**Exhibit 99.2**
 

 
Management’s Discussion and Analysis of Financial Results     PART I – OBJECTIVES AND FINANCIAL HIGHLIGHTS  12      PART II – FINANCIAL STATEMENT ANALYSIS  18      PART III – U.S. OFFICE FUND SUPPLEMENTAL INFORMATION  44      PART IV – CANADIAN OFFICE FUND SUPPLEMENTAL INFORMATION  47      PART V – RISKS AND UNCERTAINTIES  49      PART VI – CRITICAL ACCOUNTING POLICIES AND ESTIMATES  54      PART VII – BUSINESS ENVIRONMENT AND OUTLOOK  59 **FORWARD-LOOKING STATEMENTS**This annual report to shareholders contains forward-looking statements and information within themeaning of applicable securities legislation. These forward-looking statements reflect management’scurrent beliefs and are based on assumptions and information currently available to management ofBrookfield Properties. In some cases, forward-looking statements can be identified by terminologysuch as “may,” “will,” “expect,” “plan,” “anticipate,” “believe,” “intend,” “estimate,” “predict,”“forecast,” “outlook,” “potential,” “continue,” “should,” “likely,” or the negative of these termsor other comparable terminology. Although management believes that the anticipated future results,performance or achievements expressed or implied by the forward-looking statements and informationare based upon reasonable assumptions and expectations, the reader should not place undue relianceon forward-looking statements and information because they involve assumptions, known and unknownrisks, uncertainties and other factors that may cause the actual results, performance orachievements of Brookfield Properties to differ materially from anticipated future results,performance or achievements expressed or implied by such forward-looking statements andinformation. Factors that could cause actual results to differ materially from those set forth inthe forward-looking statements and information include, but are not limited to, general economicconditions; local real estate conditions, including the development of properties in closeproximity to the company’s properties; timely leasing of newly developed properties and releasingof occupied square footage upon expiration; dependence on tenants’ financial condition; theuncertainties of real estate development and acquisition activity; the ability to effectivelyintegrate acquisitions; interest rates; availability of equity and debt financing; the impact ofnewly adopted accounting principles on the company’s accounting policies and on period-to-periodcomparisons of financial results; and other risks and factors described from time to time in thedocuments filed by the company with the securities regulators in Canada and the United Statesincluding in the Annual Information Form under the heading “Business of Brookfield Properties –Company and Real Estate Industry Risks.” The company undertakes no obligation to publicly update orrevise any forward-looking statements or information, whether as a result of new information,future events or otherwise.
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Management’s Discussion and Analysis of Financial Results*March 7, 2008***PART I – OBJECTIVES AND FINANCIAL HIGHLIGHTS****BASIS OF PRESENTATION**Financial data included in Management’s Discussion and Analysis (“MD&A”) for the year endedDecember 31, 2007 includes material information up to March 7, 2008. Financial data provided hasbeen prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) withnon-GAAP measures such as net operating income and funds from operations being reconciled toappropriate Canadian GAAP measures. All dollar references, unless otherwise stated, are in millionsof US dollars except per share amounts. Amounts in Canadian dollars are identified as “C$.”The following discussion and analysis is intended to provide readers with an assessment of theperformance of Brookfield Properties Corporation (“Brookfield Properties”) over the past two yearsas well as our financial position and future prospects. It should be read in conjunction with theaudited consolidated financial statements and appended notes which begin on page 64 of this report.In our discussion of operating performance, we refer to net operating income and funds fromoperations on a total and per share basis. Net operating income is defined as income from propertyoperations after operating expenses have been deducted, but prior to deducting financing,administration, depreciation and amortization and income tax expenses. Funds from operations isdefined as net income prior to extraordinary items, one-time transaction costs, income taxes,depreciation and amortization and certain other non-cash items. Net operating income is animportant measure that we use to assess operating performance and funds from operations is arelevant measure in analyzing real estate, as commercial properties generally appreciate ratherthan depreciate. We provide the components of net operating income and a full reconciliation fromnet income to funds from operations on page 35. Net operating income and funds from operations areboth non-GAAP measures that do not have any standardized meaning prescribed by GAAP and thereforemay not be comparable to similar measures presented by other companies.Additional information, including our Annual Information Form, is available on our Web site atwww.brookfieldproperties.com, or on www.sedar.com or www.sec.gov.**OVERVIEW OF THE BUSINESS**Brookfield Properties is a publicly-traded North American commercial real estate company listed onthe New York and Toronto stock exchanges under the symbol BPO. We operate in two principal businesssegments, the first being the ownership, development and management of premier commercial officeproperties in select cities in North America, and the second being the development of residentialland. In the past three years, we have established and fully invested two core office funds for thepurpose of enhancing our position as a leading real estate asset manager. The U.S. Office Fund (asingle-purpose fund established to acquire the Trizec portfolio) and the Canadian Office Fund (asingle-purpose fund established to acquire the O&Y portfolio) are discussed in further detail inPart III and Part IV, respectively, of this MD&A. The term “Brookfield Properties Direct”(“Direct”) refers to those properties that are wholly-owned or owned through property-level jointventures. When referring to ownership of properties by the U.S. or Canadian Office Fund, suchownership percentage refers to that of the applicable fund and not the proportionate percentageownership of Brookfield Properties.At December 31, 2007, the book value of Brookfield Properties’ assets was $20.5 billion. During2007 we generated $240 million of net income ($0.59 per diluted share) and $629 million of fundsfrom operations ($1.57 per diluted share).**FINANCIAL HIGHLIGHTS**Brookfield Properties’ financial results are as follows:             (Millions, except per share amounts) **2007**  2006(1)  2005(1)  **Results of operations**            Total revenue **$****2,912**  $1,911  $1,529 Net income  **240**   135   164 Net income per share — diluted  **0.59**   0.37   0.46 Common share dividends paid per share  **0.55**   0.51   0.43 Funds from operations  **629**   443   435 Funds from operations per share — diluted  **1.57**   1.25   1.23 **Balance sheet data**            Total assets  **20,473**   19,314   9,513 Commercial properties  **15,889**   15,287   7,430 Commercial property debt  **12,125**   11,185   5,216 Shareholders’ equity  **3,078**   3,112   1,943  *(1)* *Per share amounts have been restated to reflect the impact of the three-for-twostock split effective May 4, 2007*
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**COMMERCIAL PROPERTY OPERATIONS**Our strategy of owning, proactively managing and developing premier properties in high-growth, andin many instances supply-constrained, markets with high barriers to entry has created one of NorthAmerica’s most distinguished portfolios of office properties. Our commercial property portfolioconsists of interests in 109 properties totaling 73 million square feet, including 10 millionsquare feet of parking. Our development/redevelopment portfolio comprises interests in 16 sitestotaling 18 million square feet. Our primary markets are the financial, energy and governmentcenter cities of New York, Boston, Washington, D.C., Houston, Los Angeles, Toronto, Calgary andOttawa. We intend to continue our strategy of maintaining a meaningful presence in a select numberof North American cities with attractive tenant bases.We remain focused on the following strategic priorities: **•** Surfacing value from our properties through proactive leasing and select redevelopmentinitiatives;  **•** Prudent capital management including the refinancing of mature properties;  **•** Monetizing development assets as the economy rebounds and continued supply constraintscreate opportunities; and  **•** Expanding our asset management platform through the growth of our existing office fundsor through the establishment of new funds.The following table summarizes our investment by market:                                   Brookfield Properties’  Book      Net Book   Number of  Total Area  Owned Interest  Value  Debt  Equity Region Properties  (000’s Sq. Ft.)  (000’s Sq. Ft.)(1)  (Millions)  (Millions)  (Millions)  **Direct**                        Midtown New York, New York  2   2,786   1,957  $894  $706  $188 Downtown New York, New York  5   9,661   8,778   2,973   1,968   1,005 Boston, Massachusetts  2   2,163   2,163   854   573   281 Washington, D.C.  6   2,266   2,266   685   501   184 Toronto, Ontario  9   6,646   5,253   1,370   791   579 Calgary, Alberta  7   6,326   3,164   503   370   133 Denver, Colorado  1   1,795   1,795   280   163   117 Minneapolis, Minnesota  4   3,008   3,008   422   201   221 Houston, Texas  1   892   892   146   101   45 Other  2   926   926   108   132   (24)Corporate debt  —   —   —   —   401   (401)    39   36,469   30,202   8,235   5,907   2,328                          **U.S. Office Fund**                        Midtown New York, New York  4   3,548   2,096   1,266   316   950 Downtown New York, New York  2   3,521   3,521   1,277   397   880 Washington, D.C.  22   4,236   4,059   1,137   206   931 Houston, Texas  7   6,958   6,307   930   —   930 Los Angeles, California  22   10,672   10,438   2,637   427   2,210 Corporate U.S. Fund debt  —   —   —   —   4,156   (4,156)    57   28,935   26,421   7,247   5,502   1,745                          **Canadian Office Fund**                        Toronto, Ontario  3   3,697   924   267   78   189 Calgary, Alberta  1   378   95   20   —   20 Ottawa, Ontario  6   2,780   695   102   26   76 Other  2   710   177   18   2   16     12   7,565   1,891   407   106   301  Continuing Operations  108   72,969   58,514  $15,889  $11,515  $4,374 Discontinued Operations(2)  1   209   52   3   —   3     109   73,178   58,566  $15,892  $11,515  $4,377 Office development sites      16,237   14,886   867   370   497 Redevelopment sites      1,536   1,536   305   240   65  **Total**      90,951   74,988  $17,064  $12,125  $4,939  *(1)* *Represents consolidated interest before non-controlling interests* *(2)* *Acres House, Niagara Falls is currently classified as a discontinued operation*We have historically explored property-level joint venture opportunities with strategicinstitutional partners. Although we plan to continue with this endeavor, we are also pursuing theacquisition of individual assets and portfolios through joint venture fund vehicles. In 2005 weformed our Canadian Office Fund to acquire the O&Y portfolio and in 2006 we formed our U.S. OfficeFund to consummate the acquisition
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of Trizec Properties Inc. and Trizec Canada Inc. (collectively, “Trizec”). Of our 109 commercialoffice properties, 27 are wholly owned, 12 are held in property-level joint ventures orco-tenancies, and 70 are held in our funds.Our Canadian Office Fund consists of a consortium of institutional investors, led and managed byus. Affiliates of the consortium members own direct interests in property-level joint ventures andhave entered into several agreements relating to property management, fees, transfer rights andother material issues related to the operation of the properties. We proportionately consolidateour interest in this Fund. Our U.S. Office Fund consists of a consortium of institutionalinvestors, which we lead and manage, investing through direct and indirect investment vehicles whohave also entered into several agreements relating to property management, fees, transfer rightsand other material issues related to the operation of the properties. We fully consolidate thisFund.We believe that investing our liquidity with these partners in fund formats enables us to enhancereturns. The funds and associated asset management fees represent an important area of growth as weexpand our assets under management. Purchasing properties or portfolios of properties in a fundformat 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 addconsiderably to fee revenue, typically arise later in a fund’s life cycle and are therefore not fullyreflected in current results.An important characteristic of our portfolio is the strong credit quality of our tenants. We directspecial attention to credit quality in order to ensure the long-term sustainability of rentalrevenues through economic cycles. Major tenants with over 1,000,000 square feet of space in theportfolio include Merrill Lynch, U.S. and Canadian governments and government agencies, ChevronU.S.A., CIBC, Wachovia, RBC Financial Group and Bank of Montreal. A detailed list of major tenantsis included in Part V (“Risks and Uncertainties”) of this MD&A, which begins on page 49.Our strategy is to sign long-term leases in order to mitigate risk and reduce our overallretenanting costs. We typically commence discussions with tenants regarding their spacerequirements 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 thisstrategy, less than 7% of our leases, on average, mature annually over the next five years.The following is a breakdown of lease maturities by region with associated in-place rental rates:                                                    Total Portfolio   Midtown New York   Downtown New York   Boston           Net Rent           Net Rent           Net Rent           Net Rent   000’s      per   000’s      per   000’s      per   000’s      per Year of Expiry Sq. Ft.  %  Sq. Ft.(1)   Sq. Ft.  %  Sq. Ft.(1)   Sq. Ft.  %  Sq. Ft.(1)   Sq. Ft.  %  Sq. Ft.(1)           Currently available  2,810   4.4        316   5.0        101   0.8        66   3.5     2008  2,975   4.7  $22    359   5.7  $33    121   0.9  $19    102   5.4  $30 2009  3,250   5.1   20    343   5.4   23    251   1.9   20    160   8.5   23 2010  4,266   6.7   22    344   5.5   32    176   1.4   19    175   9.3   33 2011  5,272   8.3   25    164   2.6   39    649   5.0   37    394   20.9   46 2012  5,594   8.8   22    388   6.2   32    394   3.1   12    47   2.5   24 2013  11,592   18.2   30    727   11.5   35    4,452   34.5   38    30   1.6   29 2014  3,216   5.1   26    217   3.4   27    389   3.0   39    20   1.1   35 2015 & beyond  24,622   38.7   30    3,440   54.7   48    6,368   49.4   30    893   47.2   31 Parking  9,581   —   —    36   —   —    281   —   —    276   —   —              73,178   100.0        6,334   100.0        13,182   100.0        2,163   100.0               Average market net rent         $36           $84             $44           $35           *(1)* *Net rent at expiration of lease*
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                                         Washington, D.C.   Houston   Los Angeles           Net Rent           Net Rent           Net Rent   000’s      per   000’s      per   000’s      per Year of Expiry Sq. Ft.  %  Sq. Ft.(1)   Sq. Ft.  %  Sq. Ft.(1)   Sq. Ft.  %  Sq. Ft.(1)        Currently available  415   7.5        341   4.9        1,065   12.5     2008  417   7.5  $24    590   8.4  $15    692   8.1  $19 2009  544   9.8   24    165   2.4   12    558   6.5   20 2010  296   5.4   23    958   13.7   11    833   9.8   22 2011  192   3.5   26    665   9.5   14    943   11.1   18 2012  576   10.4   23    999   14.2   12    1,365   16.0   25 2013  197   3.6   28    690   9.8   11    737   8.6   33 2014  1,126   20.4   27    375   5.3   11    565   6.6   25 2015 & beyond  1,769   31.9   42    2,229   31.8   18    1,775   20.8   26 Parking  970   —   —    838   —   —    2,139   —   —           6,502   100.0        7,850   100.0        10,672   100.0            Average market net rent         $35           $20           $25        *(1)* *Net rent at expiration of lease*                                         Toronto   Calgary   Ottawa           Net Rent           Net Rent           Net Rent   000’s      per   000’s      per   000’s      per Year of Expiry Sq. Ft.  %  Sq. Ft.(1)   Sq. Ft.  %  Sq. Ft.(1)   Sq. Ft.  %  Sq. Ft.(1)        Currently available  187   2.1        14   0.2        11   0.6     2008  372   4.2  $25    127   2.2  $20    91   5.2  $16 2009  577   6.5   19    304   5.4   24    36   2.1   16 2010  682   7.7   29    421   7.4   26    2   0.1   40 2011  579   6.6   29    1,383   24.3   21    —   —   87 2012  951   10.8   27    497   8.7   30    6   0.3   — 2013  1,477   16.7   30    1,337   23.5   26    1,055   60.3   19 2014  130   1.5   30    98   1.7   40    9   0.5   25 2015 & beyond  3,869   43.9   28    1,500   26.6   29    540   30.9   15 Parking  1,519   —   —    1,023   —   —    1,030   —   —           10,343   100.0        6,704   100.0        2,780   100.0            Averagemarket net rent         $27           $35           $19        *(1)* *Net rent at expiration of lease*                                         Denver   Minneapolis   Other           Net Rent           Net Rent           Net Rent   000’s      per   000’s      per   000’s      per Year of Expiry Sq. Ft.  %  Sq. Ft.(1)   Sq. Ft.  %  Sq. Ft.(1)   Sq. Ft.  %  Sq. Ft.(1)        Currently available  33   2.6        190   7.6        71   5.1     2008  30   2.3  $14    49   2.0  $10    25   1.8  $19 2009  19   1.5   24    222   8.9   5    71   5.1   11 2010  104   8.0   22    61   2.5   11    214   15.3   13 2011  93   7.2   20    38   1.5   17    172   12.3   16 2012  85   6.6   20    174   7.0   17    112   8.0   16 2013  138   10.7   23    653   26.3   10    99   7.1   19 2014  130   10.1   17    135   5.4   15    22   1.6   16 2015 & beyond  660   51.0   23    965   38.8   13    614   43.7   13 Parking  503   —   —    521   —   —    445   —   —           1,795   100.0        3,008   100.0        1,845   100.0            Averagemarket net rent         $22           $15           $22        *(1)* *Net rent at expiration of lease***COMMERCIAL DEVELOPMENT AND REDEVELOPMENT**We hold interests in 18 million square feet of high-quality, centrally-located development andredevelopment sites at various stages of planning and construction. We will seek to monetize thesesites through development only when our risk-adjusted return hurdles are met and when preleasingtargets with one or more lead tenants have been achieved. We currently have five projects underdevelopment and two projects under redevelopment as outlined on page 21 of this MD&A.
