##### 



Brookfield Properties Corporation 2004 Annual Report




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##### 



Financial Results (BAR CHARTS)




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##### 



Brookfield Properties Corporation Brookfield Properties Corporation is committed to building shareholder value by investing in
premier quality office properties and actively managing our assets to maximize return on capital. Our focused strategy of investing in high-growth markets, pro-actively leasing to top-tier tenants,
along with disciplined asset and capital management programs, has enabled us to produce
consistently strong results throughout economic cycles, delivering long-term growth for
shareholders. Selected Financial Highlights(1) All amounts expressed in US dollars unless otherwise noted (Millions, except per share information)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Results of operationsCommercial property net operating
income and gains
    
    $
    743
    
    
    $
    697
    
    
    $
    660
    
    
    $
    672
    
    
    $
    611Funds from operations and gains
    
    
    501
    
    
    
    460
    
    
    
    374
    
    
    
    334
    
    
    
    268Net income
    
    
    242
    
    
    
    279
    
    
    
    236
    
    
    
    202
    
    
    
    140Return on equity
    
    
    22.7
    %
    
    
    23.3
    %
    
    
    20.2
    %
    
    
    18.7
    %
    
    
    16.1
    %Per diluted common shareFunds from operations and gains
    
    $
    2.93
    
    
    $
    2.78
    
    
    $
    2.18
    
    
    $
    1.92
    
    
    $
    1.56Funds from operations excluding
straight-line rent,
lease termination income and gains
    
    
    2.41
    
    
    
    2.15
    
    
    
    1.87
    
    
    
    1.63
    
    
    
    1.45Net income
    
    
    1.28
    
    
    
    1.63
    
    
    
    1.34
    
    
    
    1.12
    
    
    
    0.76Dividends
    
    
    0.62
    
    
    
    2.50
    (2)
    
    
    0.40
    
    
    
    0.33
    
    
    
    0.25Book value
    
    
    13.19
    
    
    
    12.31
    
    
    
    11.07
    
    
    
    10.27
    
    
    
    10.06Closing market price  NYSE
    
    
    37.40
    
    
    
    28.70
    
    
    
    18.20
    
    
    
    15.45
    
    
    
    16.35Financial positionTotal assets
    
    $
    8,491
    
    
    $
    8,097
    
    
    $
    7,450
    
    
    $
    7,419
    
    
    $
    8,123Capital base
    
    
    3,254
    
    
    
    2,997
    
    
    
    2,433
    
    
    
    2,353
    
    
    
    2,390Fully diluted common shareholders
equity
    
    
    2,093
    
    
    
    1,965
    
    
    
    1,819
    
    
    
    1,691
    
    
    
    1,682
   (1)
    
    Excludes Brookfield Homes Corporation which was distributed to common shareholders on
January 6, 2003(2)
    
    Includes the distribution of Brookfield Homes Corporation valued at $2.00 per common
share 1




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Ric Clark, President and Chief Executive Officer, Brookfield Properties Corporation We take great pride in our accomplishments during 2004 and we remain excited about Brookfields
future. (BROOKFIELD PORTFOLIO) 2




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Dear Shareholders, 2004 was another year of solid financial and operating performance for Brookfield. It was a
year in which our revenue grew, our funds from operations grew  in fact our funds from operations
per share excluding gains and accounting changes grew by 12%, the seventh uninterrupted year of
double digit growth  our vacancy declined and our common share price increased meaningfully. We take great pride in our accomplishments during 2004 given the challenging market and
economic conditions that prevailed in most of our markets for the fourth consecutive year.
Achieving record results under these circumstances was the product of our diligent investment
strategy, the execution of our proven business model that maximizes performance throughout business
cycles, and the efforts of our pro-active and motivated management team. We closed the year with an encouraging amount of positive momentum and improving market
conditions in virtually all of our primary markets. Our U.S. and Canadian operations worked hard during the year to accomplish the major goals
that we established, not only achieving strong results but positioning us well to capitalize on the
improving economy and market conditions moving forward. Highlights of 2004  

Generated record funds from operations and gains of $501 million or $2.93 per share,
up from $460 million or $2.78 per share during 2003.

Generated record funds from operations excluding straight-line rent, lease
termination income and gains of $420 million or $2.41 per share, up from $361 million or
$2.15 per share during 2003.

Achieved a 20% return on equity, excluding gains.

Leased 3.6 million square feet of space during the year versus 900,000 square feet of expiries.

Participated in three of the largest office deals in North America: an 800,000 square
foot sublease to PricewaterhouseCoopers at 300 Madison Avenue in New York City; a 460,000
square foot lease to Cadwalader, Wickersham & Taft at One World Financial Center in New
York City; and a 331,000 square foot lease to the Canadian Imperial Bank of Commerce at
the Atrium on Bay property in Toronto.

Lowered portfolio vacancy by 110 basis points to 4.8% and 2005 portfolio rollover
exposure by 270 basis points from 7.2% to 4.5%.

Generated approximately $1 billion of liquidity consisting of free cash flow,
nonstrategic asset sales, preferred share issuances and other financing activities.

