisitions and investments                                  |  |               | 2,858  |   |               |  
|Capital expenditures                                                   |  |               | 346    |   |               |  
|Initial direct leasing costs                                           |  |               | 68     |   |               |  
|Dispositions and reclassification to assets held for sale              |  |               | (343   | ) |               |  
|Reclassification from commercial developments to commercial properties |  |               | —      |   |               |  
|Fair value gains (losses)                                              |  |               | 430    |   |               |  
|Foreign currency translation                                           |  |               | (791   | ) |               |  
|Other changes                                                          |  |               | 142    |   |               |  
|Balance, end of period                                                 |  | $             | 25,152 |   |               | $



During the second quarter of 2013, the
company exercised its option for the land lease on Principal Place, a commercial development in London, for £20 million,
of which £7 million was paid for in cash and £13 million was recognized in other non-current financial liabilities.
As a result, the company reclassified a £61 million contribution previously made in relation to Principal Place out of prepaid
expenses and other assets to commercial developments. During the third quarter of 2013, the company sold a 50% interest in the
residential portion of Principal Place for £21 million. As a result, the company derecognized the residential portion of
Principal Place previously reflected in commercial developments and now accounts for its remaining interest in the residential
development by the equity method within investments in joint ventures.



During the fourth quarter of 2013, the
company sold a 50% interest in Metropolitan Park East & West in Seattle for $45 million and disposed of 500 Jefferson Street
in Houston for $42 million.



During the third quarter of 2013, the company
sold 2000 L Street in Washington, D.C. for $192 million and Landmark Square in Los Angeles for $136 million.



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 are as follows:



|                           | Dec. 31, 2013 | Dec. 31, 2012
|-------------------------- | ------------- | -------------
|                           | Maximum       | Minimum      
|Consolidated Properties    |               |              
|United States              |               |              
|Discount rate              | 10.00%        | 6.25%        
|Terminal cap rate          | 8.75%         | 5.03%        
|Investment horizon (years) | 20            | 4            
|Canada                     |               |              
|Discount rate              | 8.00%         | 6.00%        
|Terminal cap rate          | 7.00%         | 5.25%        
|Investment horizon (years) | 13            | 10           
|Australia                  |               |              
|Discount rate              | 9.00%         | 8.00%        
|Terminal cap rate          | 9.00%         | 7.00%        
|Investment horizon (years) | 10            | 10           
|United Kingdom             |               |              
|Discount rate              | 7.00%         | 7.00%        
|Terminal cap rate          | 5.50%         | 5.25%        
|Investment horizon (years) | 10            | 10           



77







|                             | Dec. 31, 2013 | Dec. 31, 2012
|---------------------------- | ------------- | -------------
|                             | Maximum       | Minimum      
|Equity Accounted Investments |               |              
|United States                |               |              
|Discount rate                | 8.00%         | 6.00%        
|Terminal cap rate            | 7.25%         | 5.50%        
|Investment horizon (years)   | 11            | 9            
|Australia                    |               |              
|Discount rate                | 9.00%         | 8.15%        
|Terminal cap rate            | 8.50%         | 7.00%        
|Investment horizon (years)   | 10            | 10           



Fair values are most sensitive to changes
in discount rates and timing or variability of cashflows. A 25 basis point decrease in the discount and terminal capitalization
rates will impact the fair value of commercial properties by $509 million and $719 million or 2.0% and 2.9%, respectively at December
31, 2013.



The following table outlines investment
properties 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 below.



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.



|                        |  | Dec. 31, 2013 |  
|----------------------- |  | ------------- | -
|(Millions)              |  | Level 1       |  
|Investment properties   |  |               |  
|Commercial properties   |  | $             | —
|Commercial developments |  |               | —



There were no transfers between Level 1
and Level 2 during the year.



During the year ended December 31, 2013,
the company capitalized a total of $353 million (2012 – $258 million) of costs related to commercial developments. Included
in this amount is $305 million (2012 – $194 million) of construction and related costs and $48 million (2012 – $64
million) of capitalized borrowing costs. The weighted average capitalization rate used for capitalization of borrowing costs to
commercial developments is 5.01% (December 31, 2012 – 5.78%). Included in construction and related costs for the year ended
December 31, 2013, is $99 million (2012 – $165 million) paid to a subsidiary of BAM pursuant to contracts to construct investment
properties.



Included in investment properties are $2,969
million (December 31, 2012 – $3,282 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.



Commercial properties with a fair value
of approximately $6,096 million (December 31, 2012 – $4,892 million) are situated on land held under leases or other agreements
largely expiring after the year 2065. Commercial properties do not include any properties held under operating leases.



Investment properties with a fair value
of approximately $25,199 million (December 31, 2012 – $21,124 million) are pledged as security for commercial property debt.
In addition, investment properties with a fair value of approximately $780 million (December 31, 2012 – $1,767 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 approximately $836 million (December 31, 2012 – $1,226
million).



78







NOTE 6: BUSINESS COMBINATIONS

On
October 15, 2013, the company, through Brookfield DTLA Holdings LLC (“DTLA”), completed the acquisition of MPG Office
Trust, Inc. (“MPG”), an owner and operator of office properties in Los Angeles, for $443 million. DTLA is a fund established
to invest in downtown Los Angeles office properties that is controlled by the company through its approximately 47.3% equity interest
and the powers it has as manager of the fund. The remaining equity in the fund of approximately 52.7% is held by institutional
partners. The company and its institutional partners contributed cash and the Los Angeles assets previously held by the company’s
U.S. Office Fund, with the exception of Marina Towers, to DTLA. DTLA now indirectly owns both the company’s existing downtown
Los Angeles office assets and all of the assets of MPG.



Through
DTLA, the company indirectly acquired all of the voting common shares of MPG for cash of $3.15 per share. Pursuant to the terms
of the transaction, the company made a tender offer to purchase MPG’s outstanding Series A preferred equity for cash of $25.00
per share and, for each share of MPG Series A preferred equity that was not tendered, the company exchanged the preferred equity
for one share of Brookfield DTLA Fund Office Trust Investor Inc. (“DTLA Investor”) Series A preferred equity with rights,
terms and conditions substantially identical to the MPG preferred equity. DTLA Investor is the subsidiary of DTLA through which
the company completed its acquisition of MPG. The total consideration of $443 million paid for MPG common and preferred equity
was paid with cash of $190 million and 9,730,370 DTLA Investor Series A Preferred Stock with a fair value of $253 million, of which
$243 million is recognized as non-controlling interest in the company’s financial statements as it represents the fair value
of the preferred equity outstanding.



The
acquisition represents a business combination accounted for in accordance with IFRS 3R. The company has consolidated its interest
in MPG effective October 15, 2013 and recognized the assets and liabilities of MPG at fair value as at that date. The following
is a summary of the amounts assigned to each major class of asset and liability of MPG at the date the company obtained control:



|(Millions)                               | As at October 15, 2013
|---------------------------------------- | ----------------------
|Commercial properties and developments   |                       
|Accounts receivables and other assets    |                       
|Restricted cash and deposits             |                       
|Cash and cash equivalents                |                       
|Commercial property debt                 |                       
|Accounts payable and accrued liabilities |                       
|Total                                    |                       



In addition, during the fourth quarter
of 2013, the company acquired One North End Avenue in New York for cash consideration of $200 million, 685 Market Street in San
Francisco for cash consideration of $80 million and an additional 50% interest in 125 Old Broad Street in London for cash consideration
of $128 million, bringing its ownership in the commercial property to 100%. At the date the company acquired control, $740 million
was assigned to commercial properties, $207 million was assigned to commercial property debt and $3 million was assigned to net
working capital of the entities that hold these investment properties. Prior to the acquisition date, 125 Old Broad Street was
accounted for within investments in joint ventures under the equity method of accounting with a carrying value of $136 million.



During the third quarter of 2013, the company
acquired an additional 50% interest in the Victor Building in Washington, D.C. for cash consideration of $72 million, bringing
its ownership in the commercial property to 100%. At the date the company acquired control, $240 million was assigned to commercial
properties and $97 million was assigned to commercial property debt of the entity that holds this investment property. Prior to
the acquisition date, the Victor Building was accounted for within investments in joint ventures under the equity method of accounting
with a carrying value of $72 million.



During the second quarter of 2013, the
company acquired Leadenhall Court in London for cash consideration of £50 million. At the date the company acquired control,
$76 million was assigned to commercial properties of the entity that holds this investment property.



In the period from the acquisition dates
to December 31, 2013, the company recorded commercial property revenue and net income attributable to shareholders in connection
with these properties of $67 million and $41 million, respectively. In connection with these acquisitions, the company recognized
acquisition related costs of $13 million through general and administrative expense.



If the business combinations completed
in 2013 had closed as of January 1, 2013, the commercial property revenue and net income attributable to shareholders of the combined
company would have been $2,644 million and $1,165 million, respectively, for the year ended December 31, 2013, assuming no fair
value gains (losses) on the properties during the period prior to acquisition.



79







NOTE 7: INVESTMENTS IN JOINT VENTURES

The company has investments in joint arrangements
that are joint ventures. These joint ventures hold individual commercial properties and commercial developments that the company
owns together with co-investors.