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The following table summarizes our commercial development projects at December 31, 2007:                                                   Other         Number Owned         Share-  Net       of Interest    Owned  holder’s  Owned (Square feet in 000’s) Region Description Sites % Total  Interest(1)  Interest Interest  **Direct**                            Ninth Avenue New York Between 31st and 33rdStreets across from the Farley Post Office  1   100%  5,400   5,400   —   5,400 77 K Street Washington Adjacent to Union Station  1   50%  327   164   (4)  160 Bay Adelaide Centre Toronto Bay and Adelaide Streets  1   100%  2,600   2,600   (286)  2,314 Brookfield Place III Toronto Third phase of Brookfield Place project  1   65%  800   520   (57)  463 Bankers Court Calgary East and West Parkades adjacent to Bankers Hall  1   50%  500   250   (28)  222 Herald Site Calgary One block from our existing Calgary assets  1   100%  1,200   1,200   (132)  1,068 425 15th Street Denver One block from Republic Plaza  1   100%  833   833   —   833 Tremont Garage Denver One block from Republic Plaza  1   100%  500   500   —   500         8   1   2,160   11,467   (507)  10,960                              **U.S. Office Fund**                            Reston Crescent Washington 36 acre landscaped campus in Reston, Virginia  1   100%  1,000   1,000   (548)  452 Waterview Washington At the foot of the Key Bridge in Rosslyn,Virginia  1   25%  300   75   (41)  34 1500 Smith Street Houston Adjacent to Four Allen Center  1   100%  800   800   (438)  362 Allen Center Garage Houston Located in the heart of the AllenCenter / Cullen Center complex  1   100%  700   700   (383)  317 Allen Center Gateway Houston Adjacent to the Allen Center  1   100%  700   700   (383)  317         5       3,500   3,275   (1,793)  1,482                              **Canadian Office Fund**                            300 Queen Street Ottawa Third phase of Place de Ville project  1   25%  577   144   (16)  128         1       577   144   (16)  128         **14**   ** **   **16,237**   **14,886**   **(2,316****)**  **12,570**                              **Redevelopment**                            Four Allen Center(2)  Houston 1400 Smith Street  1   100%  **1,267**   1,267   (694)  573 1225 Connecticut Washington Downtown Washington, D.C.  1   100%  **269**   269   (147)  122  **Total development and redevelopment**      **16**   ** **   **17,773**   **16,422**   **(3,157****)**  **13,265**  *(1)* *Represents the company’s consolidated interest before non-controlling interests* *(2)* *Property is currently under redevelopment. 100% of the building has been leased toChevron, who will move into the building once redevelopment is complete***Residential Development**Through our residential development business segment, we develop residential land and conducthomebuilding operations. These business units primarily entitle and develop land in master-plannedcommunities and sell these lots to other homebuilders. These units also build and sell homes.Operations are currently focused in five markets: Alberta and Ontario in Canada, and Colorado,Texas and Missouri in the U.S.We intend to continue to grow this business by selectively acquiring land that provides theresidential development groups with attractive projects that are consistent with our overallstrategy and management expertise.We classify our residential development business into three categories: land held for development;land under development; and housing inventory. Costs attributable to land held for developmentinclude costs of acquiringland as well as general infrastructure costs to service the land within a community. These costsare not directly related to saleable lots. Once development of a phase begins, the associated costswith that phase are transferred from land held for development to land under development, whichincludes all underlying costs that are attributable to the phase of saleable lots, including costsof the underlying land, roads, and parks. Included in housing inventory is associated land as wellas construction costs.The following table summarizes our residential land development at December 31, 2007:                                 Held for Development   Under Development  Housing Inventory  Estimated    ($ in Millions) Number of Lots  Book Value  Number of Units  Book Value  Number of Lots  Book Value  Alberta  4,297  $358   398  $57   39,835  $424 Ontario  330   24   239   28   13,104   64 Colorado  958   43   —   —   8,667   122 Texas  106   4   —   —   13,529   84 Missouri  88   2   —   —   1,357   18  Total  5,779  $431   637  $85   76,492  $712  
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**PERFORMANCE MEASUREMENT**The key indicators by which we measure our performance are: **•** Net income per share;  **•** Net operating income;  **•** Funds from operations 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 primarybusiness objective of generating reliable and growing cashflow is monitored and analyzed using netincome, net operating income and funds from operations. While net income is calculated inaccordance with generally accepted accounting principles (“GAAP’), net operating income and fundsfrom operations are both non-GAAP financial measures that do not have any standardized meaningprescribed by GAAP and are therefore unlikely to be comparable to similar measures presented byother companies. We provide the components of net operating income and a full reconciliation fromnet income to funds from operations on page 35 of this MD&A.**Net Income**Net income is calculated in accordance with GAAP. Net income is used as a key indicator inassessing the profitability of the company.**Net Operating Income**Net operating income is defined as income from property operations after operating expenses havebeen deducted, but prior to deducting financing, administration, depreciation and amortization andincome tax expenses. Net operating income is used as a key indicator of performance as itrepresents a measure over which management has control. We measure the performance of management bycomparing the performance of the property portfolio adjusted for the effect of current and prioryear sales and acquisitions.**Funds from Operations**Funds from operations is defined as net income prior to extraordinary items, one-time transactioncosts, income taxes, depreciation and amortization, and certain other non-cash items. While webelieve that funds from operations is the most relevant measure to analyze real estate, ascommercial properties generally appreciate rather than depreciate, we believe that funds fromoperations, net operating income and net income are all relevant measures. Funds from operationsdoes not represent or approximate cash generated from operating activities determined in accordancewith GAAP in Canada or the United States and should not be considered an alternative to GAAPmeasures. Accordingly, we provide a reconciliation of funds from operations to net income,consistent with the definition provided as set out above. A reconciliation is not provided tocashflow from operating activities, as it is often subject to fluctuations based on the timing ofworking capital payments.**KEY PERFORMANCE DRIVERS**In addition to monitoring and analyzing performance in terms of net income, net operating incomeand funds from operations, we consider the following items to be important drivers of our currentand anticipated financial performance: **•** Increases in occupancies by leasing vacant space;  **•** Increases in rental rates as market conditions permit; and  **•** Reduction in occupancy costs through achieving economies of scale and diligently managingcontracts.We also believe that the key external performance drivers are: **•** The availability of new property acquisitions that fit into our strategic plan;  **•** The availability of equity capital at a reasonable cost; and  **•** The availability of debt capital at a cost and on terms conducive to our goals.
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**PART II — FINANCIAL STATEMENT ANALYSIS****ASSET PROFILE**Our total asset book value was $20.5 billion at December 31, 2007, an increase of $1.2 billion from2006. The increase in total assets is primarily attributable to the purchase of the remaininginterest in our two Boston properties and the acquisition of 1201 Louisiana Street in Houston, asignificant increase in our commercial development portfolio and residential developments, as wellas the strengthening of the Canadian dollar, offset by the sale of seven buildings in Canada during2007. The following is a summary of our assets over the past two years:         (Millions) **Dec. 31, 2007**  Dec. 31, 2006  Commercial properties **$****15,889**  $15,287 Commercial developments  **1,172**   735 Residential developments  **1,228**   706 Receivables and other  **1,056**   974 Intangible assets  **759**   853 Restricted cash and deposits  **151**   507 Cash and cash equivalents  **214**   188 Assets related to discontinued operations(1)  **4**   64  Total **$****20,473**  $19,314  *(1)* *Includes $3 million of commercial properties and $1 million of other assetsassociated with assets related to discontinued operations at December 31, 2007 (December 31, 2006 -$61 million and $3 million, respectively)***COMMERCIAL PROPERTIES**The book value of our commercial properties was $15.9 billion as at December 31, 2007 compared to$15.3 billion at December 31, 2006. This increase is primarily attributable to the acquisition ofthe remaining interest in 53 and 75 State Street in Boston in the fourth quarter of 2007, theacquisition of 1201 Louisiana Street in Houston in the second quarter of 2007, and the favorableimpact of foreign exchange fluctuations on our Canadian dollar-denominated assets. These increaseswere offset by the sale of Gulf Canada Square in Calgary in December of 2007, the sale of 2 and 40St. Clair Avenue West in Toronto in August of 2007, the sale of 18 King Street in Toronto in May of2007, and the sale of Atrium on Bay in Toronto and 2200 and 2204 Walkley in Ottawa in February of2007. The consolidated carrying value of our North American properties is approximately $271 persquare foot, significantly less than the estimated replacement cost of these assets.A breakdown of our commercial properties by region is as follows:                               Brookfield Properties’  **Dec. 31, 2007**  Dec. 31, 2006   Total Area  Owned Interest  **Book Value**  **Book Value**  Book Value  Book Value Region (000’s Sq. Ft.)  (000’s Sq. Ft.)(1)  **(Millions)**  **per Sq. Ft.**  (Millions)  Per Sq. Ft.  Midtown, New York, New York  6,334   4,053  **$****2,160**  **$****533**  $2,201  $543 Downtown, New York, New York  13,182   12,299   **4,250**   **346**   4,294   349 Boston, Massachusetts  2,163   2,163   **854**   **395**   350   317 Washington, D.C.  6,502   6,325   **1,822**   **288**   1,980   300 Houston, Texas  7,850   7,199   **1,076**   **149**   941   149 Los Angeles, California  10,672   10,438   **2,637**   **253**   2,689   258 Toronto, Ontario  10,343   6,177   **1,637**   **265**   1,434   226 Calgary, Alberta  6,704   3,259   **523**   **160**   513   145 Ottawa, Ontario  2,780   695   **102**   **147**   88   127 Denver, Colorado  1,795   1,795   **280**   **156**   264   147 Minneapolis, Minnesota  3,008   3,008   **422**   **140**   423   141 Other  1,636   1,103   **126**   **114**   110   95  Continuing operations  72,969   58,514   **15,889**   **272**   15,287   267 Discontinued operations  209   52   **3**   **58**   61   92  Total  73,178   58,566  **$****15,892**  **$****271**  $15,348  $265  *(1)* *Represents the company’s consolidated interest before non-controlling interests***TENANT INSTALLATION COSTS AND CAPITAL EXPENDITURES**Upon the signing of the majority of our leases, we provide a capital allowance for tenantimprovements for leased space in order to accommodate the specific space requirements of thetenant. In addition to this capital, leasing commissions are paid to third-party brokersrepresenting tenants in lease negotiations. Tenant improvements and leasing commissions arecapitalized in the year incurred, amortized over the term of the lease and recovered through rentalpayments. Expenditures for tenant installation costs in 2007 totaled $148 million, compared withthe $82 million expended in 2006. The increase was due to the leasing commissions and improvementsincurred as a result of a higher level of leasing activity in the current year, especially in thefourth quarter, as well as an increase in total leasable area in 2007 compared to 2006 due to theacquisition of the Trizec portfolio in the fourth quarter of 2006.
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Tenant installation costs are summarized as follows:         (Millions) **2007**  2006  Leasing commissions **$****41**  $27 Tenant improvements  **107**   55  Total **$****148**  $82  We also invest in ongoing maintenance and capital improvement projects to sustain the high qualityof the infrastructure and tenant service amenities in our properties. Capital expenditures for theyear ended December 31, 2007 totaled $49 million, compared with $25 million during 2006. Theseexpenditures exclude repairs and maintenance costs, a portion of which are recovered throughcontractual tenant cost recovery payments. The increase in capital expenditures in the current yearis due primarily to the increase in properties with the acquisition of the Trizec portfolio in thefourth quarter of 2006 and the associated capital projects. Capital expenditures includerevenue-enhancing capital expenditures, which represent improvements to an asset or reconfigurationof space to increase rentable area or increase current rental rates, and non-revenue-enhancingexpenditures, which are those required to extend the service life of an asset. These expendituresare recoverable in some cases. During 2007, $19 million of our total capital expenditures isrecoverable which compares with $14 million in the prior year.**ASSETS RELATED TO DISCONTINUED OPERATIONS**In the fourth quarter of 2007, one property met the criteria for being classified as a discontinuedoperation: Acres House, Niagara Falls. We have reclassified $4 million of assets and $3 million ofliabilities to assets and liabilities related to discontinued operations, respectively, inconnection with this property as at December 31, 2007.As at December 31, 2006, three properties met the criteria for being classified as discontinuedoperations: Atrium on Bay in Toronto, and 2200 Walkley and 2204 Walkley in Ottawa. We reclassified$64 million of assets and $36 million of liabilities to assets and liabilities related todiscontinued operations, respectively, in connection with these properties as at December 31, 2006.These properties were sold in the first quarter of 2007.**COMMERCIAL DEVELOPMENTS**Commercial developments consist of commercial property development sites, density rights andrelated infrastructure. The total book value of this development land and infrastructure was $1,172million at December 31, 2007, an increase of $437 million from $735 million in 2006. The increaseis primarily attributable to active construction at a number of development sites, offset by thesale of a portion of the Waterview site in Washington, D.C. during the second quarter of 2007.The details of the commercial property development portfolio and related book values are asfollows:                       Sq. Ft. Currently         Buildable  Under Construction  **Book Value**  Book Value (Millions) Sq. Ft. (000’s)  (000’s)  **Dec. 31, 2007**  Dec. 31, 2006  **Active developments**                Bay Adelaide Centre, Toronto  2,600   1,160  **$****416**  $251 Reston Crescent, Washington, D.C.  1,000   185   **56**   6 Waterview, Washington, D.C.  300   300   **27**   44 77 K Street, Washington, D.C.  327   327   **34**   16 Bankers Court, Calgary  500   265   **22**   7                  **Planning**                Ninth Avenue, New York  5,400       **207**   184 Herald Site, Calgary  1,200       **53**   38 *Others*                1500 Smith Street, Houston  800             Allen Center Gateway, Houston  700             Allen Center Garage, Houston  700             425 15th Street, Denver  833             Tremont Garage, Denver  500             Brookfield Place III, Toronto  800             300 Queen Street, Ottawa  577                                4,910       **52**   50  Total developments  16,237   2,237   **867**   596 **Redevelopment**                Four Allen Center, Houston  1,267   1,267   **198**   139 1225 Connecticut Avenue, Washington, D.C.  269   269   **107**   —  Total developments and redevelopments  17,773   3,773  **$****1,172**  $735  
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Although we are generally not a speculative developer, we are a full-service real estate companywith in-house development expertise. With 18 million square feet of high-quality, centrally-locateddevelopment and redevelopment properties in New York, Washington, D.C., Houston, Toronto, Calgary,Ottawa and Denver, we will undertake developments when our risk-adjusted returns and preleasingtargets have been achieved. The following development activity took place during 2007: **•** Bay Adelaide Centre in Toronto represents one of our largest development projects.Ground-breaking on Phase I of this project took place in July of 2006 and construction isactively underway. Phase I represents 1.2 million square feet of a three-phase project thatis expected to total 2.6 million square feet and be completed in 2009. Due to thecontinuous construction on Phase I, as well as the impact of foreign exchange, the bookvalue of this site has increased by $165 million since December 31, 2006.  **•** Construction is substantially complete at Four Allen Center, a redevelopment sitecomprising 1,267,000 square feet in downtown Houston. This building has been entirelyleased to Chevron, U.S.A., Inc., who is expected to occupy the space during the firstquarter of 2008. As a result of the construction throughout the year, the book value ofthis site has increased by $59 million since December 31, 2006.  **•** Reston Crescent, a development project acquired with the Trizec portfolio in the fourthquarter of 2006, is a 36 acre landscaped campus where construction is underway on TwoReston Crescent, a 185,000 square foot building. Completion is expected in the beginning of2008. During the first quarter of 2007, demolition began on the existing Reston Unisys Iand II buildings. As a result of construction progress to date, the book value of thisproject has increased by $50 million since December 31, 2006.  **•** Construction on Bankers Court in Calgary, a 500,000 square foot, two-building project,commenced in the third quarter of 2006. Active development of the first building, totaling265,000 square feet, is taking place and is expected to be complete in 2008. The buildingis 100% leased. As a result of the continuous development, as well as the impact of foreignexchange, the book value of this site has increased by $15 million since December 31, 2006.  **•** Construction on 77 K Street in Washington, D.C., a development project we acquired in July2006, commenced in the fourth quarter of 2006. Completion is expected in 2008. As a resultof active construction, the book value of this site has increased by $18 million sinceDecember 31, 2006.  **•** 1225 Connecticut Avenue in Washington, D.C. is a property that was acquired as part of theTrizec portfolio. The property is currently undergoing a full redevelopment of its 269,000square feet, which is expected to be completed in the fourth quarter of 2008. This site wasclassified as a commercial property at December 31, 2006 and was reclassified as aredevelopment site in the third quarter of 2007. The book value increased to $107 millionat December 31, 2007.  **•** Waterview, a development site acquired with the Trizec portfolio, was under constructionprior to the acquisition. During the second quarter of 2007, we sold the 630,000 squarefoot office portion of this development site. The remaining 300,000 square foot building issubstantially complete and expected to be operational in the first quarter of 2008. Thissite is our only hotel/residential asset in Washington, D.C. As a result of the sale, thebook value of this site has decreased by $17 million since December 31, 2006.Expenditures for development and redevelopment of commercial properties totaled $313 million in2007 compared with $79 million in 2006. The increase is due to construction costs incurred on theseven projects mentioned above, which are all currently under active development.The details of development and redevelopment expenditures are as follows:         (Millions) **2007**  2006  Construction costs **$****211**  $38 Interest capitalized  **54**   24 Tenant improvements  **47**   — Property taxes and other  **1**   17  Total **$****313**  $79  
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Further details on our active developments as at December 31, 2007 are as follows:                                   Square Feet          Currently      Owned Interest(1)   Under  Expected          Estimated  Total  Amount  Estimated   Construction  Date of  %  Investment  Total  Construction  Drawn Dec.  NOI at (Millions) (000’s)  Completion  Pre-leased  to Date  Investment  Loan  31, 2007  Stabilization  **Active developments**                                Bay Adelaide Centre, Toronto  1,160   Q3 2009   55% $254  $541  $421  $101  $39 Reston Crescent, Washington, D.C.  185   Q1 2008   —   24   60   —   —   6 77 K Street, Washington, D.C.  327   Q4 2008   —   34   64   51   18   5 Bankers Court, Calgary  265   Q4 2008   100%  22   55   49   8   5  Subtotal office developments  1,937          $334  $720  $521  $127  $55 Waterview, Washington, D.C.(2) 300        Complete(3)  —   27   34   20   16   —  Total  2,237          $361  $754  $541  $143  $55  **Redevelopments**                                Four Allen Center, Houston 1,267    Complete(3)  100% $198  $210  $240  $240  $21 1225 Connecticut, Washington D.C.  269   Q4 2008   8%  107   160   —   —   12  Total  1,536          $305  $370  $240  $240  $33  *(1)* *Represents the company’s consolidated interestbefore non-controlling interests* *(2)  *Estimated value of hotel and condominium upon completion is $45 million *(3)* *Substantially complete as at December 31, 2007***RESIDENTIAL DEVELOPMENTS**Our residential development operations are focused in five markets: Alberta, Ontario, Colorado,Texas and Missouri. The book value of these investments at December 31, 2007 was $1,228 million,compared with $706 million at the end of 2006. The increase was attributable to additional landacquisitions and increased work in progress offset by residential inventory sold.The details of our residential development property portfolio are as follows:         (Millions) **Dec. 31, 2007**  Dec. 31, 2006  Under development **$****431**  $249 Housing inventory  **85**   58 Held for development  **712**   399  Total **$****1,228**  $706  The details of our land under development, housing inventory and land held for development are asfollows:                    Number of Lots    Book Value (Millions) Under development **Dec. 31, 2007**  Dec. 31, 2006   **Dec. 31, 2007**  Dec. 31, 2006     Alberta  **4,297**   3,753   **$****358**  $212 Ontario  **330**   350    **24**   4 Colorado  **958**   806    **43**   29 Texas  **106**   102    **4**   3 Missouri  **88**   64    **2**   1     Total  **5,779**   5,075   **$****431**  $249                         Number of Units    Book Value (Millions) Housing Inventory **Dec. 31, 2007**  Dec. 31, 2006   **Dec. 31, 2007**  Dec. 31, 2006     Alberta  **398**   566   **$****57**  $35 Ontario  **239**   186    **28**   23     Total  **637**   752   **$****85**  $58                                  Estimated Number of Lots   Number of Acres    Book Value (Millions) Held for Development **Dec. 31, 2007**  Dec. 31, 2006   **Dec. 31, 2007**  Dec. 31, 2006   **Dec. 31, 2007**  Dec. 31, 2006        Alberta  **39,835**   32,007    **5,955**   4,913   **$****424**  $223 Ontario  **13,104**   8,185    **2,184**   1,637    **64**   52 Colorado  **8,667**   7,686    **2,167**   1,531    **122**   79 Texas  **13,529**   7,178    **3,328**   1,860    **84**   40 Missouri  **1,357**   498    **226**   83    **18**   5        Total  **76,492**   55,554    **13,860**   10,024   **$****712**  $399        
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**RECEIVABLES AND OTHER ASSETS**Receivables and other assets increased to $1,056 million at December 31, 2007 from $974 million atDecember 31, 2006 primarily due to the impact of straight-line rent and free rent receivables onthe assets from our recent acquisitions as well as the expansion of our land and housing business.The components of receivables and other assets are as follows:         (Millions) **Dec. 31, 2007**  Dec. 31, 2006  Accounts receivable **$****154**  $133 Straight-line rent and free rent receivables  **378**   299 Real estate mortgages  **63**   86 Residential receivables and other assets  **292**   245 Prepaid expenses and other assets  **169**   211  Total **$****1,056**  $974  **INTANGIBLE ASSETS**We have allocated $759 million (2006 — $853 million) to lease origination costs, tenantrelationships, above-market leases and below-market ground leases, net of related amortization, inconnection with acquisitions of individual commercial properties and portfolios, including theTrizec acquisition, the O&Y acquisition and the 2006 acquisitions in the greater Washington, D.C.area.The components of intangible assets are as follows:         (Millions) **Dec. 31, 2007**  Dec. 31, 2006  Intangible assets        Lease origination costs **$****377**  $321 Tenant relationships  **501**   515 Above-market leases and below-market ground leases  **82**   79    **$****960**  $915          Less accumulated amortization        Lease originations costs  **(124****)**  (45)Tenant relationships  **(62****)**  (13)Above-market leases and below-market ground leases  **(15****)**  (4) Total net **$****759**  $853  **RESTRICTED CASH AND DEPOSITS**Cash and deposits are considered restricted when there are limits imposed by third parties thatprevent its use for current purposes. Restricted cash and deposits decreased to $151 million in2007 from $507 million in 2006. The decrease is a result of the maturity of short-term governmentsecurities (balance at December 31, 2006 — $249 million) which were held in a trust account tomatch interest and principal payments on a mortgage at One Liberty Plaza, which matured in December2007. In addition there have been drawdowns on an escrow account set up in the fourth quarter of2006 in connection with the acquisition of Four Allen Center. The money is being used to fund thecurrent redevelopment taking place at Four Allen Center.**CASH AND CASH EQUIVALENTS**We endeavor to maintain high levels of liquidity to ensure that we can react quickly to potentialinvestment opportunities. This liquidity consists of cash and marketable securities, whichcontribute investment returns, as well as committed lines of credit. To ensure we maximize ourreturns, cash balances are generally carried at a modest level and excess cash is used to repayrevolving credit lines.As at December 31, 2007, cash balances increased to $214 million from $188 million at December 31,2006 principally as a result of the sale of Gulf Canada Square in Calgary in December of 2007,which generated gross cash proceeds of $97 million, the sale of 2 St. Clair Avenue West and 40 St.Clair Avenue West in Toronto in August of 2007, which generated gross cash proceeds of $22 million,the sale of 18 King Street in Toronto in the second quarter of 2007 for gross cash proceeds of $10million as well as the sale of Atrium on Bay in Toronto and 2200 Walkley and 2204 Walkley inOttawa, which were all sold in February of 2007 for gross cash proceeds of $116 million. Theseincreases were partially offset by cash utilized on development and redevelopment activities.