Redeployed this capital through acquisitions, purchasing
1.4 million of our common shares, repayment of more costly debt and preferred shares, and by making various other
real estate investments.

Expanded to a three-building, 1.6 million square foot portfolio in Washington, D.C.
with the acquisition of two additional properties, 701 9th Street in the District and
Potomac Tower in Rosslyn, V.A.

Realized a total return to shareholders of 33%, including a $9 increase in share
price to $37.40. As investors continued to view real estate stocks as an attractive
investment, the entire sector experienced multiple expansion and resulting share price
appreciation. From a financial performance standpoint, Brookfield in particular was a
stand-out among the group, given our double digit growth in funds from operations per
share.

Continued to improve corporate governance practices, building upon the initiatives
that we
undertook in 2002 and 2003. For 2004, our Board of Directors instituted a formal procedure
for evaluating Board and Committee performance and introduced the requirement that each
member of the board own a minimum amount of equity in the company. Outlook As we enter the new year and plan our affairs for 2005, we are encouraged by the positive signs
that we are seeing. In the supply-constrained markets in which we are primarily invested, we see an
increase in tenant demand, particularly for high quality office properties such as the ones that we
own. Most economic indicators such as corporate profits, investment and gross domestic product are
improving. Job growth data even suggests a modest recovery. Sustained job growth is, of course, the
key to a bright future and, for the first time in four years, the economy is moving in the right
direction. Internally, it is interesting to note that 3




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one quarter of our leasing activity during 2004, 855,000 square feet, was to our existing tenants
looking to accommodate internal expansion. In contrast, we leased 300,000 square feet of expansion
space to tenants in each of 2003 and 2002, a trend that may well indicate that businesses are again
focusing on facilitating top-line growth. As we begin to emerge from four years of tough market fundamentals, we are heartened by the
fact that relative to past market cycles, the vacancy rates in our primary markets are
significantly lower than at the same point in past cycles. Using the Manhattan market as an
example, a market which represents 56% of Brookfields net operating income, the overall vacancy
rate peaked at 18.5% at the bottom of the last cycle. Although vacancy peaked at 12.5% thirteen
months ago, today it stands at 11.1%, 110 basis points from what most believe is the equilibrium
point, where rental rates spike and transaction costs narrow. We view this disparity as very meaningful and believe that as our primary markets continue to
improve, development will play an important role in facilitating business expansion. As such,
monetizing the six million square feet of office development inventory that we own and control will
be an important contributor to our future growth. Of course, we will continue to approach
development on a measured risk/reward basis. On the acquisition front, investor demand for well-leased, high quality office properties
strengthened as the year progressed. While this makes our properties even more valuable, it also
means that accretive acquisitions that meet our investment criteria are even harder to find. To
stay competitive, we are sourcing acquisitions with joint venture partners who are looking to team
up with experienced operators. This approach enhances our returns through fees earned in exchange
for our expertise. Although there is ample reason to be optimistic about the future, and we are, it would be
imprudent to depart from our disciplined, focused strategy to property management and investing.
For 2005, our strategic plan remains virtually the same as the objectives we shared with you last
year with a specific emphasis on four principle themes: sign leases in advance of maturities;
aggressively and prudently invest our ample liquidity; acquire our common shares which we believe
remain undervalued; and as our core markets rebound, capitalize on our development inventory and
expand our development capabilities. Dividend Policy Brookfields dividend policy has always been based on the belief that free cash flow should be
utilized to grow the business, repurchase shares, and pay prudent sustainable dividends to
shareholders at a level that is reflective of the companys operating cash flows. The allocation of
liquidity among these three categories is determined after a careful evaluation of all relevant
factors with an aim to maximize value for shareholders over the long term. As Brookfield has benefited from substantial tax losses over the years, it has made sense for
the company to reinvest the majority of our liquidity in activities designed to grow the business.
In order to expand the appeal of Brookfield common shares to a wider audience, we are raising our
quarterly dividend by 70%, and are distributing to shareholders one common share for every two
shares held. This dividend increase is a reflection of our faith in the strength of Brookfields underlying
business as leasing markets recover across North America. In Closing In closing, we are encouraged by the positive economic signs that we are seeing and believe
that Brookfields sound strategy, strong balance sheet and desirable, high quality properties
position us well to both capitalize upon opportunities that arise as the economy continues to
strengthen and to deliver industry leading results. We also pay tribute to John Bud McCaig, a board member since 1995 and one of our great
mentors, who passed away last month after a remarkable life as an entrepreneur, business leader,
and philanthropist. Bud was an inspiration to us all and he will be deeply missed. On behalf of the management and Board of Directors, we remain excited about Brookfields
future and thank you for your continued support. -s- Richard B. Clark Richard B. ClarkPresident and Chief Executive Officer
February 9, 2005 4




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(PIE CHARTS) 5




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1995
    
    
    
    1996
    
    
    
    1997
    
    
    
    1998
    
    
    
    1999NET OPERATING
INCOME AND GAINS
(MILLIONS)
    
    
    $103
    
    
    
    $174
    
    
    
    $346
    
    
    
    $506
    
    
    