Details of the company’s investments
in joint ventures, which have been accounted for following the equity method, are as follows:





|                               |  |                               |  |                                      |  | Principal Place of Business/ |  | Proportion of Ownership
    Interest/Voting Rights Held by
    the Company
|------------------------------ |  | ----------------------------- |  | ------------------------------------ |  | ---------------------------- |  | --------------------------------------------------------------------------
|Name of Entity                 |  | Name of Property              |  | Principal Activity                   |  | Place of Incorporation       |  | Dec. 31, 2013                                                             
|1114 6th Avenue Co. LLC        |  | The Grace Building            |  | Property holding company             |  | Midtown New York/Delaware    |  | 50%/50%                                                                   
|750 Ninth Street Parent, LLC   |  | Victor Building               |  | Property holding company             |  | Washington, D.C./Delaware    |  | —                                                                         
|Marina Airport Building, Ltd.  |  | Marina Towers                 |  | Property holding company             |  | Los Angeles/California       |  | 50%/50%                                                                   
|BFP 245 Park Co. LLC(1)        |  | 245 Park Avenue               |  | Property holding company             |  | Midtown New York/Delaware    |  | 51%/50%                                                                   
|33rd Street Partners JV LLC(1) |  | 450 West 33rd Street          |  | Property holding company             |  | Midtown New York/Delaware    |  | 75%/50%                                                                   
|Latitude Landowner Pty Ltd(2)  |  | E&Y Complex                   |  | Property holding company             |  | Sydney/Australia             |  | 50%/50%                                                                   
|London Wall Place LP           |  | London Wall Place             |  | Development property holding company |  | London/U.K.                  |  | 50%/50%                                                                   
|Principal Place Tower Limited  |  | Principal Place - Residential |  | Development property holding company |  | London/Jersey                |  | 50%/50%                                                                   





| | (1) | 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
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | 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
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the fourth quarter of 2013, the
company acquired an additional 50% interest in 125 Old Broad Street in London resulting in acquisition of control of the commercial
property. As a result, the company has consolidated its interest in the property. The company previously acquired a 50% interest
in 125 Old Broad Street in London for £79 million, net of £64 million in commercial property debt, during the second
quarter of 2013.



During the third quarter of 2013, the company
sold a 50% interest in the residential portion of Principal Place, a commercial development in London, for £21 million. As
a result, the company equity accounted for the residential portion of Principal Place and recognized a $32 million addition to
investments in joint ventures. Prior to the sale, the residential portion of Principal Place was consolidated within commercial
developments.



Also, during the third quarter of 2013,
the company acquired an additional 50% interest in the Victor Building in Washington, D.C. resulting in acquisition of control
of the commercial property. As a result, the company has consolidated its interest in the property.



80







The company has aggregated investments
in joint ventures that share similar risk characteristics. Investments in joint ventures have been aggregated by principal investment
activity and geography. Summarized financial information in respect of the company’s aggregated investments in joint ventures
is set out below:



|                              | Dec. 31, 2013       |           | Dec. 31, 2012
|----------------------------- | ------------------- | --------- | -------------
|                              | Commercial Property |           | Development  
|(Millions)                    | U.S.                | Australia | U.K.         
|Non-current assets            |                     |           |              
|Commercial properties         | $4,562              | $  473    | —            
|Commercial developments       | —                   | —         | —            
|Other non-current assets      | —                   | —         | —            
|Current assets                | 98                  | —         | —            
|Cash                          | 5                   | 2         | —            
|Total assets                  | 4,665               | 475       | —            
|Non-current liabilities       |                     |           |              
|Commercial property debt      | 829                 | —         | —            
|Current liabilities           | 851                 | 2         | —            
|Total liabilities             | 1,680               | 2         | —            
|Net assets                    | $2,985              | $  473    | —            
|Company’s share of net assets | $1,570              | $  236    | —            



|                                                  | 2013                |           | 2012       
|------------------------------------------------- | ------------------- | --------- | -----------
|                                                  | Commercial Property |           | Development
|(Millions)                                        | U.S.                | Australia | U.K.       
|Revenue                                           | $   319             | $    44   | $   6      
|Expense                                           | (190)               | (11)      | (3)        
|Fair value gains (losses)                         | 204                 | 23        | 11         
|Net earnings                                      | $   333             | $    56   | $ 14       
|Other comprehensive income (loss)                 | —                   | —         | —          
|Total comprehensive income (loss)                 | 333                 | 56        | 14         
|Dividends received from the joint ventures        | 29                  | 18        | —          
|The above net earnings include
    the following: |                     |           |            
|Interest income                                   | —                   | —         | —          
|Interest expense                                  | (77)                | —         | (1)        
|Income tax expense
    (income)                   | —                   | —         | —          
|Company’s share of net earnings                   | $   189             | $    28   | $   7      



Certain of the company’s investments
in joint ventures are subject to restrictions over the extent to which they can remit funds to the company in the form of cash
dividends, or repayment of loans and advances as a result of borrowing arrangements, regulatory restrictions and other contractual
requirements.



81







NOTE 8: INVESTMENTS IN joint
Operations

The company’s interests in the following
properties are subject to joint control and, accordingly, the company has recorded its share of the assets, liabilities, revenue
and expenses of the properties in these consolidated financial statements:





|                                    |  |                      |  | Place of Incorporation and  |  | Proportion of Ownership
    Interest and Voting Rights Held
    by the Company
|----------------------------------- |  | -------------------- |  | --------------------------- |  | ------------------------------------------------------------------------------
|Name of Entity and Name of Property |  | Principal Activity   |  | Principal Place of Business |  | Dec. 31, 2013                                                                 
|Brookfield Place – Retail & Parking |  | Property             |  | Toronto                     |  | 56%                                                                           
|Brookfield Place III                |  | Development property |  | Toronto                     |  | 54%                                                                           
|Exchange Tower                      |  | Property             |  | Toronto                     |  | 50%                                                                           
|First Canadian Place(1)             |  | Property             |  | Toronto                     |  | 25%                                                                           
|151 Yonge Street                    |  | Property             |  | Toronto                     |  | 25%                                                                           
|2 Queen Street East                 |  | Property             |  | Toronto                     |  | 25%                                                                           
|Bankers Hall                        |  | Property             |  | Calgary                     |  | 50%                                                                           
|Bankers Court                       |  | Property             |  | Calgary                     |  | 50%                                                                           
|Bankers West Parkade                |  | Development property |  | Calgary                     |  | 50%                                                                           
|Suncor Energy Centre                |  | Property             |  | Calgary                     |  | 50%                                                                           
|Fifth Avenue Place                  |  | Property             |  | Calgary                     |  | 50%                                                                           
|Place de Ville I                    |  | Property             |  | Ottawa                      |  | 25%                                                                           
|Place de Ville II                   |  | Property             |  | Ottawa                      |  | 25%                                                                           
|Jean Edmonds Towers                 |  | Property             |  | Ottawa                      |  | 25%                                                                           
|300 Queen Street                    |  | Development property |  | Ottawa                      |  | 25%                                                                           
|KPMG Tower(2)                       |  | Property             |  | Sydney                      |  | 50%                                                                           
|World Square Retail(2)              |  | Property             |  | Sydney                      |  | 50%                                                                           
|52 Goulburn Street(2)               |  | Property             |  | Sydney                      |  | 50%                                                                           
|235 St Georges Terrace(2)           |  | Property             |  | Perth                       |  | 50%                                                                           
|108 St
    Georges Terrace(2)       |  | Property             |  | Perth                       |  | 50%                                                                           



| | (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) | 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
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 9: INVESTMENTS IN ASSOCIATES

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





|                                         |  |                         |  | Place of Incorporation and  |  | Proportion of Ownership
    Interest and Voting Rights Held
    by the Company
|---------------------------------------- |  | ----------------------- |  | --------------------------- |  | ------------------------------------------------------------------------------
|Name of Entity                           |  | Principal Activity      |  | Principal Place of Business |  | Dec. 31, 2013                                                                 
|BSREP Australia Trust                    |  | Investment properties   |  | Australia                   |  | 31.5%                                                                         
|Brookfield Global FM Limited Partnership |  | Facilities management   |  | Canada                      |  | 42.1%                                                                         
|Brookfield Johnson Controls Canada       |  | Facilities management   |  | Canada                      |  | ―                                                                             
|Oakridges                                |  | Residential development |  | Canada                      |  | 23.8%                                                                         



On March 1, 2013, the company sold a portion
of its ownership interest in BSREP Australia Trust to a fund that is controlled by a subsidiary of BAM for cash proceeds of $8
million. The sale decreased the company’s ownership interest in the associate from 41.2% to 38.8%. During the second and
third quarters of 2013, the company sold incremental interests in BSREP Australia Trust to the fund for cash proceeds of $25 million.
The sales further decreased the company’s ownership interest in the associate to 31.5%.



Brookfield Global FM Limited Partnership
(“FM Co.”) was created on October 1, 2013 through the consolidation of four core facilities management businesses.
As a result of the restructuring, the company acquired an interest in Brookfield Johnson Controls Australia and certain Middle
East and Asia facilities management businesses in exchange for the transfer of a portion of its interest in Brookfield Johnson
Controls Canada (“BJCC”) and Brookfield Residential Services Ltd. The company’s ownership interest in FM Co.
is 42.1% with a subsidiary of BAM acquiring a 57.9% interest. The difference between the carrying value of FM Co. and the interests
transferred was recorded in contributed surplus. Previously, on February 1, 2013, BJCC, formerly Brookfield LePage Johnson Controls,
was restructured. The company’s ownership interest in the associate effectively decreased from 39.9% to 33.1% and a subsidiary
of BAM acquired a 16.8% ownership interest in the associate.



82







Summarized financial information in respect
of the company’s material investments in associates are set out below:



|                              |  | Dec. 31, 2013             |     |  | Dec. 31, 2012 |  
|----------------------------- |  | ------------------------- | --- |  | ------------- | -
|(Millions)                    |  | BSREP
    Australia Trust |     |  | FM Co.        |  
|Non-current assets            |  | $                         | 840 |  |               | $
|Current assets                |  |                           | 59  |  |               |  
|Total assets                  |  |                           | 899 |  |               |  
|Non-current liabilities       |  |                           | 18  |  |               |  
|Current liabilities           |  |                           | 548 |  |               |  
|Total liabilities             |  |                           | 566 |  |               |  
|Net assets                    |  | $                         | 333 |  |               | $
|Company’s share of net assets |  | $                         | 105 |  |               | $



|                                               |  | 2013                      |    |   | 2012      |  
|---------------------------------------------- |  | ------------------------- | -- | - | --------- | -
|(Millions)                                     |  | BSREP
    Australia Trust |    |   | FM Co.(1) |  
|Revenue                                        |  | $                         | 26 |   |           | $
|Expense                                        |  |                           | (7 | ) |           |  
|Net earnings                                   |  |                           | 19 |   |           |  
|Other comprehensive income (loss)              |  |                           | 8  |   |           |  
|Total comprehensive income (loss)              |  |                           | 27 |   |           |  
|Dividends received from the joint
    ventures |  |                           | —  |   |           |  
|Company’s share of net earnings                |  | $                         | 6  |   |           | $

| | (1) | Includes BJCC for the period prior to the creation of FM Co. on October 1, 2013
| | --- | -------------------------------------------------------------------------------



Summarized financial information in respect
of the company’s aggregate investments in associates that are not individually material is set out below:



|(Millions)                                           |  | Dec. 31, 2013 |   |  | Dec. 31, 2012 |  
|---------------------------------------------------- |  | ------------- | - |  | ------------- | -
|Company’s share of net assets                        |  | $             | 2 |  |               | $
|                                                     |  |               |   |  |               |  
|(Millions)                                           |  | 2013          |   |  | 2012          |  
|Company’s share of net earnings                      |  | $             | 5 |  |               | $
|Company’s share of other comprehensive income (loss) |  |               | — |  |               |  
|Company’s share of total comprehensive income (loss) |  | $             | 5 |  |               | $



Certain of the company’s investments
in associates are subject to restrictions over the extent to which they can remit funds to the company in the form of cash dividends,
or repayment of loans and advances as a result of borrowing arrangements, regulatory restrictions and other contractual requirements.