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**LIABILITIES AND SHAREHOLDERS’ EQUITY**Our asset base of $20.5 billion is financed with a combination of debt, capital securities andpreferred and common equity. The components of our liabilities and shareholders’ equity over thepast two years are as follows:         (Millions) **Dec. 31, 2007**  Dec. 31, 2006  **Liabilities**        Commercial property debt **$****12,125**  $11,185 Accounts payable and other liabilities  **1,357**   923 Intangible liabilities  **834**   919 Future income tax liability  **600**   584 Liabilities related to discontinued operations(1)  **3**   36 Capital securities — corporate  **1,053**   1,093 Capital securities — fund subsidiaries  **762**   810 Non-controlling interests — fund subsidiaries  **193**   259 Non-controlling interests — other subsidiaries  **86**   67 Preferred equity — subsidiaries  **382**   326 **Shareholders’ equity**        Preferred equity — corporate  **45**   45 Common equity  **3,033**   3,067  Total **$****20,473**  $19,314  *(1)* *Includes nil of commercial property debt and $3 million of other liabilitiesassociated with liabilities related to discontinued operations at December 31, 2007 (December 31,2006 — $34 million and $2 million, respectively)***COMMERCIAL PROPERTY DEBT**Commercial property debt totaled $12.1 billion at December 31, 2007, compared with $11.2 billion atDecember 31, 2006. The increase is primarily attributable to the refinancings of One Liberty Plazain New York, Canada Trust Tower in Toronto, Royal Centre in Vancouver and Dain Plaza inMinneapolis, as well as new property debt on 1201 Louisiana Street in Houston, which was acquiredin the second quarter of 2007, and additional debt on 53 and 75 State Street in Boston due to theacquisition of the remaining 49% interest in these properties in the fourth quarter of 2007. Theseincreases were offset by principal amortization as well as the sale of buildings out of ourCanadian portfolio during 2007. Commercial property debt at December 31, 2007 had an averageinterest rate of 6.65% (compared to 6.79% at December 31, 2006). Almost all of our Directcommercial property debt is recourse only to specific properties, thereby reducing the overallfinancial risk to the company. Our U.S. Office Fund debt is recourse to the Fund entities.Select financial ratios are set out in the following table:                   Three-Year  Annual Results Objective Average  **2007**  2006  2005  Debt-to-total-market-capitalization  41%  **47****%**  41%  34%Non-recourse debt as a percentage of total(1)  92%  **94****%**  94%  88%Interest expense coverage  2.2x   **2.0****x**  2.1x   2.6x  *(1)* *Non-recourse to Brookfield Properties*We attempt to match the maturity of our commercial property debt portfolio with the average leaseterm of our properties. At December 31, 2007, the average term to maturity of our commercialproperty debt was consistent with our average lease term at approximately seven years.
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During 2007, we financed, refinanced or assumed through acquisitions $2,609 million of commercialproperty debt. The details are as follows:                              Drawn at(Millions) Financed / Refinanced Interest Rate%  Maturity Date Mortgage/Loan Dec. 31, 2007(1) **First Quarter**               One World Financial Center Refinanced  5.83% February 2017 $310 $310**Second Quarter**               1201 Louisiana Assumed  6.73% September 2011  102  10277 K Street Financed LIBOR + 175bps  April 2010  14  14Bankers Court Financed CDOR + 150bps  October 2009  46  8**Third Quarter**               One Liberty Plaza Refinanced  6.14% September 2017  850  850Bay Adelaide Centre Financed BA + 135bps  July 2012  423  101**Fourth Quarter**               Canada Trust Tower Refinanced  5.87% December 2017  200  200Dain Plaza Refinanced LIBOR + 150bps  December 2008  80  8053 State Street Assumed  5.96% August 2016  137  13775 State Street Assumed  7.00% September 2028  80  8075 State Street Financed  5.00% March 2008  130  130Royal Centre Refinanced Prime  November 2008  132  132West 31st Street Refinanced LIBOR + 140bps  December 2009  105`  105 Total Commercial Property          2,609  2,249Corporate Credit Facilities   LIBOR + 110bps  September 2008  800  251Corporate Term Loan   LIBOR + 150bps  June 2009  150  150 Total         $3,559 $2,650 *(1)**Excludes deferred financing costs*In addition to property specific debt financings completed in 2007, we were successful in securingconstruction financings including, during the second quarter of 2007, a new secured constructionloan totaling C$49 million for the construction of the Bankers Court development in Calgary. Thefacility, maturing in July 2009, is secured by the Bankers Court project. The facility bears anannual interest rate of CDOR + 150 basis points. As at December 31, 2007, $8 million was drawn onthis facility.In addition, during the third quarter of 2007, we completed a new secured, non-revolving creditfacility totaling C$420 million for the construction of the Bay Adelaide West development inToronto. The facility, maturing July 2010 with two optional one-year extensions, is secured by theBay Adelaide Centre project. The facility bears an annual interest rate of BA + 135 basis points.BPO Properties, one of our subsidiaries, currently has guaranteed up to C$90 million of thefacility which reduces to C$60 million upon meeting certain leasing thresholds. As at December 31,2007, $101 million was drawn on this facility.We have $800 million of committed corporate credit facilities consisting of a $500 million bankcredit facility and a $300 million line from Brookfield Asset Management Inc, our parent company.At December 31, 2007, the balance drawn on these facilities, which are in the form of three-yearrevolving facilities, was $251 million and nil, respectively (balances at December 31, 2006 werenil and nil, respectively). At the time of the Trizec acquisition, we financed a new $600 millionterm loan facility at a rate of LIBOR + 150 basis points. The outstanding balance at December 31,2007 on this facility was $150 million (December 31, 2006 — $300 million) and it matures onSeptember 30, 2008 after considering two six-month extension options.As at December 31, 2007, we had approximately $15 million (2006 — $345 million) of indebtednessoutstanding to Brookfield Asset Management Inc. and its affiliates, after taking into considerationC$200 million loaned to Brookfield Asset Management Inc. in the third quarter of 2007 that has been offset against theClass AAA Series E capital securities.The composition of debt owed to Brookfield Asset Management Inc. is as follows:         (Millions) **Dec. 31, 2007**  Dec. 31, 2006  Commercial property specific debt **$**—  $72 Development debt  **15**   102 Class AAA series E capital securities  —   171  Total **$****15**  $345  Interest expense related to this indebtedness, including preferred dividends reclassified tointerest expense, totaled $11 million for the year ended December 31, 2007, compared to $35 millionin 2006, and was recorded at the exchange amount.
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The details of commercial property debt at December 31, 2007 are as follows:                    ($ in millions) Location Interest Rate% Maturity Date Dec. 31, 2007(1,2) Mortgage Details **Direct**                   105 Adelaide Toronto  5.77  February 2008  $23  Non-recourse, fixed rate75 State Street Boston  5.00  March 2008   130  Non-recourse, fixed rateHudson’s Bay Centre Toronto  6.21  April 2008   100  Non-recourse, floating rate22 Front Street Toronto  11.88  July 2008   6  Non-recourse, fixed rateRoyal Centre Vancouver  6.50  November 2008   132  Non-recourse, fixed ratePetro-Canada Centre Calgary  6.43  December 2008   123  Non-recourse, fixed rateDain Plaza Minneapolis  6.10  December 2008   79  Non-recourse, floating rateBankers Court(3) Calgary  6.11  October 2009   8  Non-recourse, floating rateWest 31st Street(3) New York  6.00  December 2009   105  Partial-recourse, floating rateDain Plaza Minneapolis  6.00  December 2009   29  Non-recourse, fixed rate77 K Street(3) Washington, D.C.  6.35  April 2010   18  Non-recourse, floating rate245 Park Avenue New York  6.65  February 2011   230  Non-recourse, fixed rateQueen’s Quay Terminal Toronto  7.26  March 2011   35  Non-recourse, fixed rateFifth Avenue Place Calgary  7.59  August 2011   73  Non-recourse, fixed rate1201 Louisiana Street Houston  6.73  September 2011   101  Non-recourse, fixed ratePotomac Tower Washington, D.C.  4.72  November 2011   75  Non-recourse, fixed rate300 Madison Avenue New York  6.09  April 2012   76  Non-recourse, floating rateExchange Tower Toronto  6.83  April 2012   62  Non-recourse, fixed rateBay Adelaide Centre(3) Toronto  5.96  July 2012   101  Non-recourse, floating rateHSBC Building Toronto  8.19  October 2012   23  Non-recourse, fixed rateBay Wellington Tower Toronto  6.49  April 2013   342  Non-recourse, fixed rateTwo World Financial Center New York  6.91  September 2013   454  Non-recourse, fixed rateFour World Financial Center New York  6.95  September 2013   269  Non-recourse, fixed rate601 South 12th Street Washington, D.C.  5.42  October 2013   52  Non-recourse, fixed rate701 South 12th Street Washington, D.C.  5.42  October 2013   43  Non-recourse, fixed rateBankers Hall Calgary  7.20  November 2013   174  Non-recourse, fixed rateRepublic Plaza Denver  5.13  April 2014   163  Non-recourse, fixed rate1625 Eye Street Washington, D.C.  6.00  September 2014   125  Non-recourse, fixed rateTwo World Financial Center New York  10.30  September 2014   100  Non-recourse, floating rate53 State Street Boston  5.96  August 2016   279  Non-recourse, fixed rateOne Bethesda Washington, D.C.  5.66  October 2016   53  Non-recourse, fixed rateOne World Financial Center New York  5.83  February 2017   309  Non-recourse, fixed rateOne Liberty Plaza New York  6.14  September 2017   836  Non-recourse, fixed rateTD Canada Trust Tower Toronto  5.87  December 2017   200  Non-recourse, fixed rateWest 33rd Street(3) New York  5.90  April 2018   122  Non-recourse, fixed rate33 South Sixth Street Minneapolis  6.72  May 2028   93  Non-recourse, fixed rate75 State Street Boston  7.00  September 2028   164  Non-recourse, fixed rate701 9th Street Washington, D.C.  6.73  December 2028   153  Non-recourse, fixed rate300 Madison Avenue New York  7.26  April 2032   400  Non-recourse, fixed rate Total Direct    6.44         $5,860                        **U.S. Office Fund**                   2000 L Street Washington, D.C.  6.26  March 2008  $56  Non-recourse, fixed rateBethesda Crescent Washington, D.C.  7.07  March 2008   33  Non-recourse, fixed rate5670 Wilshire Los Angeles  6.35  May 2008   58  Non-recourse, floating rateTwo Ballston Plaza Washington, D.C.  6.91  June 2008   25  Non-recourse, fixed rateWaterview(3) Washington, D.C.  7.20  August 2009   16  Non-recourse, floating rate1460 Broadway New York  5.11  November 2012   12  Non-recourse, fixed rateFour Allen Center(3) Houston  5.77  October 2013   240  Non-recourse, fixed rateErnst & Young Plaza Los Angeles  5.07  February 2014   113  Non-recourse, fixed rateGrace Building New York  5.54  July 2014   193  Non-recourse, fixed rate1411 Broadway New York  5.50  July 2014   111  Non-recourse, fixed rateBank of America Plaza Los Angeles  5.31  September 2014   235  Non-recourse, fixed rate2001 M Street Washington, D.C.  5.25  December 2014   45  Non-recourse, fixed rateOne New York Plaza New York  5.50  March 2016   397  Non-recourse, fixed rateVictor Building Washington, D.C.  5.39  February 2016   47  Non-recourse, fixed rateMarina Towers Los Angeles  5.84  April 2016   21  Non-recourse, fixed rateU.S. Fund Corporate and other debt                   CMBS Pool debt —  6.83  March 2008   160  Non-recourse, fixed rateMezzanine debt —  7.53  October 2011   3,093  Non-recourse, floating rateCMBS Pool debt —  5.78  October 2011   594  Non-recourse, floating rateCMBS Pool debt —  6.83  May 2011   309  Non-recourse, fixed rate Total U.S. Office Fund    6.77         $5,758     *(1) *Represents the company’s consolidated interest before non-controlling interests* *(2) *Includes $43 million of transaction costs which have been reclassified from otherassets as a result of changes in accounting policy* *(3) *Development debt*25
 

 
                    ($ in millions)LocationInterest Rate % Maturity Date Dec. 31, 2007(1,2) Mortgage Details **Canadian Office Fund**                   Enbridge Tower Edmonton  6.72  June 2009  $2  Non-recourse, fixed ratePlace de Ville I Ottawa  7.81  November 2009   7  Non-recourse, fixed rateFirst Canadian Place Toronto  8.06  December 2009   66  Non-recourse, fixed rate151 Yonge Street Toronto  6.01  June 2012   12  Non-recourse, fixed rateJean Edmonds Tower Ottawa  5.55  January 2014   2  Non-recourse, fixed rateJean Edmonds Tower Ottawa  6.79  January 2024   17  Non-recourse, fixed rate Total Canadian Office Fund    7.53         $106                        **Corporate**                   Term facility —  6.10  September 2008  $150  Recourse, floating rateCorporate Revolver —  5.70  June 2009   251  Recourse, floating rate Total Corporate              $401    **Total Commercial Property Debt**    **6.65**         **$****12,125**     *(1) *Represents the company’s consolidated interest before non-controlling interests* *(2) *Includes $43 million of transaction costs which have been reclassified from otherassets as a result of changes in accounting policy* *(3) *Development debt*Commercial property debt maturities for the next five years and thereafter are as follows:                               Weighted-               Average   Scheduled          Interest Rate at (Millions) Amortization  Maturities  Total  Dec. 31, 2007  2008 $154  $1,078  $1,232   6.36%2009  177   482   659   6.29%2010  193   18   211   6.55%2011  199   4,486   4,685   7.01%2012  207   212   419   6.52%2013 and thereafter  660   4,259   4,919   6.17% Total commercial property debt $1,590  $10,535  $12,125   6.65% **CONTRACTUAL OBLIGATIONS**The following table presents our contractual obligations over the next five years:                           Payments Due By Period (Millions) Total  1 year  2 - 3 Years  4 - 5 Years  After 5 Years  Commercial property debt(1) $12,125  $1,232  $870  $5,104  $4,919 Residential development debt  501   180   312   9   — Capital securities  1,053   —   199   —   854 Interest expense(2)                    Commercial property debt  3,208   652   765   571   1,220 Capital securities — corporate  372   58   115   94   105 Capital securities — fund subsidiaries(3)  163   28   56   56   23 Minimum rental payments — ground leases(4)  3,256   29   56   56   3,115   *(1)* *Includes 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)* *Excludes redeemable equity interests* *(4)* *Represents payments on propertiessituated on land held under leases or other agreements***Credit Ratings**We are currently rated by two credit rating agencies, Dominion Bond Rating Service Inc. (“DBRS”)and Standard and Poors Rating Service (“S&P”). We are committed to arranging our affairs tomaintain these ratings and improve them further over time.The credit ratings for the company at December 31, 2007 and at the date of this report were asfollows:       DBRS S&P Corporate rating BBB(high) BBBPreferred shares Pfd-3(high) P3(high) Credit ratings are intended to provide investors with an independent measure of the credit qualityof an issue of securities. The credit ratings presented are not recommendations to purchase, holdor sell the company’s common or preferred shares, as such ratings do not comment as to market priceor suitability for a particular investor. There is no assurance that any rating will remain ineffect for any given period or that any rating will not be revised or withdrawn entirely by arating agency in the future if, in its judgment, circumstances so warrant.26
 

 