    $569PORTFOLIO SIZE
(SQ. FT., MILLIONS)
    
    
    23
    
    
    
    26
    
    
    
    32
    
    
    
    34
    
    
    
    33MILESTONES
    
    The Brookfield
Development
Corporation included:Toronto
Bay Wellington Tower,
TD Canada Trust Tower,
BCE PlaceDenver
Republic Plaza,
Trade Center,
Colorado State Bank
BuildingMinneapolis
Dain Plaza,
33 South Sixth Street
Residential Operations:
Carma Corporation
(Land development)
Brookfield Homes
    
    Acquired a 46% interest
in Brookfield Financial
Properties, formerly
Olympia & York U.S.A.,
including:New York
One, Two and Four
World Financial Center,
One Liberty Plaza,
245 Park AvenueBoston
53 State Street
Other acquisitions:Calgary
Fifth Avenue PlaceToronto
20% interest in
Atrium on Bay
    
    Acquired an additional
24% interest in
Brookfield Financial
Properties.
Acquired a 45% interest
in BPO Properties, formerly Gentra, including:Toronto
HSBC Building
Other acquisitions:Toronto
Exchange Tower Block,
Queens Quay TerminalBoston
75 State Street
    
    Acquired an additional
19% interest in
Brookfield Financial
Properties bringing total
ownership to 89%.
Other acquisitions:Calgary
Acquired a 50% interest
in Petro-Canada Centre
    
    Began trading on the
New York Stock
Exchange
 6




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2000
    
    
    2001
    
    
    
    2002
    
    
    
    2003
    
    
    
    2004$611
    
    
    $672
    
    
    
    $660
    
    
    
    $697
    
    
    
    $74346
    
    
    45
    
    
    
    46
    
    
    
    46
    
    
    
    46Increased ownership in
BPO Properties to 87%New York
Acquired 300 Madison
Avenue development
site in Midtown
Manhattan and
commenced constructionBoston
Sold a 49% interest
in 53 State Street and
75 State StreetCalgary
Acquired Bankers Hall complex
    
    Toronto
Acquired a 50% joint
venture interest in the
Bay-Adelaide Centre
Acquired a 25% interest
in Hudsons Bay Centre
development siteCalgary
Sold a 50% interest in
Fifth Avenue PlaceVancouver
Acquired Royal Centre
    
    New York
Acquired a 100%
interest in 51% of Three
World Financial CenterToronto
Sold a 50% interest in
Exchange Tower
Acquired an additional
30% interest in Atrium
on BayCalgary
Sold a 50% interest in
Bankers Hall complex
Acquired a 20% interest
in Gulf Canada Square
    
    Increased ownership in
Brookfield Financial
Properties to 99%
Increased ownership in
BPO Properties to 89%
Spun off Brookfield
HomesNew York
300 Madison Avenue
development completed
Sold a 49% interest in
245 Park AvenueWashington, D.C.
Acquired 1625 Eye
Street, N.W.
    
    Washington, D.C.
Acquired 701 Ninth
Street, N.W., and
Potomac TowerToronto
Completed Hudsons
Bay Centre
developmentCalgary
Sold 20% interest
in Gulf Canada Square
 A Decade of Growth: Building the Portfolio 7




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Premier Office Properties From the World Financial Center in New York to BCE Place in Toronto, from Bankers Hall in
Calgary to Exchange Place in Boston, Brookfields portfolio is distinguished by the quality and
prime location of its landmark properties. Our strategy is to acquire well-located, modern office
buildings in high-growth markets that are attractive to large users of space. Our primary markets
have strong local economies that produce stable demand for office space and high barriers to entry
 both physical and regulatory  that protect the supply of new office development and give them an
edge during market cycles. During peak periods, high quality assets foster maximum demand and lower
vacancy and rollover rates, and during periods of weak demand, a flight to quality ensures these
assets remain well-leased. We continue to seek out opportunities to expand our presence further in
our primary markets and select new markets. (VACANCY BAR CHART) 8




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Portfolio Attributes  

46 properties and development sites

46 million square feet

95.2% occupancy Premier Asset Qualities  

Central business district locations

Technologically-advanced Class A properties

Diverse, high-quality tenant base Primary Market Characteristics  

High-growth cities

Strong local economies

Supply-constrained with barriers to entry from left to right:
The World Financial Centernew york Four unique office towers, extensive public spaces and the spectacular Winter Garden comprise the
eight-million square foot World Financial Center on the Hudson River. BCE Placetoronto The landmark towers are located in the heart of the financial district, home to the worlds most
prestigious financial, commercial and legal firms, as well as the Hockey Hall of Fame. Bankers Hallcalgary Encompassing an entire city block, Bankers Hall is the focal point of downtown Calgary. Two
47-story office towers are joined by a
spectacular four-level, sky-lit retail gallery. 75 & 53 State Streetboston Modern and elegant, 75 State Street (front) and 53 State Street (back, also known as Exchange
Place), are located on the street considered long renowned as the financial center of New England. 9