NOTE 10: PARTICIPATING LOAN INTERESTS

Participating loan interests, that represent
interests in certain properties in Australia that do not provide the company with control over the entity that owns the underlying
property, 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 them into direct
ownership interests in the underlying commercial properties, and a contractual interest rate that varies with the results of operations
of those properties.



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



|(Millions)                         |                        |  |  |               |     |              
|---------------------------------- | ---------------------- |  |  | ------------- | --- | -------------
|Name of Property                   | Participation Interest |  |  | Dec. 31, 2013 |     | Dec. 31, 2012
|Darling Park Complex, Sydney       | 30%                    |  |  | $             | 161 |              
|IAG House, Sydney                  | 50%                    |  |  |               | 110 |              
|NAB House, Sydney                  | 25%                    |  |  |               | 105 |              
|Bourke Place Trust, Melbourne      | 43%                    |  |  |               | 174 |              
|Total participating loan interests |                        |  |  | $             | 550 |              



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, 2013 was $56 million (December
31, 2012 – $48 million). For the year ended December 31, 2013, the company recognized interest income of $37 million (2012
– $32 million) on the participating loan interests and fair value gains (losses) on the associated embedded derivative of
$21 million (2012 –$2 million).



83







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





|(Millions)                |  | Dec. 31, 2013 |       |   | Dec. 31, 2012 |  
|------------------------- |  | ------------- | ----- | - | ------------- | -
|Non-current assets        |  | $             | 2,282 |   |               | $
|Current assets            |  |               | 53    |   |               |  
|Total assets              |  |               | 2,335 |   |               |  
|Non-current liabilities   |  |               | 166   |   |               |  
|Current liabilities       |  |               | 660   |   |               |  
|Total liabilities         |  |               | 826   |   |               |  
|Net assets                |  | $             | 1,509 |   |               | $
|                          |  |               |       |   |               |  
|(Millions)                |  |               | 2013  |   |               |  
|Revenue                   |  | $             | 202   |   |               | $
|Expense                   |  |               | (101  | ) |               |  
|Fair value gains (losses) |  |               | 54    |   |               |  
|Net earnings              |  | $             | 155   |   |               | $



NOTE 11: OTHER NON-CURRENT FINANCIAL
ASSETS

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





|(Millions)                               |  | Dec. 31, 2013 |     |  | Dec. 31, 2012 |  
|---------------------------------------- |  | ------------- | --- |  | ------------- | -
|Equity securities designated as AFS      |  | $             | 105 |  |               | $
|Other loans receivable                   |  |               | 89  |  |               |  
|Other financial assets                   |  |               | 26  |  |               |  
|Total other non-current financial assets |  | $             | 220 |  |               | $



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

Equity securities designated as AFS includes
$105 million (December 31, 2012 – $105 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, 2012 – $92 million) recognized in other non-current financial liabilities.



| | (b) | Other loans receivable
| | --- | ----------------------

Other loans receivable includes an $89
million (December 31, 2012 – $104 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.



| | (c) | Other financial assets
| | --- | ----------------------

Included in other financial assets are
derivative assets with a carrying amount of $26 million (December 31, 2012 – nil). Refer to Note 28, Financial Instruments.



NOTE 12: RECEIVABLES AND OTHER ASSETS

The components of receivables and other
assets are as follows:



|(Millions)                         |  | Dec. 31, 2013 |     |  | Dec. 31, 2012 |  
|---------------------------------- |  | ------------- | --- |  | ------------- | -
|Accounts receivable                |  | $             | 235 |  |               | $
|Loan receivable from affiliate(1)  |  |               | ―   |  |               |  
|Prepaid expenses and other assets  |  |               | 147 |  |               |  
|Total receivables and other assets |  | $             | 382 |  |               | $



| | (1) | At December 31, 2012, included a $75 million receivable from a subsidiary of BAM that was repaid
during the first quarter of 2013
| | --- | ---------------------------------------------------------------------------------------------------------------------------------



During the second quarter of 2013, the
company exercised its option for the land lease on Principal Place, a commercial development, in London. As a result, the company
reclassified a £61 million contribution previously made in relation to Principal Place out of prepaid expenses and other
assets to commercial developments.



NOTE
13: 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 $142 million at December 31,
2013 (December 31, 2012 - $103 million).



84







NOTE 14: ASSETS HELD FOR SALE AND DISCONTINUED
OPERATIONS

During the second quarter of 2013, the
company reclassified Landmark Square in Los Angeles to assets held for sale upon entering into an agreement to dispose of the commercial
property. On August 8, 2013, the company sold Landmark Square in Los Angeles for approximately $136 million, resulting in net proceeds
of approximately $61 million.



On January 31, 2013, the company sold RBC
Plaza in Minneapolis for $127 million, resulting in net proceeds of $53 million. RBC Plaza was presented in assets held for sale
at December 31, 2012.



At December 31, 2012, the properties that
comprise the company’s Minneapolis portfolio were presented in assets held for sale. These properties were part of the company’s
U.S. commercial segment.



|(Millions)                                       |  | Dec. 31, 2013 |   |  | Dec. 31, 2012 |  
|------------------------------------------------ |  | ------------- | - |  | ------------- | -
|Assets                                           |  |               |   |  |               |  
|Commercial properties                            |  | $             | — |  |               | $
|Receivables and other assets                     |  |               | — |  |               |  
|Assets held for sale                             |  | $             | — |  |               | $
|Liabilities                                      |  |               |   |  |               |  
|Commercial property debt                         |  | $             | — |  |               | $
|Accounts payable and accrued liabilities         |  |               | — |  |               |  
|Liabilities associated with assets held for sale |  | $             | — |  |               | $



Discontinued operations included the company’s
Minneapolis portfolio, a specific geographic market that was held for sale, which the company exited in the first quarter of 2013.
The following table summarizes income and cash flows from discontinued operations:



|(Millions, except per share information)                                                           |  | 2013 |     |   | 2012 |  
|-------------------------------------------------------------------------------------------------- |  | ---- | --- | - | ---- | -
|Commercial property revenue                                                                        |  | $    | 3   |   |      | $
|Direct commercial property expense                                                                 |  |      | 3   |   |      |  
|Interest expense                                                                                   |  |      | —   |   |      |  
|Fair value gains (losses), net                                                                     |  |      | —   |   |      |  
|Income (loss) from discontinued operations                                                         |  | $    | —   |   |      | $
|Income (loss) from discontinued operations attributable to common shareholders per share – basic   |  | $    | —   |   |      | $
|Income (loss) from discontinued operations attributable to common shareholders per share – diluted |  | $    | —   |   |      | $
|Cash flows from (used in) operating activities                                                     |  | $    | —   |   |      | $
|Cash flows from (used in) financing activities                                                     |  |      | (64 | ) |      |  
|Cash flows from (used in) investing activities                                                     |  |      | 117 |   |      |  



NOTE 15: COMMERCIAL PROPERTY DEBT





|                                                                   |  | Dec. 31, 2013             |      |   | Dec. 31, 2012 |  
|------------------------------------------------------------------ |  | ------------------------- | ---- | - | ------------- | -
|(Millions)                                                         |  | Weighted
    Average Rate |      |   | Debt Balance  |  
|Unsecured Corporate Debt                                           |  |                           |      |   |               |  
|Corporate revolving facility                                       |  |                           | 3.45 | % |               | $
|Brookfield Canada Office
    Properties (“BOX”) revolving facility |  |                           | ―    |   |               |  
|Senior unsecured notes                                             |  |                           | 4.17 | % |               |  
|Australian property
    loans(1)                                   |  |                           | 4.66 | % |               |  
|Secured Commercial Property Debt                                   |  |                           |      |   |               |  
|Fixed rate property debt                                           |  |                           | 5.10 | % |               |  
|Variable rate property
    debt(2)                                 |  |                           | 3.36 | % |               |  
|Secured note
    payable                                           |  |                           | ―    |   |               |  
|Total                                                              |  |                           | 4.50 | % |               | $
|                                                                   |  |                           |      |   |               |  
|Current                                                            |  |                           |      |   |               | $
|Non-current                                                        |  |                           |      |   |               |  
|Associated with assets held for
    sale                           |  |                           |      |   |               |  
|Total                                                              |  |                           |      |   |               | $



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

| | (2) | At December 31, 2013, includes nil of other indebtedness outstanding to a subsidiary of BAM
(December 31, 2012 – $30 million)
| | --- | -----------------------------------------------------------------------------------------------------------------------------



85







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, 2013 |        |  | Dec. 31, 2012  |   
|------------------ |  | ------------- | ------ |  | -------------- | --
|(Millions)         |  | U.S. Dollars  |        |  | Local Currency |   
|U.S. dollars       |  | $             | 8,938  |  |                | $ 
|Canadian dollars   |  |               | 2,776  |  |                | C$
|Australian dollars |  |               | 1,507  |  |                | A$
|British pounds     |  |               | 564    |  |                | £ 
|Total              |  | $             | 13,785 |  |                |   



Included in commercial property debt is
$1,507 million (December 31, 2012 – $1,625 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 8, Investments in Joint Operations.