**Corporate Guarantees and Contingent Obligations**We conduct our operations through entities that are fully or proportionately consolidated in ourfinancial statements except for our investment in Brookfield LePage Johnson Controls and a 25%investment in Oakridges, a residential development project in Toronto, which are both equityaccounted.We may be contingently liable with respect to litigation and claims that arise in the normal courseof business. In addition, we may execute agreements that provide for indemnifications andguarantees to third parties. Disclosure of guarantees, contingencies and commitments can be foundin Note 26 to our consolidated financial statements.**ACCOUNTS PAYABLE AND OTHER LIABILITIES**Accounts payable and other liabilities totaled $1,357 million at December 31, 2007, compared with$923 million at December 31, 2006. The increase is primarily due to new land development debt,which totaled $501 million in 2007 compared with $236 million in 2006. This financing is primarilyrecourse in nature to the underlying residential development properties and relates to constructionand development loans, which are repaid from the sales proceeds of building lots and homes, andother short-term advances. As new homes are constructed, loans are funded on a rolling basis. Thisfinancing had a weighted average interest rate of 6.17% at December 31, 2007 (2006 — 6.16%). Thebalance of the change is due to additional accrued interest as a result of higher debt balances aswell as the impact of the strengthening of the Canadian dollar throughout 2007 and $33 millionrelated to the fair market value of a forward-starting interest rate swap that we entered intoduring 2007 to hedge the interest rate risk associated with the anticipated issuance of $350million of fixed rate debt.A summary of the components of accounts payable and other liabilities is as follows:         (Millions) **Dec. 31, 2007**  Dec. 31, 2006  Accounts payable and accrued liabilities **$****613**  $503 Straight-line rent payable  **59**   46 Residential payables and accrued liabilities  **184**   138 Land development debt  **501**   236  Total **$****1,357**  $923  **INTANGIBLE LIABILITIES**Intangible liabilities consist of below-market tenant leases and above-market ground leaseobligations assumed on acquisitions, net of related accumulated amortization.The components of intangible liabilities are as follows:         (Millions) **Dec. 31, 2007**  Dec. 31, 2006  Intangible liabilities        Below-market leases **$****971**  $902 Above-market ground lease obligations  **58**   70     **1,029**   972          Less accumulated depreciation        Below-market leases  **(189****)**  (46)Above-market ground lease obligations  **(6****)**  (7) Total net **$****834**  $919  **FUTURE INCOME TAXES**At December 31, 2007, we had a net future income tax liability of $600 million broken out asfollows:         (Millions) **Dec. 31, 2007**  Dec. 31, 2006  Future income tax liabilities related to difference in tax and book basis, net **$****(944****)** $(935)Future income tax assets related to non-capital losses and capital losses  **344**   351  Total net **$****(600****)** $(584) Together with our Canadian subsidiaries, we have future income tax assets of $117 million (2006 -$117 million) that relate to non-capital losses which expire over the next 20 years and $106million (2006 — $101 million) that relate to capital losses which have no expiry. Our U.S.subsidiaries have future income tax assets of $121 million(2006 — $133 million) that relate to net operating losses which expire over the next 15 years. Theamount of non-capital losses and deductible temporary differences, for which no future income taxassets have been recognized, is approximately $395 million (2006 — $341 million) which also expireover the next 10 years.27
 

 
**CAPITAL SECURITIES — CORPORATE**Pursuant to CICA Handbook section 3861, “Financial Instruments — Disclosure and Presentation,”financial instruments that may be settled, at our option, in cash or the equivalent value of avariable number of the company’s equity instruments are required to be presented as a liability.Accordingly, certain of our Class AAA preferred shares are classified as liabilities under thecaption “Capital securities.”We have the following capital securities — corporate outstanding:                   Shares  Cumulative       (Millions, except share information) Outstanding  Dividend Rate  **Dec. 31, 2007****(1)**  Dec. 31, 2006  Class AAA Series E  8,000,000  70% of bank prime **$**—  $171 Class AAA Series F  8,000,000   6.00%  **199**   171 Class AAA Series G  4,400,000   5.25%  **109**   110 Class AAA Series H  8,000,000   5.75%  **199**   171 Class AAA Series I  8,000,000   5.20%  **199**   171 Class AAA Series J  8,000,000   5.00%  **198**   171 Class AAA Series K  6,000,000   5.20%  **149**   128  Total         **$****1,053**  $1,093   *(1)* *Includes transaction costs of $7 million at December 31, 2007* * * *For redemption dates, refer to Note 16 of the consolidated financial statements***CAPITAL SECURITIES — FUND SUBSIDIARIES**We consolidate our investment in the U.S. Office Fund. Capital securities within our U.S. OfficeFund are as follows:         (Millions) **Dec. 31, 2007**  Dec. 31, 2006  Debt securities **$****257**  $257 Redeemable equity interests  **505**   553  Total **$****762**  $810  Debt securities consist of partner contributions to the U.S. Office Fund by way of an unsecureddebenture. The debenture matures on October 31, 2013 and bears interest at 11%.Redeemable equity interests include $440 million representing the equity interest in the U.S.Office Fund held by our joint venture partner, The Blackstone Group (“Blackstone”). Under the termsof the joint venture agreement, commencing in 2011 Blackstone has the option to put its interest inthe venture in exchange for certain properties that are sub-managed by Blackstone. If Blackstonedoes not exercise this option, in 2013 the Brookfield Properties-led consortium has the option tocall Blackstone’s interest in the venture in exchange for the Blackstone sub-managed properties. Onexercise of either the put or call, the parties are subject to certain cash adjustment payments tocompensate for differences between the actual distributions and cashflows of the respectivesub-managed properties, as well as changes in fair values of such properties from the date ofacquisition to the call or the put closing date. Such cash adjustments also provide for crossparticipation in cashflows and changes in fair value of each party’s sub-managed properties.Blackstone’s equity interest is classified as a liability (Capital securities — fund subsidiaries)in our financial statements as we could be obligated to transfer assets to Blackstone as a resultof Blackstone’s put option. The carrying amount of the liability is determined based on thecarrying amount of the properties to be transferred to Blackstone on exercise of its put plus thecash adjustment payments accrued based on the relative performance of the properties. The balanceof redeemable equity interests is comprised of $65 million of redeemable preferred securitiesbearing interest at 6%.**NON-CONTROLLING INTERESTS — FUND SUBSIDIARIES**At December 31, 2007, non-controlling interests — fund subsidiaries was $193 million (2006 — $259million) and represents equity contributions by other U.S. Office Fund investors in the BrookfieldProperties-led consortium.**NON-CONTROLLING INTERESTS — OTHER SUBSIDIARIES**In addition to our 100% owned subsidiaries and our U.S. Office Fund, we conduct our commercialproperty operations through BPO Properties Ltd. (“BPO Properties”) in Canada, which holdssubstantially all of our Canadian assets other than Brookfield Place in Toronto, and throughBrookfield Financial Properties, L.P. (“Brookfield Financial Properties”) in the U.S., which holdssubstantially all of our Direct interests in our New York, Boston and some of our Washington, D.C.assets.The following table details the components of non-controlling interests:             (Millions) Others’ Equity Ownership  **Dec. 31, 2007**  Dec. 31, 2006  Common shares of BPO Properties  11.0% **$****73**  $55 Limited partnership units of Brookfield Financial Properties  0.6%  **13**   12  Total     **$****86**  $67  28
 

 
Non-controlling interests in BPO Properties increased to $73 million at December 31, 2007 from $55million at December 31, 2006 primarily due to earnings in 2007 in excess of distributions.**PREFERRED EQUITY — SUBSIDIARIES**In addition to the preferred equity classified as capital securities, we had $382 million ofpreferred equity outstanding at December 31, 2007 issued by BPO Properties. These preferred sharesrepresent low-cost capital to Brookfield Properties, without dilution to the common equity base.Dividends paid on these preferred shares are a component of non-controlling interests expense.The following table details the preferred shares issued by BPO Properties:                       Shares  Preferred  Cumulative       (Millions, except share information) Outstanding  Shares Series  Dividend Rate  **Dec. 31, 2007**  Dec. 31, 2006     1,805,489  Series G 70% of bank prime **$****45**  $39    3,816,527  Series J 70% of bank prime  **96**   82    300  Series K 30-day BA + 0.4%  **150**   127    2,847,711  Series M 70% of bank prime  **71**   61    800,000  Series N 30-day BA + 0.4%  **20**   17  Total             **$****382**  $326  During 2007, dividends of $17 million were paid on preferred shares issued by BPO Properties,compared with $14 million in 2006.**PREFERRED EQUITY — CORPORATE**At December 31, 2007 we had $45 million of preferred equity outstanding. Similar to the preferredshares issued by subsidiaries, these preferred shares represent low-cost capital to us, withoutdilution to our common equity base. Dividends paid on these preferred shares are accounted for ascapital distributions.We have the following preferred shares outstanding:                   Shares  Cumulative       (Millions, except share information) Outstanding  Dividend Rate  **Dec. 31, 2007**  Dec. 31, 2006  Class A redeemable voting  14,202,000   7.50% **$****11**  $11 Class AA Series E  2,000,000  70% of bank prime  **34**   34  Total         **$****45**  $45  *For details regarding the terms on our preferred shares, refer to our Annual Information Form*During 2007, we paid preferred dividends of $3 million, consistent with preferred dividends paid in2006.**COMMON EQUITY**As at December 31, 2007, we had 392,805,608 issued and outstanding common shares. On a dilutedbasis, we had 401,062,602 common shares outstanding, calculated as follows:           **Dec. 31, 2007**  Dec. 31, 2006(1)  Common shares outstanding  **392,805,608**   396,868,457 Unexercised options  **8,256,994**   7,179,457  Common shares outstanding — diluted(2)  **401,062,602**   404,047,914  Common shares repurchased  **4,513,720**   —   *(1)* *Restated to reflect three-for-two stock split effective May 4, 2007* *(2)* *Includes all potential common shares at December 31, 2007 and December 31, 2006*In 2007, we repurchased 4,513,720 shares at an average price of $22.87 per share. Since theinception of the normal course issuer bid in 1999, we have repurchased approximately 36 millionshares at an average price of $11.60 per share on a post-split adjusted basis.At December 31, 2007, the book value of our common equity was $3.0 billion, compared with a marketequity capitalization of approximately $7.6 billion, calculated as total common shares outstandingmultiplied by $19.25, the closing price per common share on the New York Stock Exchange on December31, 2007.**Equity offering**In December 2006, we entered into agreements for the issuance of 49.5 million of our common shares.Under the agreements, a syndicate of underwriters purchased 30.938 million of our common shares ata price of $25 per share. Concurrently, an affiliate of Brookfield Asset Management Inc. purchased18.562 million of our common shares at a price of $25 per share. The gross proceeds from thecombined share issuances totaled approximately $1.25 billion.29
 

 
Following the offering, Brookfield Asset Management Inc. owns, directly and indirectly,approximately 50.1% of our voting interest.The proceeds from this offering were used to repay outstanding indebtedness taken on to finance thecompany’s $857 million equity investment in its U.S. Office Fund and the repayment of lines ofcredit to ensure the company is in a position to acquire further assets should opportunities ofinterest become available.**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 orderto enhance returns for common shareholders. Our principal liquidity needs for the next twelvemonths are to: **•** fund recurring expenses;  **•** meet debt service requirements;  **•** make dividend payments;  **•** fund capital expenditures, including tenant improvements;  **•** fund current development costs not covered under construction loans;  **•** invest in the establishment of new funds;  **•** repurchase our stock; and  **•** possibly fund new property acquisitionsWe believe that our liquidity needs will be satisfied using cash on hand, cashflows generated fromoperating activities and provided by financing activities, as well as proceeds from asset sales.Rental revenue, recoveries from tenants, interest and other income, available cash balances, drawson our corporate credit facilities and refinancings, including upward refinancings, of maturingindebtedness are our principal sources of capital used to pay operating expenses, dividends, debtservice and recurring capital and leasing costs in our commercial property portfolio. We seek toincrease income from our existing properties by maintaining quality standards for our propertiesthat promote high occupancy rates and support increases in rental rates while reducing tenantturnover and related retenanting costs, and controlling operating expenses. Another source ofcashflow includes third-party fees generated by our asset management, leasing and developmentbusinesses. In addition, our tax status as a corporation and tax loss pools allow us to retain andreinvest 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 thenecessary funds for our short-term liquidity needs. However, material changes in these factors mayadversely affect our net cashflows.Our principal liquidity needs for periods beyond the next twelve months are for development costs,potential property acquisitions, scheduled debt maturities and non-recurring capital expenditures.We plan to meet these needs with one or more of the following: **•** cashflows from operations;  **•** construction loans;  **•** investment in new funds;  **•** proceeds from sales of assets; and  **•** our credit facilities and refinancing opportunitiesOur commercial property debt is primarily fixed-rate and non-recourse to the company. Theseinvestment-grade financings are typically structured on a loan-to-appraised value basis of up to70%. In addition, in certain circumstances where a building is leased almost exclusively to ahigh-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 ourequity requirements to finance commercial property, and enhances equity returns.30
 

 
**Utilization of Cash Resources**The following table illustrates the utilization of cashflow generated by our operating activities,and our financing and investing initiatives:              (Millions) **2007**  2006   Total     **Operating**             Increase in land and housing inventory and related working capital **$****(355****)** $(258)  $(613)Net increase in cash from other operating activities  **342**   324    666        **(13****)**  66    53     **Financing**             Commercial and corporate borrowings, net of repayments  **375**   1,288    1,663 Land development borrowings, net of repayments  **219**   78    297 Trizec acquisition financing arranged  —   3,702    3,702 Other acquisition financing arranged  **130**   —    130 Distributions to non-controlling interests  **(19****)**  (12)   (31)Net issuance (repurchase) of common shares  **(100****)**  1,233    1,133 Preferred share dividends  **(3****)**  (3)   (6)Common share dividends  **(216****)**  (173)   (389)       **386**   6,113    6,499     **Investing**             Marketable securities  —   58    58 Loans receivable and other  **40**   (24)   16 Loans receivable — affiliate  **(200****)**  —    (200)Acquisition of Trizec, net of cash and cash equivalents acquired  —   (5,341)   (5,341)Acquisitions of real estate, net  **(307****)**  (569)   (876)Dispositions of real estate, net  **224**   82    306 Development and redevelopment investments  **(313****)**  (79)   (392)Commercial property tenant improvements  **(107****)**  (55)   (162)Restricted cash and deposits  **365**   (102)   263 Capital expenditures  **(49****)**  (25)   (74)       **(347****)**  (6,055)   (6,402)    **Increase in cash** **$****26**  $124   $150     Cashflow from operating activities represents a source of liquidity to service debt, to fundcapital expenditures and leasing costs, and to fund distributions on shares. Cashflow fromcommercial operating activities is dependent upon occupancy levels of properties owned, rentalrates achieved and timing of the collection of receivables and payment of payables.For the year ended December 31, 2007, common share dividends paid exceeded net cash provided fromoperating activities, primarily due to the continued expansion of our investment in residentialdevelopment land and housing inventory which utilized approximately $355 million of operatingcashflow and was funded largely through land development borrowings. Excluding this, operatingcashflow exceeded dividends paid by $126 million.**Cost of capital**We continually strive to reduce our weighted average cost of capital and improve commonshareholders’ equity returns through value-enhancement initiatives and the consistent monitoring ofthe balance between debt and equity financing.As at December 31, 2007, our weighted average cost of capital, assuming a 12% return on equity, was7.19% (2006 – 7.94%). Our cost of capital is lower than many of our peers because of the greateramount of investment-grade financing which can be placed on our assets, a function of thehigh-quality nature of both the assets and the tenant base which comprise our portfolio. Thedecrease over the prior year is due to a decrease in our market capitalization.