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Pro-Active Asset Management from left to right: The Great Hall, 75 State Streetboston An abundance of natural light accents the multi-hued patterns of marble and wood in this welcoming
space. Winter Garden, The World Financial Centernew york A favorite cultural venue, the enormous indoor sanctuary features 16 palm trees and a ten-story
barrel-vaulted glass ceiling. Bankers Hall Atriumcalgary The airy four-level retail gallery is capped by an angled eight-story high glass roof. Allen Lambert Galleria, BCE Placetoronto Under soaring arches, a sun-splashed streetscape provides a dramatic focal point to the citys
bustling financial district. Brookfield believes that investing in top-quality properties in stable, high-growth markets
backed by pro-active asset management and conservative capitalization produces both long-term
growing cash flow streams and low-risk leverage at the asset level. With an occupancy rate of 97.3%
in our primary markets and 95.2% throughout the overall portfolio, our tenant roster continues to
be distinguished by diversified, high credit quality corporations, the majority of which have
investment-grade ratings. These top financial and energy sector companies, along with governmental
organizations, are drawn to Brookfields premier portfolio, utilizing large blocks of space and
maintaining leases of significant duration. Brookfields industry-leading long-term lease profile
is characterized by a ten-year average term, low vacancy and minimal lease maturities, thus
limiting market risk. In 2004, we leased 3.6 million square feet, four times the amount
contractually expiring. 10




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Lease Maturities Brookfield has a strong track record of active asset management. We have leased
approximately 22 million square feet of space since 1999 with an average lease term across the
portfolio of ten years, and minimal near-term lease expiries as noted below: Currently
    
    
    Leases Maturing In:
    
    
    TotalAvailable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2012 &
    
    
    LeasableCity
    
    (000s sq. ft.)
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Beyond
    
    
    AreaNew York
    
    
    196
    
    
    
    304
    
    
    
    231
    
    
    
    75
    
    
    
    252
    
    
    
    75
    
    
    
    487
    
    
    
    193
    
    
    
    9,408
    
    
    
    11,221Boston
    
    
    60
    
    
    
    161
    
    
    
    264
    
    
    
    60
    
    
    
    376
    
    
    
    15
    
    
    
    169
    
    
    
    367
    
    
    
    691
    
    
    
    2,163Washington, D.C.
    
    
    67
    
    
    
    6
    
    
    
    
    
    
    
    36
    
    
    
    18
    
    
    
    10
    
    
    
    18
    
    
    
    47
    
    
    
    1,355
    
    
    
    1,557Toronto
    
    
    268
    
    
    
    511
    
    
    
    307
    
    
    
    326
    
    
    
    316
    
    
    
    441
    
    
    
    534
    
    
    
    535
    
    
    
    3,552
    
    
    
    6,790Calgary
    
    
    84
    
    
    
    98
    
    
    
    185
    
    
    
    119
    
    
    
    278
    
    
    
    116
    
    
    
    497
    
    
    
    1,375
    
    
    
    3,579
    
    
    
    6,331Subtotal
    
    
    675
    
    
    
    1,080
    
    
    
    987
    
    
    
    616
    
    
    
    1,240
    
    
    
    657
    
    
    
    1,705
    
    
    
    2,517
    
    
    
    18,585
    
    
    
    28,062% of Total
    
    
    2.2
    %
    
    
    3.5
    %
    
    
    3.2
    %
    
    
    2.0
    %
    
    
    4.1
    %
    
    
    2.1
    %
    
    
    5.6
    %
    
    
    8.2
    %
    
    
    50.7
    %
    
    
    81.6
    %Denver
    
    
    360
    
    
    
    237
    
    
    
    170
    
    
    
    180
    
    
    
    559
    
    
    
    159
    
    
    
    229
    
    
    
    150
    
    
    
    973
    
    
    
    3,017Minneapolis
    
    
    353
    
    
    
    60
    
    
    
    177
    
    
    
    83
    
    
    
    76
    
    
    
    122
    
    
    
    27
    
    
    
    16
    
    
    
    2,094
    
    
    
    3,008Other
    
    
    64
    
    
    
    10
    
    
    
    57
    
    
    
    72
    
    
    
    29
    
    
    
    47
    
    
    
    56
    
    
    
    25
    
    
    
    567
    
    
    
    927Subtotal
    
    
    777
    
    
    
    307
    
    
    
    404
    
    
    
    335
    
    
    
    664
    
    
    
    328
    
    
    
    312
    
    
    
    191
    
    
    
    3,634
    
    
    
    6,952% of Total
    
    
    2.6
    %
    
    
    1.0
    %
    
    
    1.3
    %
    
    
    1.1
    %
    
    
    2.1
    %
    
    
    1.1
    %
    
    
    1.0
    %
    
    
    0.7
    %
    
    
    7.5
    %
    
    
    18.4
    %Total
    
    
    1,452
    
    
    
    1,387
    
    
    
    1,391
    
    
    
    951
    
    
    
    1,904
    
    
    
    985
    
    
    
    2,017
    
    
    
    2,708
    
    
    
    22,219
    
    
    
    35,014% of Total
    
    
    4.8
    %
    
    
    4.5
    %
    
    
    4.5
    %
    
    
    3.1
    %
    
    
    6.2
    %
    
    
    3.2
    %
    
    
    6.6
    %
    
    
    8.9
    %
    
    
    58.2
    %
    
    
    100.0
    %
 11




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##### 



Portfolio by City Effective
    
    
    BrookfieldsOwnership
    
    
    EffectiveNumber of
    
    
    Leased
    
    
    Office
    
    
    Retail/Other
    
    
    Leasable Area
    
    
    Interest
    
    
    InterestProperties
    
    
    %
    
    
    000s Sq. Ft.
    