At December 31, 2012, commercial property
debt included 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 could 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 was measured at fair value with
changes in fair value reported through earnings in fair value gains (losses), net. The carrying amount of the embedded derivative
at December 31, 2012 was $54 million. In the first quarter of 2013, the company negotiated a modification to the terms of the mortgage
to establish a new fixed interest rate and remove the participation feature. The company recognized $22 million in interest and
other income representing the difference between the carrying amount of the original mortgage, including the embedded derivative,
and the fair value of the amended mortgage.



NOTE 16: CAPITAL SECURITIES –
CORPORATE

The company has the following capital securities
– corporate outstanding:



|                                         | Shares      | Cumulative        |               |              
|---------------------------------------- | ----------- | ----------------- | ------------- | -------------
|(Millions, except share information)     | Outstanding | Dividend Rate     | Dec. 31, 2013 | Dec. 31, 2012
|Class AAA Series E(1)                    | 8,000,000   | 70% of bank prime | $             | ―            
|Class AAA Series F                       | ―           | 6.00%             |               | ―            
|Class AAA Series G                       | 4,400,000   | 5.25%             |               | 110          
|Class AAA Series H                       | 8,000,000   | 5.75%             |               | 188          
|Class AAA Series J                       | 8,000,000   | 5.00%             |               | 188          
|Class AAA Series K                       | 6,000,000   | 5.20%             |               | 142          
|Total capital securities
    – corporate |             |                   | $             | 628          
|                                         |             |                   |               |              
|Current                                  |             |                   | $             | 188          
|Non-current                              |             |                   |               | 440          
|Total capital securities
    – corporate |             |                   | $             | 628          

| | (1) | Class AAA, Series E capital securities are owned by BPY, the company’s parent. The company
has an offsetting loan receivable against these securities earning interest at 108% of bank prime
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



Capital securities – corporate includes
$518 million (December 31, 2012 – $756 million) repayable in Canadian dollars of C$550 million (December 31, 2012 –
C$750 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 30,
2014 the Board of Directors of the company declared quarterly dividends payable for the Class AAA Series G, H, J and K preferred
shares.



86







The redemption terms of capital securities
– corporate 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 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 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 G, H, J and K into common shares of the company. The Class AAA, Series 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 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
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 17: CAPITAL SECURITIES –
FUND SUBSIDIARIES

The company has $491 million of capital
securities – fund subsidiaries outstanding at December 31, 2013 (December 31, 2012 – nil). Capital securities –
fund subsidiaries represent the equity interests in DTLA held by the company’s co-investors in the Fund which have been classified
as a liability, rather than as non-controlling interest, due to the fact that on October 15, 2023, and on every fifth anniversary
thereafter, the holders of these interests can cause DTLA to redeem their interests in the Fund for cash equivalent to the fair
value of the interests. Capital securities – fund subsidiaries are measured at redemption amount with changes in redemption
amount reflected in the statement of income. Earnings attributable to the equity interests presented as capital securities –
fund subsidiaries are recognized as interest expense in the statement of income.



NOTE 18: OTHER NON-CURRENT FINANCIAL
LIABILITIES

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



|(Millions)                                    |  | Dec. 31, 2013 |     |  | Dec. 31, 2012 |  
|--------------------------------------------- |  | ------------- | --- |  | ------------- | -
|Loan payable                                  |  | $             | 92  |  |               | $
|Note payable                                  |  |               | ―   |  |               |  
|Other financial liabilities                   |  |               | 61  |  |               |  
|Total other non-current financial liabilities |  | $             | 153 |  |               | $



Other non-current financial liabilities
includes a loan payable of $92 million at December 31, 2013 (December 31, 2012 – $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 11(a), Equity securities designated as AFS.



Included in other financial liabilities
are derivative liabilities with a carrying amount of $32 million (December 31, 2012 – $222 million). Refer to Note 28, Financial
Instruments. At December 31, 2012, other non-current financial liabilities included derivative liabilities of $222 million that
have been reclassified from accounts payable to conform to the current year’s presentation.



Other non-current financial liabilities
included a note payable of $90 million at December 31, 2012 issued to the non-controlling shareholders of the U.S. Office Fund
in connection with a distribution declared in 2012 that was repaid during the fourth quarter of 2013. Other non-current financial
liabilities also included $25 million at December 31, 2012, 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 which has been reclassified to current in accounts payable and
accrued liabilities during the fourth quarter of 2013.



NOTE 19: ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES

Accounts payable and accrued liabilities
was $1,046 million at December 31, 2013 (December 31, 2012 – $926 million). Current tax liabilities included in accounts
payable amount to $78 million (December 31, 2012 – $177 million).



Included in accounts payable and accrued
liabilities are derivative liabilities with a carrying amount of $56 million (December 31, 2012 – $13 million). Refer to
Note 28, Financial Instruments.



Also included in accounts payable and accrued
liabilities is $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.



87







NOTE 20: INCOME TAXES

The sources of deferred income tax balances
are as follows:



|(Millions)                   |  | Dec. 31, 2013 |       |  | Dec. 31, 2012 |  
|---------------------------- |  | ------------- | ----- |  | ------------- | -
|Deferred tax assets          |  |               |       |  |               |  
|Loss carry forwards          |  | $             | 214   |  |               | $
|Deferred financing costs     |  |               | 20    |  |               |  
|Foreign currency             |  |               | 4     |  |               |  
|Other                        |  |               | 10    |  |               |  
|                             |  |               | 248   |  |               |  
|Deferred tax liabilities     |  |               |       |  |               |  
|Properties                   |  |               | 1,214 |  |               |  
|Other                        |  |               | 4     |  |               |  
|Net deferred tax liabilities |  | $             | 970   |  |               | $



The movements of deferred income tax balances
are as follows:



|                                                                               |  |               |        |   | Recognized
    in |   |      |        |  |   |                                              |  
|------------------------------------------------------------------------------ |  | ------------- | ------ | - | ----------------- | - | ---- | ------ |  | - | -------------------------------------------- | -
|(Millions)                                                                     |  | Dec. 31, 2012 |        |   | Income            |   |      | Equity |  |   | OCI                                          |  
|Deferred tax assets
    related to non-capital losses and capital losses       |  | $             | 280    |   |                   | $ | (52  | )      |  |   | $
                                         ― |  
|Deferred
    tax liabilities related to differences in tax and book basis, net |  |               | (1,012 | ) |                   |   | (183 | )      |  |   | (4                                           | )
|Net deferred tax liabilities                                                   |  | $             | (732   | ) |                   | $ | (235 | )      |  | $ | (4                                           | )
|                                                                               |  |               |        |   |                   |   |      |        |  |   |                                              |  
|                                                                               |  |               |        |   | Recognized
    in |   |      |        |  |   |                                              |  
|(Millions)                                                                     |  | Dec. 31, 2011 |        |   | Income            |   |      | Equity |  |   | OCI                                          |  
|Deferred tax assets
    related to non-capital losses and capital losses       |  | $             | 220    |   |                   | $ | 34   |        |  | $ | 2                                            |  
|Deferred
    tax liabilities related to differences in tax and book basis, net |  |               | (767   | ) |                   |   | (250 | )      |  |   | ―                                            |  
|Net deferred tax liabilities                                                   |  | $             | (547   | ) |                   | $ | (216 | )      |  | $ | 2                                            |  









The company and its Canadian subsidiaries
have deferred tax assets of $96 million (December 31, 2012 – $115 million) related to non-capital losses that expire over
the next 20 years, and $100 million (December 31, 2012– $127 million) related to capital losses that have no expiry. The
company’s U.S. subsidiaries have deferred tax assets of $18 million (December 31, 2012 – $38 million) related to net
operating losses that expire over the next 20 years.



The major components of income tax expense
include the following:



|(Millions)                     |  | 2013 |     |   | 2012 |  
|------------------------------ |  | ---- | --- | - | ---- | -
|Current tax (recovery) expense |  | $    | (28 | ) |      | $
|Deferred tax expense(1)        |  |      | 232 |   |      |  
|Total income taxes             |  | $    | 204 |   |      | $

| | (1) | Includes $3 million of amortization of the tax benefit recorded in accumulated other comprehensive
income (loss) related to losses on derivatives designated as cash flow hedges for the year ended December 31, 2013 (2012 –
nil)
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(Millions)                                                                                        |  | 2013 |      |   | 2012 |  
|------------------------------------------------------------------------------------------------- |  | ---- | ---- | - | ---- | -
|Income tax expense at the Canadian federal and provincial income tax rate of 26.5% (2012 – 26.5%) |  | $    | 378  |   |      | $
|Increase (decrease) in income tax expense due to                                                  |  |      |      |   |      |  
|Non-deductible preferred share dividends and other expenses                                       |  |      | 14   |   |      |  
|Lower income tax rates in other jurisdictions                                                     |  |      | (114 | ) |      |  
|Tax asset derecognized                                                                            |  |      | ―    |   |      |  
|Change in tax rate applicable to temporary differences                                            |  |      | ―    |   |      |  
|Change in tax reserve                                                                             |  |      | (48  | ) |      |  
|Capital gains realized on distributions                                                           |  |      | 5    |   |      |  
|Change in Canadian tax rate                                                                       |  |      | ―    |   |      |  
|Non-controlling interests in income of flow-through entities                                      |  |      | (35  | ) |      |  
|Other                                                                                             |  |      | 4    |   |      |  
|Total income taxes                                                                                |  | $    | 204  |   |      | $



The applicable tax rate is the aggregate
of the Canadian Federal income tax rate of 15.0% (2012 – 15.0%) and the Provincial income tax rate of 11.5% (2012 –
11.5%).