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The following schedule details the capitalization of the company at the end of 2007 and 2006 andthe related costs thereof:                   Cost of Capital(1)  Underlying Value(2) (Millions) **Dec. 31, 2007**  Dec. 31, 2006  **Dec. 31, 2007**  Dec. 31, 2006  **Liabilities**                Commercial property debt  **6.65****%**  6.79% **$****12,125**  $11,219 Residential debt  **6.17****%**  6.16%  **501**   236 Capital securities – corporate  **5.42****%**  5.23%  **1,053**   1,093 Capital securities – fund subsidiaries(3)  **10.00****%**  10.00%  **762**   810 Non-controlling interests – fund subsidiaries(3)  **10.00****%**  10.00%  **193**   259 Non-controlling interests – other subsidiaries  **12.00****%**  12.00%  **86**   67 Preferred equity — subsidiaries  **4.40****%**  4.30%  **382**   326 **Shareholders’ equity**                Preferred equity — corporate  **5.01****%**  5.01%  **45**   45 Common equity  **12.00****%**  12.00%  **7,562**   10,406  Total(4)  **7.19****%**  7.94% **$****22,709**  $24,461  *(1)* *As a percentage of average book value* *(2)* *Underlying value of liabilities represents the cost to retire on maturity.Underlying value of common equity is based on the closing stock price of Brookfield Properties’common shares* *(3)* *Assuming 10% return on co-invested capital* *(4)* *In calculating the weighted average cost of capital, the cost of debt has beentax-effected*
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**OPERATING RESULTS****NET INCOME**Our net income for the year ended December 31, 2007 was $240 million ($0.59 per diluted share)compared to $135 million ($0.37 per diluted share) in 2006. The net increase is largely a resultof: **•** $466 million of growth ($1.17 per diluted share) from commercial property operating income,primarily as a result of a full year of net operating income on the Trizec portfolio, OneBethesda and 601 & 701 South 12th Street in Washington, D.C., as well as the purchaseof 1201 Louisiana Street in Houston during 2007;  **•** $93 million of growth ($0.23 per diluted share) from our residential development operationswhich continued to benefit from a low interest rate environment and strong demand in the Albertahousing market during 2007;  **•** a $110 million gain ($0.28 per diluted share), net of tax, on the sale of seven propertiesfrom the O&Y portfolio and the sale of a portion of the Waterview development site during 2007as compared to a $29 million gain ($0.08 per diluted share), net of tax, on the sale of eightproperties from the O&Y portfolio as well as the Trade Center Denver during 2006;  **•** an increase of $43 million ($0.11 per diluted share) in losses absorbed by co-investors in theU.S. Office Fund due to a full year of activity in the Trizec portfolio; and  **•** a decrease in future income tax expense of $22 million ($0.06 per diluted share) due to therevaluation of the future tax liability associated with the US Office Fund, offset by: o an increase in interest expense of $275 million ($0.69 per diluted share) related to interestcarry on the Trizec portfolio, as well as various refinancings in 2007 totaling over $2 billionand the impact of foreign exchange;  o an increase in general and administrative expense of $36 million ($0.09 per dilutedshare) primarily due to the expansion of our portfolio and asset management platform;  o an increase in one-time transaction costs of $29 million ($0.07 per diluted share), $27million of which relates to a break fee incurred on the refinancing of One Liberty Plazain New York and $4 million of which relates to the write-off of our investment in afinancing vehicle for our Canadian assets that we elected not to implement;  o an increase in non-controlling interests of $9 million ($0.02 per diluted share)largely due to the impact of foreign exchange throughout 2007; and  o an increase in depreciation and amortization expense of $254 million ($0.64 per dilutedshare) related to a full year of depreciation on the Trizec portfolio, One Bethesda and601 & 701 South 12th Street in Washington, D.C., as well as the acquisition of1201 Louisiana Street in Houston in 2007.
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Set out below is a summary of the various components of our net income and funds from operations.Discussion of each of these components is provided on the following pages.             (Millions) **2007**  2006  2005  **Total revenue** **$****2,912**  $1,911  $1,528 **Net operating income**            Commercial property operations            Operating income from commercial properties  **1,298**   831   644 Lease termination, non-recurring fee and other income  **4**   5   30  Total commercial property operations  **1,302**   836   674 Residential development operations  **237**   144   106 Interest and other income  **44**   44   37     **1,583**   1,024   817              **Expenses**            Interest            Commercial property debt  **697**   422   273 Capital securities – corporate  **61**   59   54 Capital securities – fund subsidiaries  **(27****)**  (12)  — General and administrative  **103**   67   48 Transaction costs  **44**   15   — Non-controlling interests            Fund subsidiaries  **(75****)**  (21)  — Other subsidiaries  **23**   19   16 Depreciation and amortization  **530**   276   161 Future income taxes  **70**   92   103  Net income from continuing operations  **157**   107   162 Discontinued operations, net of non-controlling interests(1)  **83**   28   2  **Net income** **$****240**  $135  $164  **Net income per share – diluted**            Continuing operations **$****0.38**  $0.29  $0.45 Discontinued operations  **0.21**   0.08   0.01    **$****0.59**  $0.37  $0.46  **Funds from operations per share – diluted**            Continuing operations **$****1.55**  $1.22  $1.21 Discontinued operations  **0.02**   0.03   0.02 Lease termination income and disposition gains  **0.24**   0.13   —    **$****1.81**  $1.38  $1.23  *(1)* *Refer to page 41 for further details on discontinued operations*It should be noted that challenges of comparability of net income exist among various real estatecompanies, as those entities structured as corporations, such as Brookfield Properties, arerequired to charge their earnings with tax expense, despite the presence of tax losses which reducethe cash tax obligation. This differs from those entities which operate as real estate investmenttrusts (“REITs”), as REITs are not subject to taxation, provided they remain in compliance withspecific tax codes.Our net income per share and weighted average common shares outstanding are calculated as follows:             (Millions, except per share amounts) **2007**  2006  2005  Net income **$****240**  $135  $164 Preferred share dividends  **(3****)**  (3)  (2) Net income available to common shareholders **$****237**  $132  $162               Weighted average shares outstanding – basic  **395.9**   348.6   346.6 Net income per share – basic **$****0.60**  $0.38  $0.47               Weighted average shares outstanding – diluted  **399.2**   353.0   351.3 Net income per share – diluted **$****0.59**  $0.37  $0.46               Weighted average shares outstanding – basic  **395.9**   348.6   346.6 Unexercised options  **3.3**   4.4   4.7  Weighted average shares outstanding – diluted **$****399.2**  $353.0  $351.3  
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**RECONCILIATION OF NET INCOME TO FUNDS FROM OPERATIONS**             (Millions) **2007**  2006  2005  **Net income** **$****240**  $135  $164 Add (deduct) non-cash and extraordinary items:            Depreciation and amortization  **530**   276   161 Income taxes  **70**   92   103 Transaction costs  **44**   15   **—** Discontinued operations(1)  **(107****)**  (21)  7 Non-controlling interests in above items(2)  **(148****)**  (54)  **—**  **Funds from operations** **$****629**  $443  $435  *(1)* *Represents depreciation and amortization, income taxes and dispositionsrelated to discontinued operations**(2)* *Includes non-cash component of capitalsecurities – fund subsidiaries of $82 million (2006 – $23 million)*After providing for preferred share dividends, our funds from operations per diluted share,excluding lease termination income and gains, is calculated as follows:             (Millions, except per share amounts) **2007**  2006  2005  Funds from operations **$****629**  $443  $435 Preferred share dividends  **(3****)**  (3)  (2)    **626**   440   433  Funds from operations per share – diluted **$****1.57**  $1.25  $1.23  Funds from operations was $1.57 per share in 2007 compared with $1.25 per share in 2006. Our 2005results include a special fee of $30 million ($0.09 per share) received from Goldman Sachs pursuantto a cooperation agreement permitting the commencement of construction on certain lands adjacent tothe company’s World Financial Center in New York, known as Site 26.**REVENUE**The components of revenue are as follows:             (Millions) **2007**  2006  2005  Commercial property revenue            Revenue from continuing operations **$****2,124**  $1,373  $1,050 Recurring fee income  **40**   29   22 Lease termination, non-recurring fee and other income  **4**   5   30  Total commercial property revenue  **2,168**   1,407   1,102 Revenue from residential development operations  **700**   460   389  Revenue from commercial property and residential development operations  **2,868**   1,867   1,491 Interest and other  **44**   44   37  Total **$****2,912**  $1,911  $1,528  **COMMERCIAL PROPERTY OPERATIONS**Commercial property net operating income totaled $1,302 million in 2007 compared with $836 millionin 2006 and $674 million in 2005.The components of commercial property net operating income from continuing operations are asfollows:             (Millions) **2007**  2006  2005  Commercial property revenue            Revenue from current properties **$****1,940**  $1,313  $1,029 Straight-line rental income  **47**   17   21 Intangible lease amortization  **137**   43   **—**  Revenue from continuing operations  **2,124**   1,373   1,050 Recurring fee income  **40**   29   22 Lease termination, non-recurring fee and other income  **4**   5   30  Total commercial property revenue  **2,168**   1,407   1,102 Property operating costs  **(866****)**  (571)  (428) Commercial property net operating income **$****1,302**  $836  $674  
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Our Direct net operating income as well as our net operating income from our funds for the yearsended 2007, 2006 and 2005 is as follows:             (Millions) **2007**  2006  2005  **Direct**            Same property **$****656**  $627  $646 Properties acquired  **29**   14   — Recurring fee income  **28**   21   22     **713**   662   668              **U.S. Office Fund**            Properties acquired  **543**   135   — Recurring fee income  **3**   —   —     **546**   135   —              **Canadian Office Fund**            Same property  **34**   31   6 Recurring fee income  **9**   8   —     **43**   39   6  Total commercial property net operating income **$****1,302**  $836  $674  The components of commercial property net operating income from discontinued operations are asfollows:             (Millions) **2007**  2006  2005  Discontinued operations            Revenue **$****17**  $31  $35 Property operating expenses  **(6****)**  (17)  (18) Net operating income from discontinued operations **$****11**  $14  $17  Revenue from commercial properties includes rental revenues earned from tenant leases,straight-line rent, percentage rent and additional rent from the recovery of operating costs andproperty taxes. Revenue from commercial properties totaled $2,168 million during 2007 compared with$1,407 million in 2006. The increase is primarily a result of the Trizec acquisition that tookplace in the fourth quarter of 2006 as well as the acquisitions in our Washington, D.C. portfoliothat took place during 2006, both of which had a full year of revenue in 2007. In addition, the2007 results include income from 1201 Louisiana Street in Houston, which was acquired in the secondquarter.Our leases generally have clauses which provide for the collection of rental revenues in amountsthat increase every five years, with these increases negotiated at the signing of the lease. Thelarge number of high-credit quality tenants in our portfolio lowers the risk of not realizing theseincreases. GAAP requires that these increases be recorded on a straight-line basis over the life ofthe lease. For the year ended December 31, 2007, we recognized $47 million of straight-line rentalrevenue, as compared to $17 million in 2006.Commercial property operating costs which include real estate taxes, utilities, insurance, repairsand maintenance, cleaning and other property-related expenses were $866 million in 2007, ascompared to $571 million in 2006. The primary reason for the increase was a full year of expensesrelated to the Trizec portfolio as well as One Bethesda and 601 & 701 South 12th Streetin Washington D.C. and the costs related to 1201 Louisiana Street in Houston, which was acquired in2007. These acquisitions accounted for approximately $366 million of the increase over 2006.Offsetting these increases is the sale of various properties in the O&Y portfolio over the past twoyears.Substantially all of our leases are net leases in which the lessee is required to pay theirproportionate share of property operating expenses such as utilities, repairs, insurance and taxes.Consequently, leasing activity, which affects both occupancy and in-place rental rates, is theprincipal contributor to the change in same property net operating income. During 2007, occupancyincreased due to lease-ups in Lower Manhattan, Boston, Toronto, Denver and Minneapolis as comparedto 2006. At December 31, 2007, average in-place net rent throughout the portfolio was $23.63 persquare foot compared with $21 per square foot at December 31, 2006.
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The following table shows the average in-place rents and estimated current market rents for similarspace in each of our markets as at December 31, 2007:                       Avg.  Avg. In-Place  Avg. Market   Leasable Area  Lease Term  Net Rent  Net Rent   (000's Sq. Ft.)  (Years)  ($ per Sq. Ft.)  ($ per Sq. Ft.)  New York, New York                Midtown  6,298   11.3  $36.51  $84 Downtown  12,901   8.2   28.03   44 Boston, Massachusetts  1,887   6.2   29.68   35 Washington, D.C.  5,532   7.0   24.91   35 Houston, Texas  7,012   5.4   11.89   20 Los Angeles, California  8,533   4.8   20.35   25 Toronto, Ontario  8,824   6.7   25.32   27 Calgary, Alberta  5,681   6.3   24.15   35 Ottawa, Ontario  1,750   5.8   17.35   19 Denver, Colorado  1,292   7.7   17.25   22 Minneapolis, Minnesota  2,487   6.5   9.61   15 Other  1,400   8.0   12.93   22  Total(1)  63,597   7.1  $23.63  $36  *(1)* *Excludes developments*Our total portfolio occupancy rate increased by 50 basis points to 95.6% at December 31, 2007compared with 95.1% at December 31, 2006 primarily due to the improved leasing environment in 2007across almost all of our markets.A summary of our occupancy levels for the past two years is as follows:                   **Dec. 31, 2007**  Dec. 31, 2006   **Leasable**  **%**  Leasable  % (Thousands of square feet) **Sq. Ft.**  **Leased**  Sq. Ft.  Leased  New York, New York                Midtown  **6,298**   **95.0**   6,298   98.3 Downtown  **12,901**   **99.2**   12,901   95.7  Total New York, New York  **19,199**   **97.8**   19,199   96.5 Boston, Massachusetts  **1,887**   **96.5**   1,887   92.5 Washington, D.C.  **5,532**   **92.5**   5,749   97.6 Houston, Texas  **7,012**   **95.1**   6,168   94.6 Los Angeles, California  **8,533**   **87.5**   8,533   87.4 Toronto, Ontario  **8,824**   **97.9**   10,455   95.8 Calgary, Alberta  **5,681**   **99.8**   6,801   99.8 Ottawa, Ontario  **1,750**   **99.3**   1,909   99.2 Denver, Colorado  **1,292**   **97.5**   1,292   95.7 Minneapolis, Minnesota  **2,487**   **92.4**   2,487   89.3 Other  **1,400**   **94.9**   1,400   95.6  Total(1)  **63,597**   **95.6**   65,880   95.1  *(1)**Excludes developments*
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During 2007, we leased 8.8 million square feet of space at an average leasing net rent of $30.32per square foot. This included 3.9 million square feet of new leases and 4.9 million square feet ofrenewals. Expiring net rent for the portfolio averaged $20.74 per square foot.The details of our leasing activity for 2007 are as follows:                                                      Activities During the Year Ended December 31, 2007                    Average      Year One  Average          Dec. 31, 2006       Expiring      Leasing  Leasing  Acq./   **Dec. 31, 2007**   Leasable  Leased   Expiries  Net Rent  Leasing  Net Rent  Net Rent  (Disp.)   **Leasable**  **Leased** (Square feet in 000’s) Sq. Ft(1)  Sq. Ft.(1)   Sq. Ft. (1)  ($ per sq. ft.)  Sq. Ft.(1)  ($ per sq. ft.)  ($ per sq. ft.)  Sq. Ft. (1)   **Sq. Ft.****(1)**  **Sq. Ft.****(1)**        New York, New York                                          Midtown  6,298   6,192    (570) $27.56   360  $69.48  $72.43   —    **6,298**   **5,982** Downtown  12,901   12,342    (1,469)  22.27   1,927   32.94   36.78   —    **12,901**   **12,800** Boston, Massachusetts  1,887   1,745    (238)  26.74   314   32.26   34.79   —    **1,887**   **1,821** Washington, D.C.  5,749   5,610    (792)  20.95   511   30.14   31.48   (212)   **5,532**   **5,117** Houston, Texas  6,168   5,832    (1,605)  13.30   1,687   15.63   18.15   757    **7,012**   **6,671** Los Angeles, California  8,533   7,458    (969)  18.85   979   24.77   27.28   —    **8,533**   **7,468** Toronto, Ontario  10,455   10,012    (1,142)  25.12   1,222   26.96   27.75   (1,455)   **8,824**   **8,637** Calgary, Alberta  6,801   6,786    (1,070)  25.24   1,071   33.97   34.43   (1,120)   **5,681**   **5,667** Ottawa, Ontario  1,909   1,894    (139)  13.85   143   19.72   19.72   (159)   **1,750**   **1,739** Denver, Colorado  1,292   1,236    (89)  19.22   112   22.02   23.37   —    **1,292**   **1,259** Minneapolis, Minnesota  2,487   2,220    (156)  12.15   233   13.56   15.26   —    **2,487**   **2,297** Other  1,400   1,338    (204)  13.98   195   21.97   22.41   —    **1,400**   **1,329**        Total(1)  65,880   62,665    (8,443) $20.74   8,754  $28.18  $30.32   (2,189)   **63,597**   **60,787**        *(1)* *Excludes developments***Acquisitions**The value created in our mature commercial properties provides us with the opportunity to generategains and a potential source of capital available to reinvest in other assets at higher returns.The acquisition of 1201 Louisiana Street in Houston provided $6 million of net operating income in2007. A full year of net operating income from the Trizec portfolio as well as One Bethesda and 601& 701 South 12th Street in Washington, D.C. contributed an additional $566 million tonet operating income in 2007. Net operating income from these acquisitions was $149 million in2006.**Recurring fee income**Fee income includes property management fees, leasing fees and project management fees relating tocertain co-owned properties. Fee income serves as a cashflow supplement to enhance returns fromco-owned assets. We also earn fees through Brookfield Residential Services Ltd. and BrookfieldLePage Johnson Controls. Brookfield Residential Services Ltd. has been managing condominiums in theGreater Metropolitan Toronto area for the past 28 years and manages in excess of 51,000 units inover 266 condominium corporations. Brookfield LePage Johnson Controls, one of the largestfacilities management operations in Canada, is owned 40% by Brookfield Properties in partnershipwith Johnson Controls. This joint venture, which is equity accounted, manages nearly 80 millionsquare feet of premises for major corporations and government.The details of our fee income are as follows:             (Millions) **2007**  2006  2005  Property management, leasing, project management and other fees **$****20**  $13  $7 Brookfield Residential Services Ltd. fees  **17**   13   9 Brookfield LePage Johnson Controls  **3**   3   6  Total **$****40**  $29  $22  The generation of fee income is not viewed as a separate business segment; however, with theestablishment of our office funds, the associated fees represent an important area of growth for usand are expected to increase as we expand our assets under management. These fees typically includea stable base fee for providing regular ongoing services as well as performance fees that areearned when the performance of the fund exceeds certain predetermined benchmarks. We will also earntransaction fees for investment and leasing activities conducted on behalf of these funds.