    
    000s Sq. Ft.
    
    
    000s Sq. Ft.
    
    
    %
    
    
    000s Sq. Ft.New YorkWorld Financial CenterOne
    
    
    1
    
    
    
    99.8
    
    
    
    1,520
    
    
    
    108
    
    
    
    1,628
    
    
    
    100
    
    
    
    1,628Two
    
    
    1
    
    
    
    100.0
    
    
    
    2,455
    
    
    
    36
    
    
    
    2,491
    
    
    
    100
    
    
    
    2,491Four
    
    
    1
    
    
    
    100.0
    
    
    
    1,711
    
    
    
    89
    
    
    
    1,800
    
    
    
    51
    
    
    
    917Retail
    
    
    
    
    
    
    65.0
    
    
    
    
    
    
    
    295
    
    
    
    295
    
    
    
    100
    
    
    
    295One Liberty Plaza
    
    
    1
    
    
    
    95.7
    
    
    
    2,194
    
    
    
    20
    
    
    
    2,214
    
    
    
    100
    
    
    
    2,214300 Madison Avenue
    
    
    1
    
    
    
    99.1
    
    
    
    1,089
    
    
    
    5
    
    
    
    1,094
    
    
    
    100
    
    
    
    1,094245 Park Avenue
    
    
    1
    
    
    
    98.4
    
    
    
    1,630
    
    
    
    62
    
    
    
    1,692
    
    
    
    51
    
    
    
    863DevelopmentsThree World Financial Center
    
    
    1
    
    
    
    
    
    
    
    1,200
    
    
    
    
    
    
    
    1,200
    
    
    
    100
    
    
    
    1,200401 West 31st Street
    
    
    1
    
    
    
    
    
    
    
    2,500
    
    
    
    
    
    
    
    2,500
    
    
    
    100
    
    
    
    2,500Other
    
    
    1
    
    
    
    100.0
    
    
    
    
    
    
    
    7
    
    
    
    7
    
    
    
    50
    
    
    
    49
    
    
    
    98.2
    
    
    
    14,299
    
    
    
    622
    
    
    
    14,921
    
    
    
    
    
    
    
    13,206Boston53 State Street
    
    
    1
    
    
    
    95.2
    
    
    
    1,091
    
    
    
    70
    
    
    
    1,161
    
    
    
    51
    
    
    
    59275 State Street
    
    
    1
    
    
    
    99.0
    
    
    
    742
    
    
    
    260
    
    
    
    1,002
    
    
    
    51
    
    
    
    5112
    
    
    
    96.8
    
    
    
    1,833
    
    
    
    330
    
    
    
    2,163
    
    
    
    
    
    
    
    1,103Washington, D.C.1625 Eye Street
    
    
    1
    
    
    
    82.6
    
    
    
    374
    
    
    
    197
    
    
    
    571
    
    
    
    100
    
    
    
    571701 Ninth Street
    
    
    1
    
    
    
    100.0
    
    
    
    340
    
    
    
    207
    
    
    
    547
    
    
    
    100
    
    
    
    547Potomac Tower
    
    
    1
    
    
    
    100.0
    
    
    
    236
    
    
    
    203
    
    
    
    439
    
    
    
    100
    
    
    
    4393
    
    
    
    93.2
    
    
    
    950
    
    
    
    607
    
    
    
    1,557
    
    
    
    
    
    
    
    1,557TorontoBCE PlaceTD Canada Trust Tower
    
    
    1
    
    
    
    99.5
    
    
    
    1,126
    
    
    
    17
    
    
    
    1,143
    
    
    
    50
    
    
    
    572Bay Wellington Tower
    
    
    1
    
    
    
    95.7
    
    
    
    1,297
    
    
    
    42
    
    
    
    1,339
    
    
    
    100
    
    
    
    1,339Retail, parking and office
    
    
    2
    
    
    
    99.6
    
    
    
    137
    
    
    
    809
    
    
    
    946
    
    
    
    75
    
    
    
    705Exchange Tower Block
    
    
    2
    
    
    
    98.3
    
    
    
    1,136
    
    
    
    257
    
    
    
    1,393
    
    
    
    58
    
    
    
    812HSBC Building
    
    
    1
    
    
    
    100.0
    
    
    
    188
    
    
    
    37
    
    
    
    225
    
    
    
    100
    
    
    
    225Queens Quay Terminal
    
    
    1
    
    
    
    89.2
    
    
    
    428
    
    
    
    75
    
    
    
    503
    
    
    
    100
    
    
    
    503Atrium on Bay
    
    
    1
    
    
    
    87.7
    
    
    