88







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 21: 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, 2013 |             |  | Dec. 31, 2012 | 
|--------------------------------------------------------- |  | ------------- | ----------- |  | ------------- | 
|Common shares issued and outstanding, beginning of period |  |               | 504,720,629 |  |               | 
|Shares issued on exercise of options                      |  |               | 1,824,291   |  |               | 
|Dividend reinvestment                                     |  |               | 135,922     |  |               | 
|Other(1)                                                  |  |               | 20,806      |  |               | 
|Common shares issued and outstanding, end of period       |  |               | 506,701,648 |  |               | 

| | (1) | At December 31, 2013, other consists of shares sold to cover income taxes less dividends received
net of shares repurchased in connection with the company’s restricted stock plan. At December 31, 2012, other also consisted
of shares repurchased in connection with the company’s normal course issuer bid
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Total common share dividends in the year
ended December 31, 2013, were $283 million or $0.56 per share. On January 30, 2014, the Board of Directors of the company declared
common share dividends of $0.14 per share to be paid in the first quarter of 2014.



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

As of December 31, 2013, and December 31,
2012, accumulated other comprehensive income consists of the following amounts:



|(Millions)                                                                                                                                                                                                    |  | Dec. 31, 2013 |      |   | Dec. 31, 2012 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---- | - | ------------- | -
|Foreign currency translation gains (losses) on investments in subsidiaries, net of related hedging activities, net of taxes of $28 million (December 31, 2012 – $32 million), net of non-controlling interest |  | $             | (93  | ) |               | $
|Gains (losses) on derivatives designated as cash flow hedges, net of taxes of $33 million (December 31, 2012 – $78 million)(1)                                                                                |  |               | (101 | ) |               |  
|Unrealized gains (losses) on equity securities designated as AFS, net of taxes of nil (December 31, 2012 – nil)                                                                                               |  |               | (2   | ) |               |  
|Net change in revaluation surplus, net of taxes of nil (December 31, 2012 – nil)                                                                                                                              |  |               | 8    |   |               |  
|Accumulated other comprehensive income (loss)(2)                                                                                                                                                              |  | $             | (188 | ) |               | $

| | (1) | Includes losses of $14 million (December 31, 2012 - $10 million) which will be reclassified
to interest expense over the next 12 months
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Each component of the company’s accumulated other comprehensive income may be reclassified
to profit (or loss) in the future
| | --- | ----------------------------------------------------------------------------------------------------------------------------



| | (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)                                                                       |  | 2013 |       |   | 2012 |  
|-------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | -
|Net income from continuing operations                                            |  | $    | 1,222 |   |      | $
|Non-controlling interests                                                        |  |      | (131  | ) |      |  
|Preferred share dividends                                                        |  |      | (81   | ) |      |  
|Net income from continuing operations available to common shareholders – basic   |  |      | 1,010 |   |      |  
|Dilutive effect of conversion of capital securities – corporate                  |  |      | 35    |   |      |  
|Net income from continuing operations available to common shareholders – diluted |  | $    | 1,045 |   |      | $
|                                                                                 |  |      |       |   |      |  
|Net income attributable to shareholders                                          |  | $    | 1,091 |   |      | $
|Preferred share dividends                                                        |  |      | (81   | ) |      |  
|Net income available to common shareholders – basic                              |  |      | 1,010 |   |      |  
|Dilutive effect of conversion of capital securities – corporate                  |  |      | 35    |   |      |  
|Net income available to common shareholders – diluted                            |  | $    | 1,045 |   |      | $
|                                                                                 |  |      |       |   |      |  
|Weighted average shares outstanding – basic                                      |  |      | 505.1 |   |      |  
|Unexercised dilutive options and restricted stock                                |  |      | 4.1   |   |      |  
|Conversion of capital securities – corporate                                     |  |      | 45.1  |   |      |  
|Weighted average shares outstanding – diluted(1)                                 |  |      | 554.3 |   |      |  

| | (1) | The calculation of diluted weighted average shares outstanding at December 31, 2013, excludes
options for 16 million shares as their inclusion would be anti-dilutive (December 31, 2012 – 16 million)
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



89











| | (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, 2013 | Dec. 31, 2012
|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          
|Class AAA Series V                   | 1,805,489   | 70% of bank prime |               | 25           
|Class AAA Series W                   | 3,816,527   | 70% of bank prime |               | 55           
|Class AAA Series X                   | 300         | 30-day BA + 0.4%  |               | 66           
|Class AAA Series Y                   | 2,847,711   | 70% of bank prime |               | 42           
|Class AAA Series Z                   | 800,000     | 30-day BA + 0.4%  |               | 9            
|Total preferred equity               |             |                   | $             | 1,542        





On April 30, 2013, the existing preferred
shares of BPO Properties Ltd. (“BPP”), a subsidiary of the company, were exchanged for new class AAA preferred shares
of the company with substantially the same terms and conditions. The class AAA preferred shares series V, W and Y of the company
replaced the series G, J and M preferred shares of BPP and began trading on the Toronto Stock Exchange under the stock symbols
“BPO.PR.X”, “BPO.PR.W” and “BPO.PR.Y”, respectively. The new class AAA preferred shares of
the company were recorded at fair value upon initial recognition. The difference between the carrying value of the BPP preferred
shares, which were previously recognized as non-controlling interests, and the new class AAA preferred shares resulted in a credit
to contributed surplus of $181 million.



For the year ended December 31, 2013, the
company paid preferred dividends of $81 million (2012 - $70 million). Cumulative preferred dividends are payable, as and when declared
by the Board of Directors, on the last day of March, June, September and December, the 14th day of February, May, August
and November or the Thursday following the third Wednesday of every month depending on the series of preferred shares. On January
30, 2014 the Board of Directors of the company declared dividends payable for the Class A, Class AA Series E and Class AAA Series
L, N, P, R, T, V, W, X, Y and Z 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.



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                       
|Class AAA Series V | ―                  | C$25.00             | ―                                        
|Class AAA Series W | ―                  | C$25.00             | ―                                        
|Class AAA Series X | ―                  | C$500,000.00        | ―                                        
|Class AAA Series Y | ―                  | C$25.00             | ―                                        
|Class AAA Series Z | ―                  | C$25.00             | ―                                        





| | (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 Series L, N, P, R and T 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
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



90







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

Non-controlling interests consist of the following:





|(Millions)                      |  |  |  |  | Dec. 31, 2013 | Dec. 31, 2012
|------------------------------- |  |  |  |  | ------------- | -------------
|Preferred equity – subsidiaries |  |  |  |  | $             | 243          
|Other non-controlling interests |  |  |  |  |               | 1,242        
|Total non-controlling interests |  |  |  |  | $             | 1,485        







Preferred Equity – Subsidiaries

Subsidiaries’ preferred shares outstanding
as of December 31, 2013 totaled $243 million (December 31, 2012 - $385 million) as follows:













|(Millions, except share information)  | Shares
Outstanding |  | Preferred
Shares Series | Cumulative Dividend Rate | Dec. 31, 2013 | Dec. 31, 2012
|------------------------------------- | ------------------ |  | ----------------------- | ------------------------ | ------------- | -------------
|DTLA Investor                         | 9,357,469          |  | Series A                | 7.63%                    | $             | 243          
|                                      |                    |  |                         |                          |               |              
|BPP                                   | 1,805,489          |  | Series G                | 70% of bank prime        |               | ―            
|                                      | 3,816,527          |  | Series J                | 70% of bank prime        |               | ―            
|                                      | 300                |  | Series K                | 30-day BA + 0.4%         |               | ―            
|                                      | 2,847,711          |  | Series M                | 70% of bank prime        |               | ―            
|                                      | 800,000            |  | Series N                | 30-day BA + 0.4%         |               | ―            
|Total preferred equity – subsidiaries |                    |  |                         |                          | $             | 243          









Refer to Note 21(d), Preferred Equity for
discussion of exchange of preferred equity – subsidiaries for Class AAA preferred shares of the company.



Refer to Note 6, Business Combinations
for discussion of exchange of MPG Series A preferred equity for DTLA Investor Series A preferred equity.



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)                                                        | Place
        of Incorporation and
        Principal
        Place of Business | Proportion
        of Ownership Interest
        and
        Voting Rights Held by Non-
        Controlling
        Interests | Dec.
    31, 2013 | Dec.
    31, 2012
|----------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------- | ----------------- | -----------------
|Units of BOX(1)                                                   | Ontario                                                                        | 16.7%                                                                                                                         | $                 | 488              
|Limited partnership units of Brookfield Financial Properties L.P. | Delaware                                                                       | 0.6%                                                                                                                          |                   | 40               
|Units of Brookfield Prime Property Fund(2)                        | Australia                                                                      | 19.5%                                                                                                                         |                   | 48               
|Partnership units of The 100 Bishopsgate Partnership(3)           | U.K.                                                                           | 12.5%                                                                                                                         |                   | 1                
|Members interest in Brookfield Heritage Partners LLC              | Delaware                                                                       | 49.0%(4)                                                                                                                      |                   | 133              
|Interest in 1801 California Street                                | Denver                                                                         | 49.0%(4)                                                                                                                      |                   | 63               
|Members interest in BOP Met Park LLC(5)                           | Delaware                                                                       | 50.0%(4)                                                                                                                      |                   | 52               
|U.S. Office Fund                                                  | Delaware                                                                       | 15.7%                                                                                                                         |                   | 417              
|Total other non-controlling interests                             |                                                                                |                                                                                                                               | $                 | 1,242            









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



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

| | (3) | British pound denominated
| | --- | -------------------------

| | (4) | The company controls 100% of Brookfield Heritage
Partners LLC, 1801 California Street and BOP Met Park LLC as the managing member based on the control provided in the venture
agreements
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | The company disposed of a 50% interest in BOP Met
Park LLC, the entity through which it owns Metropolitan Park East & West in Seattle, to a co-investor in the fourth quarter
of 2013. The difference between the fair value of the non-controlling interest issued and proceeds received was recognized as
a charge to retained earnings of $7 million
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