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**RESIDENTIAL DEVELOPMENT OPERATIONS**Our residential development operations are located in five markets: Alberta, Ontario, Colorado,Texas and Missouri. Most of our land holdings were purchased in the mid-1990’s, and as a resulthave an embedded cost advantage over many companies which are acquiring land today at much higherprices.Our residential development operations contributed $237 million of pre-tax income during 2007 ascompared to $144 million during 2006. The increase in earnings is due to higher home sales andmulti-family lot volumes, higher margins as a result of increased selling prices and product mix,offset by an increase in both labor and material costs in Alberta as a result of shortages causedby the rapid growth in the economy fueled by the energy sector.The components of residential development net operating income are as follows:             (Millions) **2007**  2006  2005  Sales revenue **$****700**  $460  $389 Operating costs  **(463****)**  (316)  (283) Total **$****237**  $144  $106  Lot sales for the past three years and the related revenue are as follows:                                         Lot Sales   Lot Sales Revenue   Average Lot Sales Revenue   (Units)   (Millions)   (Thousands)   **2007**  2006  2005   **2007**  2006  2005   **2007**  2006  2005        Alberta  **2,125**   2,347   2,617   **$****369**  $277  $184   **$****174**  $118  $70 Ontario  **152**   **—**   **—**    **18**   **—**   **—**    **118**   **—**   **—** Colorado  **123**   96   369    **13**   6   22    **106**   63   60 Texas  **102**   55   **—**    **4**   2   **—**    **39**   36   **—** Missouri  **1**   64   **—**    **—**   2   **—**    **—**   31   **—** Other(1)  **—**   —   **—**    **—**   —   5    **—**   —   **—**        Total  **2,503**   2,562   2,986   **$****404**  $287  $211   **$****161**  $112  $71        *(1)* *Represents $5 million earned on the completion of all outstanding commitmentsrelated to a previous development in Florida*Home sales for the past three years and the related revenue are as follows:                                         Home Sales   Home Sales Revenue   Average Home Sales Revenue   (Units)   (Millions)   (Thousands)   **2007**  2006  2005   **2007**  2006  2005   **2007**  2006  2005        Alberta  **773**   538   556   **$****216**  $100  $84   **$****279**  $186  $151 Ontario  **277**   280   391    **80**   73   94    **289**   261   240        Total  **1,050**   818   947   **$****296**  $173  $178   **$****282**  $211  $188        Residential development operating costs, which include land costs, land servicing costs, housingdevelopment costs, property taxes and other related costs increased to $463 million in 2007 from$316 million in 2006. These costs increased as a result of our expanded operations and have beencompounded by material and labor shortages as discussed above.**INTEREST AND OTHER INCOME**Interest and other income includes interest charged on real estate mortgages and residentialreceivables, interest received on cash balances, and transactional gains. Interest and other incomeremained consistent at $44 million in 2007.**INTEREST EXPENSE****Commercial propertydebt**Interest expense relating to commercial property debt increased to $697 million in 2007 from $422million in 2006. This increase is related to additional interest carry on the debt associated withthe Trizec portfolio as well as the acquisitions in Washington, D.C. in 2006 and in Houston in 2007and various upward refinancings that took place during 2007, including One Liberty Plaza.**Capital securities – corporate**Interest expense on capital securities – corporate relates to preferred share dividendsreclassified to interest expense. This amount increased to $61 million in 2007 from $59 million in2006 due to foreign exchange fluctuations offset by the cessation of interest expense on the ClassAAA Series E shares that were offset with a deposit to Brookfield Asset Management Inc., our parentcompany, in the third quarter of 2007.
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**Capital securities – fund subsidiaries**Interest expense on capital securities – fund subsidiaries represents expenses related to thefollowing interests in the U.S. Office Fund:             (Millions) **2007**  2006  2005  Interest on debt securities **$****26**  $7  $— Interest on redeemable equity interests  **29**   4   —     **55**   11   — Non-cash component(1)  **(82****)**  (23)  —  Total **$****(27****)** $(12) $—  *(1)* *Represents co-investors share of non-cash items, such as depreciation andamortization***GENERAL AND ADMINISTRATIVE EXPENSES**General and administrative costs during the year ended 2007 increased to $103 million from $67million in 2006 due to expansion of our asset management platform, including the acquisition of theTrizec portfolio in the fourth quarter of 2006, as well as inflationary and competitive pressureson salaries. Included in general and administrative expenses is $16 million (2006 — $13 million) ofexpenses related to the operations of our subsidiary, Brookfield Residential Services Ltd.**TRANSACTION COSTS**During the third quarter of 2007, we refinanced One Liberty Plaza with an $850 million,non-recourse 10-year mortgage at a fixed rate of 6.139%. As part of the refinancing, we defeased anexisting $397 million 6.75% loan maturing in 2011 by assigning the loan and securities with a valueof approximately $420 million to a special purpose entity established to assume One Liberty Plaza’sobligation under the loan. In connection with the refinancing, we recognized a break fee of $23million representing the difference between the carrying value of the defeased loan and the valueof the securities pledged to satisfy our obligation under this loan. In addition, we also wrote-off$4 million of transaction costs that had been capitalized against the original note.Also included in transaction costs for the year ended December 31, 2007 were $17 million of costswhich included $13 million of merger integration costs and employee transition costs resulting fromthe Trizec merger and $4 million related to the write-off of costs associated with a financing planthat we elected not to implement. Net of non-controlling interests, our share of these costs was $9million and $4 million, respectively.**NON-CONTROLLING INTERESTS****Fundsubsidiaries**Non-controlling interests in our U.S. Office Fund are as follows:             (Millions) **2007**  2006  2005  Non-controlling interests **$****60**  $1  $— Non-cash component(1)  **(109****)**  (22)  —  Total  **(49****)**  (21)  —  *(1)* *Represents co-investors share of non-cash items, such as depreciation andamortization*Non-controlling interests – fund subsidiaries is comprised of non-controlling interests fromcontinuing operations and discontinued operations as follows:             (Millions) **2007**  2006  2005  Non-controlling interests – fund subsidiaries – continuing operations **$****(75****)** $(21) $— Non-controlling interests – fund subsidiaries – discontinued operations  **26**   —   —  Total non-controlling interests – fund subsidiaries **$****(49****)** $(21) $—  **Other subsidiaries**Non-controlling interests – other subsidiaries consists of earnings attributable to interests notowned by Brookfield Properties in BPO Properties and Brookfield Financial Properties, as well asdividends on shares issued by BPO Properties and our 100%-owned subsidiaries.For the year ended December 31, 2007, dividends paid on shares issued by our subsidiaries increasedto $15 million from $14 million in 2006. Non-controlling interests in subsidiary earnings was $15million in 2007 compared with $7 million in 2006.
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The following table outlines the dividends and earnings paid or attributable to other shareholdersof subsidiaries of Brookfield Properties:               (Millions)  Type**2007**  2006  2005  BPO Properties  Redeemable preferred shares(1)**$****15**  $14  $11 BPO Properties   Participating interests **14**   6   4 Brookfield Financial Properties   Participating interests **1**   1   1  Total **$****30**  $21  $16  *(1)* *Non-participating*Non-controlling interests – other subsidiaries is comprised of non-controlling interests fromcontinuing operations and discontinued operations as follows:             (Millions) **2007**  2006  2005  Non-controlling interests – other subsidiaries – continuing operations **$****23**  $19  $— Non-controlling interests – other subsidiaries – discontinued operations  **7**   2   —  Total non-controlling interests – other subsidiaries **$****30**  $21  $—  **DEPRECIATION AND AMORTIZATION EXPENSE**Depreciation for the year ended December 31, 2007 increased by $254 million to $530 million from$276 million in 2006. The majority of this increase was due to a full year of depreciation andamortization from the acquisition of the Trizec portfolio in the fourth quarter of 2006.**FUTURE INCOME TAXES**Future income taxes for the year ended December 31, 2007 decreased to $70 million from $92 millionin 2006. The majority of this decrease relates to a $75 million reduction in our future taxliability as a result of a decrease in the tax rates applied to the U.S. Office Fund and a netrelease of contingencies of $14 million on the settlement of tax audits in the U.S. Office Fund.These decreases are offset by an increase of $55 million on the tax effect of foreign exchangegains on U.S. dollar denominated debt in Canadian companies.**DISCONTINUED OPERATIONS**During the fourth quarter of 2007, we sold our 25% interest in Gulf Canada Square andrecognized a gain of approximately $27 million. During the third quarter of 2007, we sold our 25%interest in both 2 and 40 St. Clair Avenue West in Toronto, properties which were acquired with theO&Y portfolio, and recognized a gain of approximately $7 million. During the second quarter of2007, we sold a portion of our Waterview development site in Washington, D.C., which was acquiredin 2006 as part of the Trizec portfolio. In addition, we sold our 25% interest in 18 King Street inToronto. As a result of these sales, we recognized a gain of $62 million in the second quarter of2007. Subsequent to the sale of Waterview in the second quarter, we received $1 million of residualpayments and recognized an additional $1 million as a result of completing certain remainingdevelopment obligations for which a portion of the proceeds had been deferred, resulting in a gainrecognized in the third and fourth quarters of 2007, respectively. During the first quarter of2007, we sold our 50% interest in Atrium on Bay in Toronto as well as our 25% interest in both 2200Walkley and 2204 Walkley in Ottawa. As a result of these sales, we recognized a gain of $47million. Excluding gains, non-controlling interests and future income taxes, income attributable todiscontinued operations was $6 million for the year ended December 31, 2007.During the second quarter of 2006, we sold our 25% interest in eight of the properties purchased inthe O&Y acquisition resulting in a gain of $14 million. During the first quarter of 2006, we soldour 100% interest in the World Trade Center Denver and recognized a gain of $30 million. Excludinggains, non-controlling interests and future income taxes, income attributable to discontinuedoperations was $1 million in 2006.The following table summarizes the income from discontinued operations:             (Millions) **2007**  2006  2005  Revenue **$****17**  $31  $34 Operating expenses  **(6****)**  (17)  (17)    **11**   14   17 Interest expense  **(2****)**  (5)  (8) Funds from operations  **9**   9   9 Depreciation and amortization  **(3****)**  (8)  (7) Income from discontinued operations before gains, non-controlling interests and taxes  **6**   1   2 Gain on sale of commercial properties  **144**   44   — Non-controlling interests  **(33****)**  (2)  — Future income taxes  **(34****)**  (15)  —  Income from discontinued operations **$****83**  $28  $2  
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**SEGMENTED INFORMATION**The company and its subsidiaries operate in the U.S. and Canada within the commercial property andthe residential development businesses. The commercial markets in which we operate are primarilyNew York, Boston, Washington, D.C., Houston, Los Angeles, Denver and Minneapolis in the U.S., andToronto, Calgary and Ottawa in Canada. Approximately 79% of our commercial property net operatingincome is derived from the U.S. Our residential development operations are focused in five markets:Alberta and Ontario in Canada and Colorado, Texas and Kansas City in the U.S. Details of thesegmented financial information for our principal areas of business are as follows:                                      Commercial   Residential       United States   Canada   Development   Total (Millions) **2007**  2006   **2007**  2006   **2007**  2006   **2007**  2006           Assets                                   Commercial properties **$****13,498**  $13,136   **$****2,391**  $2,151   **$**—  $—   **$****15,889**  $15,287 Development properties  **676**   433    **496**   302    **1,228**   706    **2,400**   1,441 Receivables and other  **569**   516    **195**   213    **292**   245    **1,056**   974 Intangible assets  **719**   799    **40**   54    —   —    **759**   853 Restricted cash and deposits  **146**   497    **2**   10    **3**   —    **151**   507 Cash and cash equivalents  **134**   166    **74**   21    **6**   1    **214**   188 Assets related to discontinuedoperations  —   —    **4**   64    —   —    **4**   64           Total **$****15,742**  $15,547   **$****3,202**  $2,815   **$****1,529**  $952   **$****20,473**  $19,314                                                 Commercial   Residential       United States   Canada   Development   Total (Millions) **2007**  2006   **2007**  2006   **2007**  2006   **2007**  2006           Revenues **$****1,713**  $994   **$****455**  $413   **$****700**  $460   **$****2,868**  $1,867 Expenses  **678**   400    **188**   171    **463**   316    **1,329**   887              **1,035**   594    **267**   242    **237**   144    **1,539**   980 Interest and other income  **18**   19    **14**   16    **12**   9    **44**   44           Net operating income fromcontinuing operations  **1,053**   613    **281**   258    **249**   153    **1,583**   1,024 Interest expense                                   Commercial property debt  **654**   370    **43**   52    —   —    **697**   422 Capital securities – corporate  **9**   6    **52**   53    —   —    **61**   59 Capital securities – fund subsidiaries  **(27****)**  (12)   —   —    —   —    **(27****)**  (12)General and administrative  **58**   34    **45**   33    —   —    **103**   67 Transaction costs  **40**   15    **4**   —    —   —    **44**   15 Non-controlling interests                                   Fund subsidiaries  **(75****)**  (21)   —   —    —   —    **(75****)**  (21)Other subsidiaries  **1**   1    **22**   18    —   —    **23**   19 Depreciation and amortization  **466**   202    **64**   74    —   —    **530**   276           Income before unallocated costs  **(73****)**  18    **51**   28    **249**   153    **227**   199 Future income taxes                             **70**   92           Net income from continuing operations                            **$****157**  $107 Discontinued operations  **15**   18    **68**   10    —   —    **83**   28           Net income                            **$****240**  $135           
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**QUARTERLY RESULTS**The 2007 and 2006 results by quarter are as follows:                                    2007(1)   2006(1) (Millions, except per share amounts) **Q4**  Q3  Q2  Q1   Q4  Q3  Q2  Q1     **Total Revenue** **$****849**  $705  $720  $638   $689  $421  $414  $387     **Net operating income**                                 Commercial property operations  **330**   332   325   315    312   179   176   169 Residential development operations  **80**   43   72   42    51   37   31   25 Interest and other  **12**   13   10   9    14   9   8   13        **422**   388   407   366    377   225   215   207                                   **Expenses**                                 Interest(2)  **189**   192   189   188    205   96   92   88 Interest – capital securities – fund subsidiaries  **(5****)**  (8)  (5)  (9)   (12)  —   —   — General and administrative  **27**   23   24   29    23   15   14   15 Transaction costs                                 Debt defeasance  —   27   —   —    —   —   —   — Other  **2**   8   3   4    15   —   —   — Non-controlling interests                                 Fund subsidiaries  **(22****)**  (12)  (31)  (10)   (21)  —   —   — Other subsidiaries  **7**   6   6   4    4   7   4   4 Depreciation and amortization  **138**   135   132   125    136   49   49   42 Future income taxes  **4**   20   28   18    6   23   36   27     **Net income from continuing operations** **$****82**  $(3) $61  $17   $21  $35  $20  $31 Discontinued operations(3)  **23**   6   18   36    —   —   10   18     **Net income** **$****105**  $3  $79  $53   $21  $35  $30  $49     **Net income per share – basic**                                 Continuing operations **$****0.21**  $(0.01) $0.15  $0.04   $0.06  $0.10  $0.05  $0.09 Discontinued operations(3)  **0.06**   0.01   0.05   0.09    —   —   0.03   0.05       **$****0.27**  $—  $0.20  $0.13   $0.06  $0.10  $0.08  $0.14     **Net income per share – diluted**                                 Continuing operations **$****0.21**  $(0.01) $0.14  $0.04   $0.06  $0.09  $0.05  $0.09 Discontinued operations(3)  **0.06**   0.01   0.05   0.09    —   —   0.03   0.05       **$****0.27**  $—  $0.19  $0.13   $0.06  $0.09  $0.08  $0.14     **Funds from operations per share – diluted**                                 Continuing operations **$****0.47**  $0.35  $0.42  $0.31   $0.34  $0.30  $0.29  $0.28 Discontinued operations(3)  —   0.01   —   0.01    —   0.01   0.01   0.01 Property disposition gains(3)  **0.05**   0.02   0.06   0.11    —   —   0.04   0.09       **$****0.52**  $0.38  $0.48  $0.43   $0.34  $0.31  $0.34  $0.38     *(1)* *Per share amounts restated to include the effect of the three-for-two commonstock split effective May 4, 2007* *(2)* *Includes interest on capital securities – corporate* *(3)* *All quarters presented are net of non-controlling interests*Commercial property operations in the fourth quarter of 2007 was slightly down from the previousquarter due to an increase in operating costs throughout the quarter offset by the benefit offoreign exchange fluctuations.Residential development income increased in the fourth quarter of 2007 compared with previousquarters in 2007 due to increased lot and home sales closings in the fourth quarter at higherselling prices. In Canada, we typically service lots in April through October, which leads to moresales in May through December. New inventory is not usually created during the first quarter ofeach year, so our fourth quarter sales could be higher when builders need inventory to providesupply over the first quarter months.Interest expense decreased in the fourth quarter of 2007 as a result of a drop in LIBOR ratesduring the quarter, which has a significant impact on our floating rate debt. General andadministrative expenses increased in the fourth quarter of 2007 primarily due to the timing of thecosts and the impact of foreign exchange. Transaction costs related to debt defeasance in the thirdquarter represented a one-time break fee associated with the refinancing of debt on One LibertyPlaza in New York. The other transaction costs represent merger integration and employee transitioncosts resulting from the Trizec acquisition. The third quarter of 2007 also includes $4 million oftransaction costs related to the write-off of costs associated with a financing plan that thecompany elected not to implement. Non-controlling interests expense remained relatively consistentwith prior quarters. Depreciation and amortization has remained relatively consistent as well sincethe acquisition of the Trizec portfolio. Future income taxes decreased in the fourth quarter of2007 due to the revaluation of the future income tax liability associated with the U.S. OfficeFund. Net income increased in the fourth quarter of 2007 compared to the fourth quarter of 2006principally due to the increases in our commercial and residential operations and theaforementioned revaluation of our future tax liability, offset by increases in the expensesdiscussed above.