    914
    
    
    
    327
    
    
    
    1,241
    
    
    
    50
    
    
    
    621DevelopmentsBay-Adelaide Centre
    
    
    1
    
    
    
    
    
    
    
    1,800
    
    
    
    
    
    
    
    1,800
    
    
    
    50
    
    
    
    900Hudsons Bay Centre
    
    
    1
    
    
    
    
    
    
    
    535
    
    
    
    557
    
    
    
    1,092
    
    
    
    25
    
    
    
    273BCE Place III
    
    
    1
    
    
    
    
    
    
    
    800
    
    
    
    
    
    
    
    800
    
    
    
    65
    
    
    
    52012
    
    
    
    95.3
    
    
    
    8,361
    
    
    
    2,121
    
    
    
    10,482
    
    
    
    
    
    
    
    6,470CalgaryBankers Hall
    
    
    4
    
    
    
    98.1
    
    
    
    1,948
    
    
    
    1,250
    
    
    
    3,198
    
    
    
    50
    
    
    
    1,599Fifth Avenue Place
    
    
    2
    
    
    
    99.5
    
    
    
    1,428
    
    
    
    253
    
    
    
    1,681
    
    
    
    50
    
    
    
    841Petro-Canada Centre
    
    
    2
    
    
    
    97.9
    
    
    
    1,707
    
    
    
    245
    
    
    
    1,952
    
    
    
    50
    
    
    
    9768
    
    
    
    98.4
    
    
    
    5,083
    
    
    
    1,748
    
    
    
    6,831
    
    
    
    
    
    
    
    3,416DenverRepublic PlazaOffice
    
    
    1
    
    
    
    82.3
    
    
    
    1,247
    
    
    
    
    
    
    
    1,247
    
    
    
    100
    
    
    
    1,247Development and other
    
    
    1
    
    
    
    
    
    
    
    400
    
    
    
    548
    
    
    
    948
    
    
    
    100
    
    
    
    948Trade Center
    
    
    2
    
    
    
    87.4
    
    
    
    767
    
    
    
    43
    
    
    
    810
    
    
    
    100
    
    
    
    810Colorado State Bank Building
    
    
    1
    
    
    
    91.4
    
    
    
    412
    
    
    
    
    
    
    
    412
    
    
    
    50
    
    
    
    2065
    
    
    
    85.4
    
    
    
    2,826
    
    
    
    591
    
    
    
    3,417
    
    
    
    
    
    
    
    3,211Minneapolis33 South Sixth Street
    
    
    2
    
    
    
    83.5
    
    
    
    1,082
    
    
    
    695
    
    
    
    1,777
    
    
    
    100
    
    
    
    1,777Dain Plaza
    
    
    2
    
    
    
    89.0
    
    
    
    593
    
    
    
    638
    
    
    
    1,231
    
    
    
    100
    
    
    
    1,2314
    
    
    
    85.8
    
    
    
    1,675
    
    
    
    1,333
    
    
    
    3,008
    
    
    
    
    
    
    
    3,008OtherRoyal Centre, Vancouver
    
    
    1
    
    
    
    89.8
    
    
    
    493
    
    
    
    360
    
    
    
    853
    
    
    
    100
    
    
    
    853Other
    
    
    2
    
    
    
    96.2
    
    
    
    2,570
    
    
    
    4
    
    
    
    2,574
    
    
    
    100
    
    
    
    2,5743
    
    
    
    90.5
    
    
    
    3,063
    
    
    
    364
    
    
    
    3,427
    
    
    
    
    
    
    
    3,427Total portfolio
    
    
    46
    
    
    
    95.2
    
    
    
    38,090
    
    
    
    7,716
    
    
    
    45,806
    
    
    
    
    
    
    
    35,398Less: other shareholders interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,125
    )Brookfields net effective ownership interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,273
 12




---



##### 



Financial Review CONTENTSManagements Discussion and Analysis of the Financial Results
    
    
    14Overview
    
    
    14Operating Strategy
    
    
    14Operating Results
    
    
    14Funds from Operations
    
    
    15Net Income
    
    
    16Quarterly Results
    
    
    23Asset Profile
    
    
    24Commercial Properties
    
    
    24Development Properties
    
    
    24Receivables and Other
    
    
    26Capital Resources and Liquidity
    
    
    27Cash and Marketable Securities
    
    
    27Liabilities and Shareholders Interests
    
    
    28Commercial Property Debt
    
    
    28Accounts Payable and Other Liabilities
    
    
    30Minority Interests of Others in Properties
    
    
    31Preferred
Shares  Subsidiaries and Corporate
    
    
    31Common Shares
    
    
    32Real Estate Industry and Risks
    
    
    33Outlook
    
    
    36Auditors Report
    
    
    37Consolidated Financial Statements
    
    
    38
 This annual report to shareholders contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. The words believe, expect, anticipate, intend, estimate and
other expressions which are predictions of or indicate future events and trends and which do not
relate to historical matters identify forward-looking statements. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks, uncertainties and other
factors, which may cause the actual results, performance or achievements of the company to differ
materially from anticipated future results, performance or achievement expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ materially from those
set forth in the forward-looking statements include general economic conditions, local real estate
conditions, timely re-leasing of occupied square footage upon expiration, interest rates,
availability of equity and debt financing and other risks detailed from time to time in the
documents filed by the company with the securities regulators in Canada and the United States. The
company undertakes no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. 13