91







The company has aggregated its investments
in subsidiaries with material non-controlling interests that share similar risk characteristics. Subsidiaries have been aggregated
by principal activity and geography. Summarized financial information in respect of the company’s aggregated subsidiaries
with material non-controlling interests is set out below:





|                                               |  | Dec.
31, 2013           
|---------------------------------------------- |  | ------------------------
|                                               |  | Portfolio               
|(Millions)                                     |  | U.S. Office
        Fund
|Non-current assets                             |  | $4,595                  
|Current assets                                 |  | 178                     
|Total assets                                   |  | 4,773                   
|Non-current liabilities                        |  | 1,973                   
|Current liabilities                            |  | 146                     
|Total liabilities                              |  | 2,119                   
|Net assets                                     |  | $2,654                  
|Company’s share of net assets                  |  | $2,237                  
|Non-controlling interests’ share of net assets |  | $   417                 







|                                                 |  | 2013                    
|------------------------------------------------ |  | ------------------------
|                                                 |  | Portfolio               
|(Millions)                                       |  | U.S. Office
        Fund
|Revenue                                          |  | $   452                 
|Net earnings                                     |  | $   191                 
|Company’s share of net earnings                  |  | $   161                 
|Non-controlling interests’ share of net earnings |  | $     30                
|Dividends paid to non-controlling interests      |  | $     24                









NOTE 22: REVENUE AND
Expenses

(a)          Commercial
property revenue

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





|(Millions)                              |   | 2013  |   | 2012 
|--------------------------------------- | - | ----- | - | -----
|Rental revenue                          | $ | 2,248 | $ | 2,125
|Recurring fee income                    |   | 53    |   | 53   
|Lease termination, fee and other income |   | 3     |   | 17   
|Total commercial property revenue       | $ | 2,304 | $ | 2,195





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, 2013 | Dec. 31, 2012
|--------------------------------------------- | ------------- | -------------
|Not later than 1 year                         | $             | 1,468        
|Later than 1 year and not longer than 5 years |               | 5,510        
|Later than 5 years                            |               | 7,799        
|Total                                         | $             | 14,777       





92







(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)                    |   | 2013  |   | 2012 
|----------------------------- | - | ----- | - | -----
|Interest expense              | $ | 661   | $ | 675  
|Property maintenance          |   | 487   |   | 402  
|Real estate taxes             |   | 338   |   | 338  
|Employee benefits             |   | 163   |   | 182  
|Ground rents                  |   | 27    |   | 29   
|Depreciation and amortization |   | 19    |   | 15   
|Transaction costs             |   | 13    |   | 4    
|Other                         |   | 80    |   | 48   
|Total expenses                | $ | 1,788 | $ | 1,693





The company
recognized acquisition related costs of $13 million for the year ended December 31, 2013 (2012 – $4
million), in connection with investment properties acquired through business combinations accounted for in accordance with IFRS
3R.



Property operating costs for the year ended
December 31, 2013 includes $27 million (2012 – $27 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, 2013 | Dec. 31, 2012
|--------------------------------------------- | ------------- | -------------
|Not later than 1 year                         | $             | 28           
|Later than 1 year and not longer than 5 years |               | 99           
|Later than 5 years                            |               | 1,467        
|Total                                         | $             | 1,594        





(c)          Interest
and other income

The components of interest and other income
are as follows:





|(Millions)                                                                                 |   | 2013 |   | 2012
|------------------------------------------------------------------------------------------ | - | ---- | - | ----
|Interest income on loans receivable from BAM                                               | $ | 5    | $ | 3   
|Interest income on residential note receivable from Brookfield Residential Properties Inc. |   | ―    |   | 29  
|Interest income on participating loan interests with subsidiaries of BAM                   |   | 37   |   | 32  
|Interest and other income on loans receivable designated as FVTPL                          |   | ―    |   | 8   
|Other interest income                                                                      |   | 3    |   | 2   
|Other income(1)                                                                            |   | 45   |   | 13  
|Total interest and other income                                                            | $ | 90   | $ | 87  





(1)Includes
gain from amendment of mortgage terms for the year ended December 31, 2013. Refer to Note 15, Commercial Property Debt



NOTE 23: FAIR VALUE GAINS (LOSSES),
NET

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





|(Millions)                                      |   | 2013 |   | 2012 
|----------------------------------------------- | - | ---- | - | -----
|Investment properties                           |   |      |   |      
|Commercial properties                           | $ | 430  | $ | 897  
|Commercial developments                         |   | 122  |   | 82   
|                                                |   | 552  |   | 979  
|Financial instruments                           |   |      |   |      
|Participating loan interests                    |   | 21   |   | 2    
|Other financial instruments designated as FVTPL |   | (11) |   | 23   
|                                                |   | 10   |   | 25   
|Total fair value gains (losses), net            | $ | 562  | $ | 1,004





NOTE 24: SHARE OF NET EARNINGS FROM
EQUITY ACCOUNTED INVESTMENTS

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





|(Millions)                                                    |   | 2013 |   | 2012
|------------------------------------------------------------- | - | ---- | - | ----
|Joint ventures                                                | $ | 245  | $ | 123 
|Associates                                                    |   | 13   |   | 4   
|Total share of net earnings from equity accounted investments | $ | 258  | $ | 127 





93









NOTE 25: 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 March 31,
2013, the company granted 2,540,100 stock options (2012 – 2,416,000) under the Share Option Plan with an exercise price of
$16.71 per share (2012 – $17.84 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 13, 2013. At the grant date,
the options each had a fair value of $3.54 per share (2012 – $3.63 per share) determined using the Black-Scholes model of
valuation, assuming a 7.5-year term, 38.84% volatility (2012 – 38.72%), a weighted average dividend yield of 3.35% (2012
– 2.50%) and a risk free interest rate of 1.47% (2012 – 1.35%). 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. In addition, during the three months ended June 30, 2012, the company granted 1,500,000 stock options, 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 following table sets out the number
of options to purchase common shares which were issued and outstanding at December 31, 2013 under the company’s Share Option
Plan:





|Issue Date | Expiry Date | Number of
        Options | Weighted
        Average
        Exercise Price
|---------- | ----------- | ------------------------- | -----------------------------------------------
|2005       | 2015        |                           | 677,843                                        
|2006       | 2016        |                           | 751,329                                        
|2007       | 2017        |                           | 1,362,837                                      
|2008       | 2018        |                           | 1,932,867                                      
|2009       | 2019        |                           | 4,657,085                                      
|2010       | 2020        |                           | 2,829,600                                      
|2011       | 2021        |                           | 1,813,700                                      
|2012       | 2022        |                           | 3,816,300                                      
|2013       | 2023        |                           | 2,540,100                                      
|Total      |             |                           | 20,381,661                                     





The change in the number of options during
2013 and 2012 is as follows:





|                                 | Dec. 31, 2013 | Dec. 31, 2012           
|-------------------------------- | ------------- | ------------------------
|                                 | Number of     | Weighted
        Average
|                                 | Options       | Exercise Price          
|Outstanding, beginning of period | 19,868,908    | $                       
|Granted                          | 2,540,100     |                         
|Exercised                        | (1,792,153)   |                         
|Expired/Forfeited                | (235,194)     |                         
|Outstanding, end of period       | 20,381,661    |                         
|Exercisable at end of period     | 14,760,081    | $                       





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, 2013, the company had 1,426,460 deferred
share units outstanding and vested (December 31, 2012 – 1,356,410).



94







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. 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 vesting 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 provisions as the original restricted shares. During the year ended December
31, 2013, 29,922 (2012 – 56,646) shares were granted under the restricted stock plan with a grant date fair value of $16.70
per share (2012 – $17.65 per share). The resulting total compensation is charged to employee compensation expense over the
vesting period of the restricted stock granted. At December 31, 2013, 234,661 shares were outstanding and 80,932 shares were vested
under the restricted stock plan (December 31, 2012 – 248,357 and 83,040, respectively).



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, 2013, 99,500 (2012 – 111,500) shares
were granted under the management global share option plan with an exercise price of $16.71 per share (2012 – $15.64 per
share). At December 31, 2013, 325,500 shares were outstanding and 136,300 shares were exercisable under the global stock option
plan (December 31, 2012 – 226,000 and 71,200, respectively).



Employee compensation expense related to
the share option, deferred share unit, restricted stock and management global share option plans for the year ended December 31,
2013, was $9 million (2012– $11 million).



NOTE 26: 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
may be 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, with a judgment amount of $56 million (A$63 million), is being pursued against one of the
company’s subsidiaries related to security on a defaulted loan. Management has determined that the most probable cash outflow
related to the litigation being pursued against the company is $24 million (A$27 million), which has been fully provided for in
the company’s financial statements. The company anticipates this specific litigation will be settled in 2014.



The company, through its 50% interest in
London Wall Place LP, has a £125 million commitment in respect of obligations under an agreement for underlease relating
to 1 London Wall Place at December 31, 2013.



At December 31, 2013, the company has commitments
totaling approximately C$200 million for the development of Bay Adelaide East in Toronto and Brookfield Place East Tower in Calgary
and approximately A$250 million for the development of Brookfield Place Perth Tower 2.



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.



95







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

United States

The company maintains insurance on its
properties in amounts and with deductibles that the company 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). Its all risk policy limit is $1.5 billion per occurrence. Its 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 $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 five insurers that has a deductible
equal to 5% of the total insured values subject to a minimum $1 million and maximum $5 million. 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 the company’s U.S.
properties (including its U.S. Office Fund and DTLA), in October 2008, it 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 II to recover 85% of its losses, less certain deductibles, from the
United States government with the remaining 15% to be funded by the company.



As a result of the acquisition of MPG,
the company assumed an all risk property insurance policy (including coverage for the perils of earthquake) which expires on April
19, 2014. The company’s all risk policy limit for the MPG properties is $1.25 billion per occurrence subject to a deductible
of $25,000. The earthquake limit for these properties is $130 million per occurrence and in the annual aggregate subject to a deductible
of 5% of the value of the affected property.



Canada

The company maintains insurance on its
properties in amounts and with deductibles that the company 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). Its all risk policy limit is C$1.5 billion per occurrence. Its 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 with the exception of the loss being subject to a C$500,000 deductible for Calgary only. 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 the company 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). Its all risk policy limit is A$1.25 billion per occurrence. Its 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 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.