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**PART III – U.S. OFFICE FUND SUPPLEMENTAL INFORMATION**During 2006, we established and fully invested a U.S. Office Fund. This Fund was created as asingle purpose fund to acquire the Trizec portfolio. We successfully completed the acquisition ofthe Trizec portfolio, along with our joint venture partner, Blackstone, in the fourth quarter of2006 for $7.6 billion.The U.S. Office Fund now consists of 57 commercial properties totaling 29 million square feet andseven development and redevelopment sites totaling five million square feet in New York,Washington, D.C., Houston and Los Angeles. The following represents our portfolio:                                                                                       Brookfield                                   Brookfield  Other  Properties’   Number                          Owned  Properties’  Share-  Net   of  Leased          Total      Total  Interest  Owned  holder’s  Owned (Square feet in 000’s) Properties  %  Office  Retail  Leasable  Parking  Area  %  Interest(1)  Interests  Interest  **New York**                                            The Grace Building  1   97.2   1,499   20   1,519   —   1,519   49.9   758   (415)  343 One New York Plaza  1   98.7   2,426   33   2,459   —   2,459   100   2,459   (1,347)  1,112 Newport Tower  1   98.5   1,028   34   1,062   —   1,062   100   1,062   (582)  480 *1065 Avenue of the Americas*  1   81.8   625   40   665   —   665   99   658   (360)  298 *1411 Broadway*  1   88.4   1,074   39   1,113   36   1,149   49.9   573   (314)  259 *1460 Broadway*  1   92.0   206   9   215   —   215   49.9   107   (58)  49     **6**   **94.9**   **6,858**   **175**   **7,033**   **36**   **7,069**       **5,617**   **(3,076****)**  **2,541** **Washington, DC**                                            1200 K Street  1   100.0   366   24   390   44   434   100   434   (238)  196 1250 23rd Street  1   7.0   116   —   116   16   132   100   132   (72)  60 1250 Connecticut Avenue  1   99.9   152   20   172   26   198   100   198   (108)  90 1400 K Street  1   97.8   178   12   190   34   224   100   224   (123)  101 2000 L Street  1   93.6   308   75   383   —   383   100   383   (210)  173 2001 M Street  1   98.9   190   39   229   35   264   98   259   (142)  117 2401 Pennsylvania Avenue  1   93.6   58   19   77   16   93   100   93   (51)  42 Bethesda Crescent  3   99.5   241   27   268   68   336   100   336   (184)  152 One Reston Crescent  1   100.0   185   —   185   —   185   100   185   (101)  84 Silver Springs Metro Plaza  3   94.2   640   47   687   84   771   100   771   (422)  349 Sunrise Tech Park  4   95.8   315   1   316   —   316   100   316   (173)  143 Two Ballston Plaza  1   94.9   204   19   223   —   223   100   223   (122)  101 Victor Building  1   65.2   298   45   343   —   343   49.9   171   (93)  78 1550 & 1560 Wilson Blvd  2   67.2   226   32   258   76   334   100   334   (183)  151     **22**   **89.2**   **3,477**   **360**   **3,837**   **399**   **4,236**       **4,059**   **(2,222****)**  **1,837** **Houston**                                            Allen Center                                            One Allen Center  1   98.5   913   79   992   —   992   100   992   (544)  448 Two Allen Center  1   97.7   987   9   996   —   996   100   996   (546)  450 Three Allen Center  1   93.4   1,173   22   1,195   —   1,195   100   1,195   (655)  540 Cullen Center                                            Continental Center I  1   97.9   1,048   50   1,098   411   1,509   100   1,509   (826)  683 Continental Center II  1   86.6   428   21   449   81   530   100   530   (290)  240 KBR Tower  1   94.4   985   63   1,048   254   1,302   50   651   (357)  294 500 Jefferson Street  1   96.1   351   39   390   44   434   100   434   (237)  197     **7**   **95.6**   **5,885**   **283**   **6,168**   **790**   **6,958**       **6,307**   **(3,455****)**  **2,852** **Los Angeles**                                            601 Figueroa  1   67.9   1,037   2   1,039   123   1,162   100   1,162   (636)  526 Bank of America Plaza  1   92.1   1,383   39   1,422   343   1,765   100   1,765   (967)  798 Ernst & Young Tower  1   85.3   910   335   1,245   391   1,636   100   1,636   (896)  740 Landmark Square  1   94.2   420   23   443   212   655   100   655   (359)  296 Marina Towers  2   96.3   356   25   381   87   468   50   234   (128)  106 *5670 Wilshire Center*  1   92.7   390   19   409   —   409   100   409   (224)  185 *6060 Center Drive*  1   87.1   242   15   257   113   370   100   370   (203)  167 *6080 Center Drive*  1   96.6   288   —   288   163   451   100   451   (247)  204 *6100 Center Drive*  1   96.7   286   —   286   168   454   100   454   (249)  205 *701 B Street*  1   86.7   529   37   566   —   566   100   566   (310)  256 *707 Broadway*  1   77.5   181   —   181   128   309   100   309   (169)  140 *9665 Wilshire Blvd*  1   98.8   162   —   162   64   226   100   226   (124)  102 *Howard Hughes Spectrum*  1   100.0   37   —   37   —   37   100   37   (20)  17 *Howard Hughes Tower*  1   77.5   316   2   318   141   459   100   459   (251)  208 *Northpoint*  1   92.3   103   —   103   45   148   100   148   (81)  67 *Arden Towers at Sorrento*  4   85.7   548   54   602   —   602   100   602   (330)  272 *Westwood Center*  1   98.7   291   25   316   —   316   100   316   (173)  143 *World Savings Center*  1   94.5   464   14   478   161   639   100   639   (350)  289     **22**   **87.5**   **7,943**   **590**   **8,533**   **2,139**   **10,672**       **10,438**   **(5,717****)**  **4,721**  **TOTAL COMMERCIAL**  **57**   **91.7**   **24,163**   **1,408**   **25,571**   **3,364**   **28,935**       **26,421**   **(14,470****)**  **11,951**  *(1)* *Represents the company’s consolidated interestbefore non-controlling interests* *** *Italic – Blackstone Managed*
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                                               Brookfield               Brookfield      Properties’   Number      Owned  Properties’  Other  Net   of  Total  Interest  Owned  Shareholder’s  Owned (Square feet in 000’s) Sites  Area  %  Interest(1)  Interests  Interest  **Washington, D.C.**                        Reston Crescent  1   1,000   100   1,000   (548)  452 Waterview  1   300   25   75   (41)  34     **2**   **1,300**       **1,075**   **(589****)**  **486** **Houston**                        1500 Smith Street  1   800   100   800   (438)  362 Allen Center Garage  1   700   100   700   (383)  317 Allen Center Gateway  1   700   100   700   (383)  317     **3**   **2,200**       **2,200**   **(1,204****)**  **996**  **TOTAL DEVELOPMENT**  **5**   **3,500**       **3,275**   **(1,793****)**  **1,482** **REDEVELOPMENT**                        Four Allen Center, Houston  1   1,267   100   1,267   (694)  573 1225 Connecticut Avenue, Washington, D.C.  1   269   100   269   (147)  122                           **TOTAL DEVELOPMENT AND REDEVELOPMENT**  **7**   **5,036**       **4,811**   **(2,634****)**  **2,177**  *(1)* *Represents the company’s consolidated interest before non-controllinginterests*Our 45% economic interest in the Trizec portfolio was initially purchased for $857 million, afterthe assumption of debt and acquisition financing totaling $3.7 billion in the fourth quarter of2006.At December 31, 2007, the impact of our investment in the U.S. Office Fund on our consolidatedfinancial condition and results can be summarized as follows:                   Funds from Operations (Millions) Balance Sheet  **2007**  2006  Midtown New York, New York $1,266  **$****86**  $21 Downtown New York, New York  1,277   **99**   24 Washington, D.C.  1,137   **96**   26 Houston, Texas  930   **87**   22 Los Angeles, California  2,637   **175**   42     7,247   **543**   135 Property management and leasing fee income  —   **3**   — Development properties  414   —   —  Total book value / Net operating income  7,661   **546**   135 Property specific and subsidiary debt / Interest expense  (5,758)  **(386****)**  (96)Partner capital (debt and equity) / Interest expense and non-controlling interests  (955)  **(82****)**  (21) Total  948   **78**   18 Other assets (liabilities), net / Other income (expenses), net  (119)  **14**   2  Invested capital / Funds from operations(1) $829  **$****92**  $20  *(1)* *Fees paid by the Fund to Brookfield Properties are eliminated on consolidation. Forthe year ended December 31, 2007, a total of $31 million of fees were paid to Brookfield Properties(2006 — $7 million) which resulted in a reduction of non-controlling interests expense of $19million (2006 — $4 million) representing the net fees earned from partners*The U.S. Office Fund contributed $899 million and $216 million of commercial property revenue and$546 million and $135 million of net operating income during the year ended December 31, 2007 andDecember 31, 2006, respectively, as follows:         (Millions) **2007**  2006  Commercial property revenue        Revenue from current properties **$****737**  $174 Straight-line rental income  **40**   12 Intangible amortization  **122**   30  Total commercial property revenue  **899**   216 Property operating costs  **(353****)**  (81) Commercial property net operating income **$****546**  $135  
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**SUMMARY OF INVESTMENT**The following summarizes our investment in the U.S. Office Fund as at December 31, 2007:                                   Brookfield Properties’          Net Book   Number of  Total Area  Owned Interest  Book Value  Debt  Equity Region Properties  (000’s Sq. Ft.)  (000’s Sq. Ft.)(1)  (Millions)  (Millions)  (Millions)  **Commercial Properties**                        Midtown New York, New York  4   3,548   2,096  $1,266  $316  $950 Downtown New York, New York  2   3,521   3,521   1,277   397   880 Washington, D.C.  22   4,236   4,059   1,137   206   931 Houston, Texas  7   6,958   6,307   930   —   930 Los Angeles, California  22   10,672   10,438   2,637   427   2,210 Corporate U.S. Fund debt  —   —   —   —   4,156   (4,156)    57   28,935   26,421  $7,247  $5,502  $1,745 Office development sites  5   3,500   3,275   109   16   93 Redevelopment sites  2   1,536   1,536   305   240   65  **Total**  64   33,971   31,232  $7,661  $5,758  $1,903  *(1)* *Represents consolidated interest before non-controlling interests*Commercial property debt relating to the U.S. Office Fund totaled $5.8 billion at December 31,2007. The details are as follows:                             Brookfield               Properties’               Consolidated   Property Location Interest Rate %  Maturity Date  Share (Millions)  Mortgage Details 2000 L Street Washington, D.C.  6.26   2008  $56  Non-recourse, fixed rateBethesda Crescent Washington, D.C.  7.07   2008   33  Non-recourse, fixed rateTwo Ballston Plaza Washington, D.C.  6.91   2008   25  Non-recourse, fixed rate5670 Wilshire Los Angeles  6.35   2008   58  Non-recourse, floating rateWaterview(1) Washington, D.C.  7.20   2009   16  Non-recourse, floating rate1460 Broadway New York  5.11   2012   12  Non-recourse, fixed rateFour Allen Center(1) Houston  5.77   2013   240  Non-recourse, fixed rateThe Grace Building New York  5.54   2014   193  Non-recourse, fixed rate1411 Broadway New York  5.50   2014   111  Non-recourse, fixed rate2001 M Street Washington, D.C.  5.25   2014   45  Non-recourse, fixed rateBank of America Building Los Angeles  5.31   2014   235  Non-recourse, fixed rateErnst & Young Plaza Los Angeles  5.07   2014   113  Non-recourse, fixed rateOne New York Plaza New York  5.50   2016   397  Non-recourse, fixed rateVictor Building Washington, D.C.  5.39   2016   47  Non-recourse, fixed rateMarina Towers Los Angeles  5.84   2016   21  Non-recourse, fixed rateMezzanine debt —  7.53   2011   3,093  Non-recourse, floating rateCMBS Pool debt —  5.78   2011   594  Non-recourse, floating rateCMBS Pool debt —  6.83   2008/2011   469  Non-recourse, fixed rate Total    6.77      $5,758    *(1)* *Development debt*
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**PART IV – CANADIAN OFFICE FUND SUPPLEMENTAL INFORMATION**During 2005, we established and fully invested a Canadian Office Fund. This Fund was created as asingle purpose fund to acquire the O&Y portfolio. We successfully completed the acquisition of the O&Yportfolio in the fourth quarter of 2005 for $1.8 billion.The Canadian Office Fund, at the time of acquisition, consisted of 27 commercial propertiestotaling 11 million square feet in Toronto, Calgary, Ottawa, Edmonton and Winnipeg. However, certain ofthese properties were disposed of in the second quarter of 2006 and  throughout 2007 and the CanadianOffice Fund now consists of 13 commercial properties totaling7.8 million square feet primarily inToronto, Calgary, Ottawa and Edmonton.The following represents our Canadian Office Fund portfolio as of December 31, 2007:                                                                                       Brookfield                                   Brookfield  Other  Properties’   Number                          Owned  Properties’  Share-  Net   of  Leased          Total      Total  Interest  Owned  holder’s  Owned (Square feet in 000’s) Properties  %  Office  Retail  Leasable  Parking  Area  %  Interest(1)  Interests  Interest  **Toronto**First Canadian Place  1   98.4   2,379   232   2,611   170   2,781   25   695   (76)  619 2 Queen Street East  1   98.6   448   16   464   81   545   25   136   (15)  121 151 Yonge Street  1   94.7   289   10   299   72   371   25   93   (10)  83     **3**   **98.1**   **3,116**   **258**   **3,374**   **323**   **3,697**       **924**   **(101****)**  **823** **Calgary**Altius Centre  1   99.5   303   3   306   72   378   25   95   (11)  84     **1**   **99.5**   **303**   **3**   **306**   **72**   **378**       **95**   **(11****)**  **84** **Ottawa**Place de Ville I  2   99.8   569   18   587   502   1,089   25   272   (30)  242 Place de Ville II  2   98.6   591   19   610   433   1,043   25   261   (29)  232 Jean EdmondsTowers  2   99.7   540   13   553   95   648   25   162   (18)  144     **6**   **99.3**   **1,700**   **50**   **1,750**   **1,030**   **2,780**       **695**   **(77****)**  **618** **OtherCommercial**Canadian Western Bank,     Edmonton  1   98.7   375   31   406   91   497   25   124   (14)  110 Enbridge Tower, Edmonton  1   100.0   179   4   183   30   213   25   53   (6)  47 Acres House, Niagara Falls*(2)*  1   68.0   149   —   149   60   209   25   52   (5)  47     **3**   **93.0**   **703**   **35**   **738**   **181**   **919**       **229**   **(25****)**  **204**                                               **TOTAL COMMERCIAL**  **13**   **97.9**   **5,822**   **346**   **6,168**   **1,606**   **7,774**       **1,943**   **(214****)**  **1,729**  *(1)* *Represents the company’s consolidated interest before non-controlling interests* *(2)* *Classified as discontinued operations as at December 31, 2007*                                       Brookfield      Brookfield   Number      Owned  Properties’  Other  Properties’   of  Total  Interest  Owned  Shareholder’s  Net Owned (Square feet in 000’s) Sites  Area  %  Interest(1)  Interests  Brookfield  **Ottawa**300 Queen Street  1   577   25   144   (16)  128                           **TOTAL DEVELOPMENT**  **1**   **577**       **144**   **(16****)**  **128**  *(1)* *Represents the company’s consolidated interest before non-controlling interests*
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At December 31, 2007, the impact of our investment in the Canadian Office Fund on our consolidatedfinancial condition and results from continuing operations can be summarized as follows:                   Funds from Operations (Millions) Balance Sheet  **2007**  2006  Toronto, Ontario $267  **$****22**  $20 Calgary, Alberta  20   **3**   2 Ottawa, Ontario  102   **7**   7 Edmonton, Alberta and other  18   **3**   2     407   **35**   31 Development properties  3   —   —  Total book value / Net operating income  410   **35**   31 Property specific and subsidiary debt / Interest expense  (106)  **(9****)**  (8)    304   **26**   23 Other assets (liabilities), net / Other income (expenses), net  (63)  —   —  Net investment / Funds from operations prior to fee income  241   **26**   23 Fee income  —   **9**   7  Invested capital / Funds from operations $241  **$****35**  $30  The Canadian Office Fund contributed $81 million of commercial property revenue and $44 million ofnet operating income from continuing operations during the year ended December 31, 2007 (2006 – $71million and $38 million, respectively) as follows:             (Millions) **2007**  2006  2005  Commercial property revenue            Revenue from current properties **$****64**  $56  $18 Straight-line rental income  **1**   1   — Intangible amortization  **7**   7   9     **72**   64   27 Recurring fee income  **9**   7   1  Total commercial property revenue  **81**   71   28 Property operating costs  **(37****)**  (33)  (5) Commercial property net operating income **$****44**  $38  $23  **SUMMARY OF INVESTMENT**The following summarizes our investment in the Canadian Office Fund as at December 31, 2007:                                   Brookfield Properties’          Net Book   Number of  Total Area  Owned Interest  Book Value  Debt  Equity Region Properties  (000’s Sq. Ft.)  (000’s Sq. Ft.)(1)  (Millions)  (Millions)  (Millions)  **Commercial Properties**                        Toronto, Ontario  3   3,697   924  $267  $78  $189 Calgary, Alberta  1   378   95   20   —   20 Ottawa, Ontario  6   2,780   695   102   26   76 Other  2   710   177   18   2   16  Continuing Operations  12   7,565   1,891   407   106   301 Discontinued Operations (2)  1   209   52   3   —   3     13   7,774   1,943  $410  $106  $304 **Development sites**                        Ottawa, Ontario  1   577   144   3   —   3  **Total**  14   8,351   2,087  $413  $106  $307  *(1)* *Represents consolidated interest before non-controlling interests* *(2)* *Acres House, Niagara Falls is currently classified as a discontinued operation*Commercial property debt relating to the Canadian Office Fund totaled $106 million at December 31,2007. The details are as follows:                             Brookfield Properties’               Consolidated   Property Location Interest Rate %  Maturity Date  Share (Millions)  Mortgage Details First Canadian Place Toronto  8.06   2009  $66  Non-recourse, fixed ratePlace de Ville I Ottawa  7.81   2009   7  Non-recourse, fixed rateEnbridge Tower Edmonton  6.72   2009   2  Non-recourse, fixed rate151 Yonge Street Toronto  6.01   2012   12  Non-recourse, fixed rateJean Edmonds Tower Ottawa  5.55   2014   2  Non-recourse, fixed rateJean Edmonds Tower Ottawa  6.79   2024   17  Non-recourse, fixed rate Total    7.53      $106    
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**PART V – RISKS AND UNCERTAINTIES**Brookfield Properties’ financial results are impacted by the performance of our operations andvarious external factors influencing the specific sectors and geographic locations in which weoperate; macro-economic factors such as economic growth, changes in currency, inflation andinterest rates; regulatory requirements and initiatives; and litigation and claims that arise inthe normal course of business.Our strategy is to invest in premier assets which generate sustainable streams of cashflow. Whilehigh-quality assets may initially generate lower returns on capital, we believe that thesustainability and future growth of their cashflows is more assured over the long term, and as aresult, warrant higher valuation levels. We also believe that the high quality of our asset baseprotects the company against future uncertainty and enables us to invest with confidence whenopportunities arise.The following is a review of the material factors and the potential impact these factors may haveon the company’s business operations. A more detailed description of the business environment andrisks is contained in our Annual Information Form which is posted on our website.**PROPERTY RELATED RISKS****CommercialProperties**Our strategy is to invest in high-quality core office properties as defined by the physicalcharacteristic of the asset and, more importantly, the certainty of receiving rental payments fromlarge corporate tenants (with investment grade credit ratings – see “Credit Risk” below) whichthese properties attract. Nonetheless, we remain exposed to certain risks inherent in the coreoffice property business.Commercial property investments are generally subject to varying degrees of risk depending on thenature of the property. These risks include changes in general economic conditions (such as theavailability and costs of mortgage funds), local conditions (such as an oversupply of space or areduction in demand for real estate in the markets in which we operate), the attractiveness of theproperties to tenants, competition from other landlords with competitive space and our ability toprovide 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 or not a property isproducing sufficient income to service these expenses. Our core office properties are subject tomortgages which require substantial debt service payments. If we become unable or unwilling to meetmortgage payments on any property, losses could be sustained as a result of the mortgagee’sexercise of its rights of foreclosure or of sale. We believe the stability and long-term nature ofour contractual revenues effectively mitigates these risks.As owners and managers of premier office properties, lease roll-overs also present a risk factor,as continued growth of rental income is dependent on strong leasing markets to ensure expiringleases are renewed and new tenants are found promptly to fill vacancies. Refer below to “LeaseRoll-Over Risk” for further details.**Residential developments**The markets within our residential development and home building operations have been favorableover the past five years with strong demand for well located building lots, particularly inAlberta, Texas and Colorado. Our operations are concentrated in high growth areas which we believehave positive demographic and economic conditions. Nonetheless, the residential home building anddevelopment industry is cyclical and may be affected by changes in general and local economicconditions such as consumer confidence, job stability, availability of financing for home buyersand higher interest rates due to their impact on home buyers’ decisions. These conditions canaffect the outlook of consumers and, in particular, the price and volume of home purchases.Furthermore, we are subject to risks related to the availability and cost of materials and labor,supply and cost of building lots, and adverse weather conditions that can cause delays inconstruction schedules and cost overruns.**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 allow us to most effectively manage interest rate risk.As outlined under “Capital Resources and Liquidity,” beginning on page 30 of this MD&A, we have anon-going obligation to access debt markets to refinance maturing debt as it comes due. There is arisk that lenders will not refinance such maturing debt on terms and conditions acceptable to us,or on any terms at all. Our strategy to stagger the maturities of our mortgage portfolio attemptsto mitigate our exposure to excessive amounts of debt maturing in any one year.We have a floating rate bank credit facility of $500 million, the terms of which extend to 2009,and a floating rate term facility with Brookfield Asset Management Inc. of $300 million, the termsof which extend to 2008. At December 31, 2007, the balances drawn on these facilities were $251million and nil, respectively. We also have a floating rate term loan facility established at thetime of the Trizec acquisition, the terms of which extend to 2008. The balance drawn on thisfacility as at December 31, 2007 was $150 million. There is a risk that bank lenders will notrefinance these facilities on terms and conditions acceptable to us or on any terms at all. As amitigating