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##### 



Managements Discussion and Analysis of the Financial Results OVERVIEW
Brookfield is a publicly-traded North American commercial real estate company listed on both
the New York and Toronto stock exchanges under the symbol BPO. At December 31, 2004, the book value
of Brookfields assets was $8.5 billion, 90% of which was invested in premier office properties.
The company generated $501 million of funds from operations and gains or $2.93 per share in 2004. The following discussion and analysis is intended to provide readers with an assessment of
Brookfields performance over the past three years as well as the companys financial position and
future prospects. It should be read in conjunction with the audited consolidated financial
statements and appended notes which are included on page 38 of this report. Much of the discussion
of operating performance is based on funds from operations for reasons discussed on page 15. The
company also provides a full reconciliation to net income and an assessment of its performance on
the same basis. Additional information, including the companys Annual Information Form, is
available on the companys Web site at www.brookfieldproperties.com, or on www.sedar.com or
www.sec.gov. OPERATING STRATEGY
Brookfields strategy is to own, develop and manage premier commercial properties in downtown
locations of select cities in North America. Brookfields portfolio consists of 46 properties and
development sites, predominantly office buildings, comprising 46 million square feet of rentable
area and development capacity. The commercial property portfolio is focused in seven North American
cities, with New York, Boston, Washington, D.C., Toronto and Calgary comprising 86% of the
portfolio net operating income. Brookfield intends to continue its strategy of concentrating its
operations within a select number of supply constrained markets with attractive tenant bases in
order to maintain a meaningful presence and build on the strength of the companys tenant
relationships within these markets. Additionally, Brookfield operates ancillary real estate service businesses which focus on enhancing
the value and returns from the core commercial property business through high-quality tenant
service and amenities. Brookfield currently manages directly and with a joint venture partner in
excess of 150 million square feet of space across North America. This includes the companys own
commercial properties, properties managed for institutional investors and third party managed
properties. This scale provides Brookfield with the platform to deliver superior service to tenants
across the portfolio. Brookfield also operates a development business including a number of low-cost commercial
development sites in Toronto and Manhattan. In addition, the company owns a land development and
housing operation. OPERATING RESULTS All figures are expressed in US dollars unless otherwise noted. Brookfields financial results
are as follows: (Millions, except per share amounts)
    
    2004
    
    
    2003
    
    
    2002Continuing operations(1)Funds from operationsExcluding lease termination income and gains
    
    $
    442
    
    
    $
    361
    
    
    $
    322Including lease termination income and gains
    
    
    501
    
    
    
    460
    
    
    
    374Funds from operations per share  dilutedExcluding lease termination income and gains
    
    $
    2.55
    
    
    $
    2.15
    
    
    $
    1.87Including lease termination income and gains
    
    
    2.93
    
    
    
    2.78
    
    
    
    2.18Net incomeExcluding lease termination income and gains
    
    $
    206
    
    
    $
    209
    
    
    $
    194Including lease termination income and gains
    
    
    242
    
    
    
    279
    
    
    
    236Earnings per share  diluted
    
    
    1.28
    
    
    
    1.63
    
    
    
    1.34Common share dividends per share
    
    
    0.62
    
    
    
    2.50
    (2)
    
    
    0.40Balance sheet dataCommercial properties
    
    $
    6,693
    
    
    $
    6,297
    
    
    $
    5,661Total assets
    
    
    8,491
    
    
    
    8,097
    
    
    
    7,450Capital base
    
    
    3,254
    
    
    
    2,997
    
    
    
    2,433
   (1)
    
    Excludes the assets, liabilities and results
of operations of Brookfield Homes Corporation(2)
    
    Includes the distribution of Brookfield Homes Corporation
valued at $2.00 per common share 14