96







United Kingdom

The company maintains insurance on its
properties in amounts and with deductibles that the company 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 27:
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, 2013, the company’s weighted average cost of capital,
assuming a 12% return on common equity, was 6.92%. In determining the long term 12.00% return on common equity, management considers
various factors including a review of various financial models such as dividend growth model and capital asset pricing model, as
well as examination of market returns. Based on the calculation of the financial models, market returns and historical returns
achieved by the company, management believes that the long term 12.00% return is an appropriate benchmark.



The following schedule details the capitalization
of the company and the related costs thereof:



|                                          | Cost of Capital(1) | Underlying Value(2)
|----------------------------------------- | ------------------ | -------------------
|(Millions)                                | Dec. 31, 2013      | Dec. 31, 2012      
|Liabilities                               |                    |                    
|Commercial property debt                  |                    | 4.50%              
|Capital securities – corporate            |                    | 5.31%              
|Capital securities – fund subsidiaries(3) |                    | 12.00%             
|Shareholders’ equity                      |                    |                    
|Preferred equity – corporate              |                    | 5.30%              
|Common equity                             |                    | 12.00%             
|Non-controlling interests                 |                    |                    
|Preferred equity – subsidiaries           |                    | 7.63%              
|Other non-controlling interests(3)        |                    | 12.00%             
|Total(4)                                  |                    | 6.92%              



| | (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 and underlying value of other equity interests is based on carrying value
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (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
| | --- | -------------------------------------------------------------------------------------------



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 51% of fair value of its commercial properties. This level of indebtedness is considered by the company to be
within its target.



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



Capital securities – fund subsidiaries
and 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, a fixed charge ratio, as well as an interest
rate protection requirement, an equity value requirement and a recourse debt requirement. As of December 31, 2013 the company is
in compliance with these covenants. As of December 31, 2013, $336 million had been drawn on the credit facilities (2012 –
$68 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.



97







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, 2013, the average
term to maturity of the company’s commercial property debt was five years, compared to its average lease term of eight years.



The following table presents the contractual
maturities of the company’s financial liabilities at December 31, 2013:



|                                         |   |        | Payments Due by Period
|---------------------------------------- | - | ------ | ----------------------
|(Millions)                               |   | Total  |                       
|Commercial property debt(1)              | $ | 13,785 | $                     
|Capital securities – corporate           |   | 628    |                       
|Capital securities – fund subsidiaries   |   | 491    |                       
|Interest expense(2)                      |   |        |                       
|Commercial property debt                 |   | 2,967  |                       
|Capital securities - corporate           |   | 63     |                       
|Other non-current financial liabilities  |   | 153    |                       
|Accounts payable and accrued liabilities |   | 853    |                       



| | (1) | Net of $115 million of transaction costs and includes
commercial property debt associated with assets held for sale at December 31, 2013
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------

| | (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
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 28: 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 25, Share-Based Compensation.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





The company also designates certain
of its financial liabilities as hedges of its Canadian dollar net investments in foreign subsidiaries.



98







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, 2013, and December
31, 2012:



|(Millions)    | Hedging Item                                      | Notional | Rates        | Maturity Dates       | Fair Value
|------------- | ------------------------------------------------- | -------- | ------------ | -------------------- | ----------
|Dec. 31, 2013 | Interest rate caps of US$ LIBOR debt              | $2,005   | 3.0% to 5.8% | Jan 2014 to Oct 2018 | $2        
|              | Interest rate swaps of US$ LIBOR debt             | $784     | 0.6% to 2.2% | May 2014 to Nov 2020 | ($1)      
|              | Interest rate swaps of £ LIBOR debt               | £134     | 1.1%         | Sep 2017             | £2        
|              | Interest rate swaps of A$ BBSW/BBSY debt          | A$1,050  | 3.5% to 5.9% | Jan 2014 to Jul 2017 | (A$41)    
|              | Interest rate swaps on forecasted fixed rate debt | $1,505   | 2.3% to 4.7% | Jun 2024 to Jun 2026 | ($32)     
|              | Interest rate swaps on forecasted fixed rate debt | C$50     | 2.8%         | Dec 2024             | C$3       
|Dec. 31, 2012 | Interest rate caps of US$ 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 5.7% | 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)     



For the year ended December 31, 2013 and
2012, 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 $470 million for a
net gain of $14 million, of which $9 million is being amortized over the term of the associated hedged cash flows.



At December 31, 2013, the company has $16
million of interest rate hedges in an asset position and $14 million of interest rate hedges in a liability position that are subject
to the right to offset under enforceable master netting agreements with counterparties which have not been presented net in the
consolidated financial statements.



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, 2013,
and December 31, 2012:



|(Millions)    | Hedging Item             | Hedged Currency    | Notional | Rate       | Fair Value | Maturity | Hedged Item                   
|------------- | ------------------------ | ------------------ | -------- | ---------- | ---------- | -------- | ------------------------------
|Dec. 31, 2013 | Foreign currency forward | Australian dollars | A$35     | A$1.07/US$ | A$2        | Mar 2014 | A$ denominated net investment 
|              | Foreign currency forward | Australian dollars | A$50     | A$1.12/US$ | A$1        | Aug 2014 | A$ denominated net investment 
|Dec. 31, 2012 | Foreign currency forward | British pounds     | £45      | £0.62/US$  | nil        | Mar 2013 | GBP denominated net investment



In addition, as of December 31, 2013, the
company had designated C$900 million (December 31, 2012 – C$1,100 million) of its Canadian dollar financial liabilities as
hedges of the net investment in its Canadian operations.



For the year ended December 31, 2013 and
2012, the amount of hedge ineffectiveness recorded in earnings in connection with the company’s foreign currency hedging
activities was not significant.



Other derivatives

The following table provides details of
other derivatives outstanding as at December 31, 2013, and December 31, 2012:







|(Millions)    | Derivative Type      |  | Fair
        Value | Fair Value
        (Gain)/Loss |  | Classification of Gain/Loss
|------------- | -------------------- |  | ------------------ | ------------------------------ |  | ---------------------------
|Dec. 31, 2013 | Total return swap(1) |  | $1                 | ($5)                           |  | Administrative expense     
|Dec. 31, 2012 | Total return swap(1) |  | $1                 | ($1)                           |  | Administrative expense     





(1)Relates
to the total return swap on the company’s shares in connection with its Deferred Share Unit Plans



99







| | (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, 2013               |           |           |           | Dec. 31, 2012
|---------------------------------------- | --------- | -------- | --------------------------- | --------- | --------- | --------- | -------------
|                                         |           |          | Loans & Receivables         |           |           |           |              
|                                         | FVTPL     | AFS      | Other Financial Liabilities |           | Total     |           |              
|                                         | Fair      | Fair     | Fair                        | Amortized | Carrying  | Fair      |              
|(Millions) Measurement Basis             | Value     | Value    | Value                       | Cost      | Value     | Value     |              
|Financial assets                         |           |          |                             |           |           |           |              
|Participating loan interests             | $      56 | $      — | $    494                    | $    494  | $    550  | $    550  |              
|Non-current financial assets             |           |          |                             |           |           |           |              
|Equity securities designated as AFS      | —         | 105      | —                           | —         | 105       | 105       |              
|Other loans receivable                   | —         | —        | 89                          | 89        | 89        | 89        |              
|Other non-current financial assets       | 26        | —        | —                           | —         | 26        | 26        |              
|Receivables and other assets             |           |          |                             |           |           |           |              
|Accounts receivable                      | —         | —        | 235                         | 235       | 235       | 235       |              
|Loan receivable from affiliate           | —         | —        | —                           | —         | —         | —         |              
|Restricted cash and deposits             | —         | —        | 142                         | 142       | 142       | 142       |              
|Cash and equivalents                     | —         | —        | 713                         | 713       | 713       | 713       |              
|                                         | $      82 | $    105 | $   1,673                   | $   1,673 | $   1,860 | $   1,860 |              
|Financial liabilities                    |           |          |                             |           |           |           |              
|Commercial property debt(1)              | $      —  | $      — | $ 14,148                    | $ 13,785  | $ 13,785  | $ 14,148  |              
|Capital securities – corporate           | —         | —        | 639                         | 628       | 628       | 639       |              
|Capital securities – fund subsidiaries   | —         | —        | 491                         | 491       | 491       | 491       |              
|Other non-current financial liabilities  |           |          |                             |           |           |           |              
|Loan payable                             | —         | —        | 92                          | 92        | 92        | 92        |              
|Note payable                             | —         | —        | —                           | —         | —         | —         |              
|Other financial liabilities              | 32        | —        | 29                          | 29        | 61        | 61        |              
|Accounts payable and accrued liabilities | 56        | —        | 797                         | 797       | 853       | 853       |              
|                                         | $    88   | $      — | $ 16,196                    | $ 15,822  | $ 15,910  | $ 16,284  |              



(1)Includes
debt associated with assets held for sale



| | (c) | Fair value hierarchy
| | --- | --------------------

The company values assets and liabilities
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, 2013 | Dec. 31, 2012
|-------------------------------------------------- | ------------- | -------------
|(Millions)                                         |               | Level 1      
|Assets                                             |               |              
|Participating loan interests – embedded derivative | $             | —            
|Equity securities designated as AFS                |               | —            
|Derivative assets                                  |               | —            
|Liabilities                                        |               |              
|Commercial property debt – embedded derivative     |               | —            
|Derivative liabilities                             |               | —            







There have been no transfers during the
period between levels. A reconciliation of fair value measurements of financial instruments in Level 3 is set out below:



|                             |  |  |  |  | Dec. 31, 2013
|---------------------------- |  |  |  |  | -------------
|(Millions)                   |  |  |  |  | Assets       
|Balance, beginning of period |  |  |  |  | $            
|Dispositions                 |  |  |  |  |              
|Fair value gains (losses)    |  |  |  |  |              
|Balance, end of period       |  |  |  |  | $            



100







In Note 28(b), Fair Value of Financial
Instruments, the company discloses the fair value of financial assets and liabilities that are not measured at fair value in the
consolidated financial statements. The following table outlines the level in the fair value hierarchy for the fair value disclosures,
other than those where fair value was determined to approximate carrying value.





|                               | Dec. 31, 2013 | Dec. 31, 2012
|------------------------------ | ------------- | -------------
|(Millions)                     |               | Level 1      
|Liabilities                    |               |              
|Commercial property debt       | $             | —            
|Capital securities – corporate |               | 639          





(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, 2013
|------------------------------------------------------- | -------------
|$695M corporate revolver                                | $            
|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, 2013  | Dec. 31, 2012
|----------------------------------- | -------------- | -------------
|US$ Millions unless otherwise noted | Net investment |              
|Canadian Dollar                     | C$             | 1,810        
|Australian Dollar                   | A$             | 2,456        
|British Pound(1)                    | £              | 566          
|Total                               |                |              



| | (1) | Before taking into consideration the effect of
hedges at December 31, 2012. The currency risk on these British pound denominated investments had 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 1,411,579 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.