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factor, we intend to negotiate a one-year term extension option. Approximately 39% of the company’soutstanding commercial property debt at December 31, 2007 is floating rate debt (December 31, 2006– 43%) and subject to fluctuations in interest rates. The effect of a 25 basis point increase ininterest rates on interest expense relating to our floating rate debt, all else being equal, is anincrease in interest expense of $7 million (net of non-controlling interests) or approximately$0.02 per share, consistent with the prior year. Taking into account our floating rate residentialdevelopment debt and preferred shares issued by BPO Properties, a 25 basis point increase in rateswould increase interest expense by an additional $1 million, consistent with the prior year. Asdiscussed in the Derivative Financial Instruments section beginning on page 52, we have mitigatedto some extent the exposure to interest rate fluctuations through interest rate derivativecontracts.We currently have a level of indebtedness for the company of 65% of gross book value. It is ourview that such level of indebtedness is conservative given the lending parameters currentlyexisting in the real estate marketplace (generally 60% to 80% of current market value) and based onthis, we believe that all debts will be financed or refinanced as they come due in the foreseeablefuture.**CREDIT RISK**Credit risk arises from the possibility that tenants may be unable to fulfill their leasecommitments. We mitigate this risk by ensuring that our tenant mix is diversified and by limitingour exposure to any one tenant. We also maintain a portfolio that is diversified by property typeso that exposure to a business sector is lessened. Currently, no one tenant represents more than7.2% of total leasable area.We attempt to mitigate our credit risk by signing long-term leases with tenants who have investmentgrade credit ratings. Additional discussion of this strategy is included on page 14 of this MD&A.The following list shows the largest tenants by leasable area in our portfolio and their respectivelease commitments:                             Year of  000’s  % of  Credit    Tenant Location Expiry(1)  Sq. Ft.(2)  Sq. Ft.(2)  Rating(3)  1  Merrill Lynch(4) New York/Toronto/Denver/Los Angeles  2013   4,583   7.2% A+ 2  Government and Government Agencies(5) All Markets Various  3,060   4.8% AAA 3  Chevron U.S.A. Houston  2018   1,725   2.7% AA 4  CIBC New York/Toronto/Calgary  2031   1,701   2.7% A+ 5  Wachovia New York  2015   1,398   2.1% AA- 6  RBC Financial Group Five Markets  2018   1,152   1.8% AA- 7  Bank of Montreal Toronto/Calgary  2018   1,137   1.8% A+ 8  JP Morgan Chase Bank New York/Denver/Houston/Los Angeles  2020   928   1.5% AA- 9  Kellogg, Brown & Root Houston  2016   920   1.4% Not Rated 10  Petro-Canada Calgary  2013   897   1.4% BBB 11  Target Corporation Minneapolis  2014   865   1.4% A+ 12  Goldman Sachs New York  2011   865   1.4% AA- 13  Devon Energy Production Company Houston  2012   733   1.2% BBB 14  Continental Airlines Houston  2009   695   1.1% B 15  EnCana Corporation Calgary/Denver  2017   694   1.1% A- 16  Imperial Oil Calgary  2011   633   1.0% AAA 17  Talisman Energy Calgary  2015   527   0.8% BBB+ 18  Cadwalader, Wickersham & Taft New York  2024   519   0.8% Not Rated 19  Clearly, Gottlieb, Steen & Hamilton New York  2012   445   0.7% Not Rated 20  Amerada Hess Corporation Houston  2011   415   0.7% BBB-     Total        23,892   37.6%   *(1)* *Weighted average based on square feet* *(2)* *Prior to considering partnership interests in partially-owned properties* *(3)* *From S&P, Moody’s Investor Service or DBRS* *(4)* *Merrill Lynch occupies 2.6 million square feet with the balance leased to eight subtenants ranging in size from 40,000 square feet to 550,000 square feet* *(5)* *Represents various U.S. and Canadian federal governments and agencies*Because we invest in mortgages from time to time, further credit risks arise in the event thatborrowers default on the repayment of their mortgages to us. We endeavor to ensure that adequatesecurity has been provided in support of such mortgages.Credit risk related to residential receivables is mitigated by the fact that, in the majority ofcases, we retain title to the lots that are sold until the receivable balance is collected. In theremaining cases, exposure to credit risk is managed by securing the lots that are sold, which canultimately be taken back if receivables are not paid.
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**LEASE ROLL-OVER RISK**Lease roll-over risk arises from the possibility that we may experience difficulty renewing leasesas they expire or in releasing space vacated by tenants upon early lease expiry. We attempt tostagger the lease expiry profile so that we are not faced with disproportionate amounts of spaceexpiring in any one year; approximately 5% of our leases mature annually. We further mitigate thisrisk by maintaining a diversified portfolio mix by geographic location and by proactively leasingspace in advance of its contractual expiry. Additional discussion of our strategy to manage leaseroll-over risk can be found on page 14 of this MD&A.The following table sets out lease expiries, by square footage, for our portfolio at December 31,2007:                                               Currently                              2015       (000’s Sq. Ft.) Available  2008  2009  2010  2011  2012  2013  2014  & Beyond  Parking  Total  Midtown New York  316   359   343   344   164   388   727   217   3,440   36   6,334 Downtown New York  101   121   251   176   649   394   4,452   389   6,368   281   13,182 Boston  66   102   160   175   394   47   30   20   893   276   2,163 Washington, D.C.  415   417   544   296   192   576   197   1,126   1,769   970   6,502 Los Angeles  1,065   692   558   833   943   1,365   737   565   1,775   2,139   10,672 Houston  341   590   165   958   665   999   690   375   2,229   838   7,850 Toronto  187   372   577   682   579   951   1,477   130   3,869   1,519   10,343 Calgary  14   127   304   421   1,383   497   1,337   98   1,500   1,023   6,704 Ottawa  11   91   36   2   —   6   1,055   9   540   1,030   2,780 Denver  33   30   19   104   93   85   138   130   660   503   1,795 Minneapolis  190   49   222   61   38   174   653   135   965   521   3,008 Other  71   25   71   214   172   112   99   22   614   445   1,845  Total  2,810   2,975   3,250   4,266   5,272   5,594   11,592   3,216   24,622   9,581   73,178    4.4%  4.7%  5.1%  6.7%  8.3%  8.8%  18.2%  5.1%  38.7%      100.0% **ENVIRONMENTAL RISKS**As an owner of real property, we are subject to various federal, provincial, state and municipallaws relating to environmental matters. Such laws provide that we could be liable for the costs ofremoving certain hazardous substances and remediating certain hazardous locations. The failure toremove or remediate such substances or locations, if any, could adversely affect our ability tosell such real estate or to borrow using such real estate as collateral and could potentiallyresult in claims against us. We are not aware of any material non-compliance with environmentallaws at any of our properties nor are we aware of any pending or threatened investigations oractions by environmental regulatory authorities in connection with any of our properties or anypending 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 arecompliant with environmental laws and regulations. Although there can be no assurances, we do notbelieve that costs relating to environmental matters will have a materially adverse effect on ourbusiness, financial condition or results of operation. However, environmental laws and regulationscan change and we may become subject to more stringent environmental laws and regulations in thefuture, which could have an adverse effect on our financial condition or results of operation.**OTHER RISKS AND UNCERTAINTIES**Real estate is relatively illiquid. Such illiquidity may limit our ability to vary our portfoliopromptly in response to changing economic or investment conditions. Also, financial difficulties ofother property owners resulting in distressed sales could depress real estate values in the marketsin which we operate.Our commercial properties generate a relatively stable source of income from contractual tenantrent payments. Continued growth of rental income is dependent on strong leasing markets to ensureexpiring leases are renewed and new tenants are found promptly to fill vacancies.While the outlook for commercial office rents is positive in the long term, 2008 may not providethe same level of increases in rental rates on renewal as compared to previous years. We are,however, substantially protected against short-term market conditions, as most of our leases arelong-term in nature with an average term of seven years. A protracted disruption in the economy,such as the onset of a severe recession, could place downward pressure on overall occupancy levelsand net effective rents.The Terrorism Risk Insurance Act (“TRIA”) was enacted in November 2002 in response to theuncertainty surrounding the insurance market in the aftermath of the terrorist attacks of September11, 2001 and provides protection for “certified acts” as defined by the statute. TRIA mandates thatinsurance carriers offer insurancecovering physical damage from terrorist incidents as certified by the U.S. On December 22, 2005,the Terrorism Risk Insurance Extension Act of 2005 (the “Extension Act”) was enacted, whichextended the duration of the Terrorism Risk Insurance Program until December 31, 2007. TheTerrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) was signed into law onDecember 26, 2007. It extends the TRIA program through December 31, 2014. TRIPRA effectivelycontinues the Extension Act while removing the distinction between foreign and domestic acts ofterrorism, among other provisions.
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Our current property insurance includes coverage for certified act of terrorism up to $500 millionper occurrence and in the aggregate. We also purchase stand-alone terrorism insurance which coversnon-certified acts. As our policies renew throughout the year, we will continue to monitor theinsurance market so as to avail ourselves of the most comprehensive coverage on the mosteconomically reasonable basis.In December 2005, we formed a wholly-owned captive insurance company, Realrisk Insurance Corp.Effective January 1, 2008 Realrisk provides $1 billion in TRIA coverage in addition to that whichis contained in our third party insurance program. It also provides protection against losses duesolely to biological, chemical or radioactive contamination arising out of a certified terroristact. In the event of a covered loss in 2008, we expect our captive insurance company to recover 85%of its losses, less certain deductibles, from the United States government. We will be required tofund the remaining 15% of a covered loss.As a result of the merger with Trizec Properties, Inc. we acquired two wholly-owned captiveinsurance companies: Chapman Insurance LLC and Concordia Insurance LLC. Coverage for certified actsof terrorism for those buildings that we manage is contained in the applicable terrorism insuranceprogram, for limits of $100 million. Effective January 1, 2007, Chapman and Concordia provide up to$400 million of TRIA coverage in addition to the $100 million mentioned above. The coverageprovided by Chapman and Concordia also provides protection against losses due solely to biological,chemical, or radioactive contamination arising out of a certified terrorist act. In the event of acovered loss in 2008, we expect these captive insurance companies to recover 85% of their losses,less certain deductibles, from the Unites States government. We will be required to fund theremaining 15% of a covered loss.Third party insurers also provide Brookfield with limits up to $700 million in “Stand Alone”coverage for the entire portfolio.**FOREIGN EXCHANGE FLUCTUATIONS**Approximately 21% of our assets and 40% of our revenues originate in Canada and consequently aresubject to foreign currency risk due to potential fluctuations in exchange rates between theCanadian dollar and the U.S. dollar. To mitigate this risk, we attempt to maintain a hedgedposition with respect to the carrying value of net assets denominated in Canadian dollars throughdebt agreements denominated in Canadian dollars and through the use of financial contracts asdiscussed below. However, even if we do so, the carrying value may not equal the economic value,and any differences therein may not be hedged. In addition, we attempt to mitigate the currencyrisk of revenues denominated in Canadian dollars through similar means. At December 31, 2007, basedon our net Canadian dollar funds from operations, a $0.01 appreciation in the Canadian dollarrelative to the U.S. dollar would result in an increase in our funds from operations ofapproximately $3 million on an annual basis.**DERIVATIVE FINANCIAL INSTRUMENTS**We utilize derivative financial instruments primarily to manage financial risks, including interestrate, commodity, equity price and foreign exchange risks. Hedge accounting is applied where thederivative is designated as a hedge of a specific exposure and there is reasonable assurance thehedge will be effective in offsetting an identified risk. Realized and unrealized gains and losseson forward exchange contracts designated as hedges of currency risks are included in othercomprehensive income when the currency risk being hedged relates to a net investment in aself-sustaining subsidiary. Otherwise, realized and unrealized gains and losses on the effectiveportion of derivative financial instruments designated as cashflow hedges of financial risks arerecorded in other comprehensive income and reclassified to income in the period the underlyinghedged item impacts income.Derivatives that are not designated as hedges are carried at estimated fair values and gains andlosses arising from changes in fair values are recognized in income as a component of interest andother income or general and administrative expense, depending on the type of derivative, in theperiod the changes occur. The use of non-hedging derivative contracts is governed by documentedrisk management policies and approved limits.At December 31, 2007, our use of derivative financial instruments was limited to the transactionsidentified below. Unrealized gains and losses, representing the fair value of such contracts, aredetermined in reference to the appropriate interest rate curve or forward exchange rate for eachcontract at December 31st and are reflected in receivables and other assets or accountspayable and other liabilities, as appropriate, on the balance sheet.In 2006, we entered into a series of interest rate cap contracts that are designated as hedges ofinterest rate exposure associated with variable rate debt issued in October 2006 in connection withthe acquisition of Trizec. At December 31, 2007, there were contracts outstanding to cap theinterest rate on a notional $3.1 billion of variable rate debt at 6.0% and $600 million of variablerate debt at 7.0% for a period of two years. The contracts have been recorded at fair value inreceivables and other with changes in fair value reported in other comprehensive income for theeffective portion of the hedge. Gains or losses associated with the caps are reclassified fromaccumulated other comprehensive income to interest expense in the periods the hedged interestpayments occur. The ineffective portion of the change in fair value of these hedges recognized innet income is nil. The fair value of thecontracts at December 31, 2007 was nil. The cost of these contracts was $2.3 million. In September2007, we de-designated hedge relationships associated with $350 million of the interest rate capsas they were no longer eligible for hedge accounting. The cumulative loss associated with thede-designated contracts will be amortized out of accumulated other comprehensive income to interestexpense as the previously hedged interest payments occur. Subsequent changes in fair value of thede-designated contracts will be recorded in interest expense as they occur.
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In June 2007, we entered into a forward-starting interest rate swap to hedge the interest rate riskassociated with the anticipated issuance of fixed rate debt. The forward-starting swap hedges anotional $350 million of fixed rate debt issuance at a rate of 5.824%. The fair value of thiscontract at December 31, 2007 was a loss of $33 million. The swaps have been recorded in accountspayable and other liabilities and the effective portion of the change in fair value has beenrecorded in other comprehensive income. The loss on the interest rate swaps will be reclassified tointerest expense as the hedged interest payments occur.In July 2007, we entered into a forward starting interest rate swap to hedge the risk associatedwith debt of $700 million that was issued in August 2007. The contract was settled in August 2007for a loss of $15 million. The loss was recorded in other comprehensive income and will beamortized to interest expense over the term of the hedged debt.In September 2007, the company entered into a total return swap under which it receives the returnson a notional 966,000 Brookfield Properties Corporation common shares as an economic hedge of itsexposure to variability in share price under the Deferred Share Unit program. The fair value of thetotal return swap was $2 million and the change in fair value has been recorded in general andadministrative expense.At December 31, 2007, we had foreign exchange contracts to sell a notional amount of C$800 million,maturing in March 2008, designated as hedges for accounting purposes to manage our foreign exchangerisk in respect to our Canadian-denominated net investments in self-sustaining subsidiaries. Thefair value of these contracts at December 31, 2007 resulted in no gain or loss. Our self-sustainingsubsidiaries also had foreign exchange contracts to sell a notional amount of US$21 million,maturing in March 2008, which have not been designated as hedges for financial reporting purposes.The fair value of these contracts at December 31, 2007 resulted in no gain or loss.The primary risks associated with our use of derivatives are credit risk and price risk. Creditrisk is the risk that losses will be incurred from the default of the counterparty on itscontractual obligations. The use of derivative contracts is governed by documented risk managementpolicies and approved limits, which includes an evaluation of the creditworthiness ofcounterparties, as well as managing the size, diversification and maturity of the portfolio. Pricerisk is the risk that we will incur losses from derivatives from adverse changes in foreignexchange rates, interest rates or share prices. We mitigate price risk by entering only intoderivative transactions where we have determined a significant offset exists between changes in thefair value of, or the cashflows attributable to, the hedged item and the hedging item.
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**PART VI – CRITICAL ACCOUNTING POLICIES AND ESTIMATES****CHANGES IN ACCOUNTING POLICIES**********