101







| | (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
$9 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 $780 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.



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 29: 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:





|(Millions)                                     |               | 2013          |   | 2012 
|---------------------------------------------- | ------------- | ------------- | - | -----
|Transactions with related parties              |               |               |   |      
|Commercial property revenue(1)                 | $             | 7             | $ | 10   
|Interest and other income                      |               | 42            |   | 72   
|Interest expense on commercial property debt   |               | 12            |   | 25   
|Management fees paid                           |               | 12            |   | —    
|Administrative expense(2)                      |               | 48            |   | 51   
|                                               | Dec. 31, 2013 | Dec. 31, 2012
|Balances outstanding to (from) related parties |               |               |   |      
|Participating loan interests                   | $             | 550           | $ | 628  
|Other non-current financial assets             |               | 89            |   | 104  
|Receivables and other assets                   |               | 48            |   | 115  
|Commercial property debt                       |               | (168)         |   | (229)





| | (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, for construction and related costs paid to a subsidiary of BAM pursuant to contracts to construct
investment properties. During the second quarter of 2013, the company entered into a contract to construct an investment property
in Perth with a subsidiary of BAM. During the fourth quarter of 2013, the company entered into contracts to construct investment
properties in London with a subsidiary of BAM.



Refer
to Note 9, Investments in Associates, for the sale of a portion of the company’s ownership interest in an associate, at fair
value, to a subsidiary of BAM as well as an associate that was restructured, with a subsidiary of BAM acquiring an ownership interest.



Compensation of key management personnel

The remuneration of directors and other
key management personnel during the year ended December 31, 2013 and 2012 was as follows:





|(Millions)                                   | 2013 | 2012
|-------------------------------------------- | ---- | ----
|Salaries, incentives and short-term benefits | $    | 12  
|Post-employment benefits                     |      | ―   
|Share-based compensation                     |      | 9   
|Total                                        | $    | 21  





The remuneration of directors and key executives
is determined by the company’s governance and nominating committee and human resources and compensation committee, respectively,
having regard to the performance of individuals and market trends.



102







NOTE 30: OTHER INFORMATION

(a)          Supplemental
cashflow information







|(Millions)                                                     |   | 2013  |   | 2012
|-------------------------------------------------------------- | - | ----- | - | ----
|Acquisitions of real estate                                    | $ | 718   | $ | 855 
|Mortgages and other balances assumed on acquisition            |   | (150) |   | —   
|Net acquisitions                                               | $ | 568   | $ | 855 
|Dispositions of real estate                                    | $ | 555   | $ | 438 
|Mortgages and other balances assumed by purchasers             |   | —     |   | (36)
|Net dispositions                                               | $ | 555   | $ | 402 
|                                                               |   |       |   |     
|(Millions)                                                     |   | 2013  |   | 2012
|Cash taxes paid                                                | $ | 62    | $ | 79  
|Cash interest paid (excluding dividends on capital securities) |   | 648   |   | 612 







(b)          During
the year ended December 31, 2013, interest expense included $22 million (2012 – $19 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)          Certain
of the company’s investments in subsidiaries are subject to restrictions over the extent to which they can remit funds to
the company in the form of cash dividends, or repayment of loans and advances as a result of borrowing arrangements, regulatory
restrictions and other contractual requirements.



NOTE 31: SUBSEQUENT EVENTS

On January 8, 2014, the company increased
its corporate revolving credit facility from $695 million to $1 billion through a syndicate of lending institutions led by Deutsche
Bank AG, RBC Capital Markets and Citigroup Global Markets Inc. The increased floating rate credit facility holds a four-year term
with two six-month extension options. The facility also features an accordion option through which the company can draw an additional
$250 million at the consent of the lenders.



On January 28, 2014, the company acquired
an additional 24% interest in 450 West 33rd Street in New York for approximately $57 million resulting in acquisition
of control of the commercial property. As a result, the company will consolidate its interest in the property. Prior to the acquisition
date, 450 West 33rd Street was accounted for within investments in joint ventures under the equity method of accounting
with a carrying value of $191 million. Based on the company’s preliminary allocation of the purchase price for this asset,
the company expects to recognize commercial properties of $666 million, commercial property debt of $456 million and net working
capital of $51 million as a result of the business combination. If the acquisition had been as of January 1, 2013, the commercial
property revenue and net income attributable to shareholders in connection with this property would have been $48 million and $103
million, respectively, for the year ended December 31, 2013.



On February 11, 2014, the company sold
a 41% interest in Heritage Plaza in Houston for net proceeds of approximately $118 million. The company has retained the remaining
10% interest.



On February 28, 2014, the company sold
NAB House in Sydney, in which the company had a 25% participating loan interest, for A$116 million.



103







NOTE 32: SEGMENTED INFORMATION

The company operates four reportable segments,
the United States, Canada, Australia and the United Kingdom, in the commercial property business. The commercial markets in which
the company operates are primarily New York, Washington, D.C., Los Angeles, Houston, Boston, Denver, Seattle and San Francisco
in the United States; Toronto, Calgary, Ottawa and Vancouver in Canada; Sydney, Melbourne and Perth in Australia; and London in
the United Kingdom.



Information regarding the results of each
reportable segment is included below. Performance is measured based upon funds from operations, the measure used by management
in assessing segment profit or loss. While funds from operations is a non-IFRS measure on a total basis, it is an IFRS measure
on a segment basis because it is the measure of segment profit and loss. The company’s 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 funds from operations 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, the company also makes 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.





|                                                                     | United
    States | Canada | Australia | United
    Kingdom | Total
|-------------------------------------------------------------------- | ----------------- | ------ | --------- | ------------------ | -----
|(Millions)                                                           |                   | 2013   |           | 2012               |      
|Commercial property revenue                                          | $                 | 1,411  | $         | 1,356              | $    
|Direct commercial property expense                                   |                   | (616)  |           | (550)              |      
|Interest and other income                                            |                   | 47     |           | 11                 |      
|Interest expense(1)                                                  |                   | (406)  |           | (414)              |      
|Administrative expense(2)                                            |                   | (104)  |           | (84)               |      
|Other                                                                |                   | (6)    |           | —                  |      
|Funds from operations of equity accounted investments                |                   | 62     |           | 79                 |      
|Funds from discontinued operations                                   |                   | —      |           | 19                 |      
|Non-controlling
    interests                                        |                   | (28)   |           | (37)               |      
|Funds from operations                                                |                   | 360    |           | 380                |      
|Fair value gains (losses), net                                       |                   | 285    |           | 473                |      
|Fair value gains (losses), net from equity accounted
    investments |                   | 124    |           | 32                 |      
|Other                                                                |                   | 18     |           | 5                  |      
|Income taxes                                                         |                   | (26)   |           | (56)               |      
|Funds from discontinued operations                                   |                   | —      |           | (19)               |      
|Non-controlling
    interests                                        |                   | 28     |           | 37                 |      
|Income (loss) from continuing operations                             |                   | 789    |           | 852                |      
|Income (loss)
    from discontinued operations                       |                   | —      |           | 12                 |      
|Net income (loss)                                                    |                   | 789    |           | 864                |      
|Net
    income (loss) attributable to non-controlling interests      |                   | 94     |           | 81                 |      
|Net income (loss)
    attributable to shareholders                   | $                 | 695    | $         | 783                | $    





| | (1) | Includes allocation of interest expense on corporate
debt and capital securities – corporate of $16 million to United States and $52 million to Canada for year ended December
31, 2013 (2012 - $18 million to United States and $60 million to Canada)
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Includes allocation of corporate level administrative
expenses of $21 million to United States, $7 million to Canada and $11 million to Australia for the year ended December 31, 2013
(2012 - $18 million to United States, $8 million to Canada and nil to Australia)
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------









|                                                  | United
    States | Canada       | Australia | United
    Kingdom | Total   
|------------------------------------------------- | ----------------- | ------------ | --------- | ------------------ | --------
|                                                  | Dec. 31,          | Dec.
    31, | Dec. 31,  | Dec.
    31,       | Dec. 31,
|(Millions)                                        |                   | 2013         |           | 2012               |         
|Non-current assets(1)                             | $                 | 18,769       | $         | 16,006             | $       
|Other assets                                      |                   | 833          |           | 528                |         
|Total assets                                      | $                 | 19,602       | $         | 16,534             | $       
|Total liabilities                                 | $                 | 10,559       | $         | 8,417              | $       
|Investment in commercial properties               | $                 | 2,350        | $         | 316                | $       
|Investment in development properties              |                   | 5            |           | —                  |         
|Investments in equity accounted investments       |                   | —            |           | —                  |         
|Capital expenditures – commercial properties      |                   | 296          |           | 203                |         
|Capital
    expenditures – development properties |                   | 132          |           | 58                 |         



| | (1) | At December 31, 2013, non-current assets includes
equity accounted investments in the United States, Canada, Australia and the United Kingdom segments of $1,569 million, $53 million,
$891 million and $96 million, respectively (December 31, 2012 - $1,486 million, $16 million, $1,034 million and $26 million, respectively)
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 33: APPROVAL OF CONSOLIDATED FINANCIAL
STATEMENTS

The consolidated financial statements were
approved by the board of directors and authorized for issue on January 30, 2014.



104