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##### 



On January 6, 2003, the company distributed all of the common shares of Brookfield Homes to
common shareholders of record on January 2, 2003. Common shareholders received one common share of
Brookfield Homes for each five common shares of Brookfield held on the date of record, and the
transaction was recorded as a distribution to shareholders at the carried value of the companys
investment in Brookfield Homes. Consequently, the companys results for the year 2002 and prior
periods include the results of Brookfield Homes which have been classified as a discontinued
operation. See Discontinued Operations section for further discussion. Historically, Brookfields accounting policy has been to record revenues in accordance with
the actual payments received under the terms of the companys leases, which typically increase over
time, and to record depreciation on a sinking-fund basis. However, commencing January 1, 2004,
accounting standards require both straight-line rent recognition and straight-line depreciation.
This change resulted in additional revenue of $22 million and additional depreciation of $58
million before the effect of income taxes for the year ended December 31, 2004. See Note 2 of the
consolidated financial statements for further discussion. FUNDS FROM OPERATIONS
Funds from operations (FFO) is defined as net income prior to extraordinary items, non-cash
items and depreciation and amortization of capital assets. While Brookfield believes that FFO is
the most relevant measure to analyze real estate as commercial properties generally appreciate
rather than depreciate, the company believes that both FFO and net income are relevant measures.
The company computes FFO in accordance with the definition provided by the Canadian Institute of
Public and Private Real Estate Companies (CIPPREC) in Canada. FFO does not represent cash
generated from operating activities determined in accordance with Generally Accepted Accounting
Principles (GAAP) in the United States or Canada and should not be considered as an alternative
to GAAP measures. Brookfields strong tenant base, pro-active leasing strategies and gains on sales of partial
interests in the companys core office portfolio contributed to an increase in funds from
operations and gains of 9% to $501 million in 2004, compared with $460 million in 2003. Excluding
lease termination income and gains, funds from continuing operations increased 19% to $2.55 per
share during year 2004 (12% or $2.41 per share excluding straight-line rent) compared with $2.15
per share in 2003. After providing for preferred share dividends, Brookfields FFO per diluted share, including and
excluding lease termination income and gains, is as follows: Including Lease Termination
    
    
    
    Excluding Lease TerminationIncome and Gains
    
    
    
    Income and Gains(Millions, except per share amounts)
    
    2004
    
    
    2003
    
    
    2002
    
    
    
    2004
    
    
    2003
    
    
    2002Funds from continuing operations
    
    $
    501
    
    
    $
    460
    
    
    $
    374
    
    
    
    $
    442
    
    
    $
    361
    
    
    $
    322Preferred share dividends
    
    
    (41
    )
    
    
    (20
    )
    
    
    (19
    )
    
    
    
    (41
    )
    
    
    (20
    )
    
    
    (19
    )$
    460
    
    
    $
    440
    
    
    $
    355
    
    
    
    $
    401
    
    
    $
    341
    
    
    $
    303Weighted average shares outstanding
    
    
    157.1
    
    
    
    158.6
    
    
    
    162.3
    
    
    
    
    157.1
    
    
    
    158.6
    
    
    
    162.3FFO per share
    
    $
    2.93
    
    
    $
    2.78
    
    
    $
    2.18
    
    
    
    $
    2.55
    
    
    $
    2.15
    
    
    $
    1.87
 The 2004 results included lease termination income of $60 million, or $0.38 per share, in
conjunction with the termination of a previously existing lease and the commencement of a new lease
at One World Financial Center in New York. The 2003 gains related to the sale of a 49% interest in
245 Park Avenue in New York totaling $100 million, or $0.63 per share. The 2002 gains related to
the sale of 50% interests in Exchange Tower in Toronto and Bankers Hall in Calgary, totaling $60
million or $0.31 per share. 15




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##### 



FUNDS FROM OPERATIONS AND NET INCOME
A summary of the components of Brookfields funds from operations and net income are as
follows: (Millions)
    
    2004
    
    
    2003
    
    
    2002Total revenue and gains
    
    $
    1,442
    
    
    $
    1,363
    
    
    $
    1,372Net operating incomeCommercial property operations
    
    $
    743
    
    
    $
    697
    
    
    $
    660Development and residential operations
    
    
    42
    
    
    
    31
    
    
    
    22Interest and other income
    
    
    47
    
    
    
    62
    
    
    
    48832
    
    
    
    790
    
    
    
    730Unallocated costs
    
    
    331
    
    
    
    330
    
    
    
    356Funds from continuing operations and gains
    
    
    501
    
    
    
    460
    
    
    
    374Depreciation and amortization
    
    
    143
    
    
    
    79
    
    
    
    80Taxes and other non-cash items
    
    
    116
    
    
    
    102
    
    
    
    58Net income before discontinued operations
    
    
    242
    
    
    
    279
    
    
    
    236Net income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    44Net income
    
    $
    242
    
    
    $
    279
    
    
    $
    280Funds from operations per share  dilutedContinuing operations  excluding lease termination income and gains
    
    $
    2.55
    
    
    $
    2.15
    
    
    $
    1.87Lease termination income and gains
    
    
    0.38
    
    
    
    0.63
    
    
    
    0.31Discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.45$
    2.93
    
    
    $
    2.78
    
    
    $
    2.63Net income per share  dilutedContinuing operations  excluding lease termination income and gains
    
    $
    1.06
    
    
    $
    1.19
    
    
    $
    1.09Lease termination income and gains
    
    
    0.22
    
    
    
    0.44
    
    
    
    0.25Discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.27$
    1.28
    
    
    $
    1.63
    
    
    $
    1.61
 COMMERCIAL PROPERTY OPERATIONS Total commercial property operations contributed $743 million of net operating income and
gains in 2004, a 7% increase over 2003 net operating income of $697 million. The increase is due to
the contribution from 300 Madison Avenue in New York, 1625 Eye Street, 701 9th Street and Potomac
Tower in Washington, D.C. and an increment of $22 million of straight-line rent during 2004 due to
a change in accounting policy. See Note 2 of the consolidated financial statements for further
discussion of the change in accounting policy. The contribution from the commercial property
operations is as follows: (Millions)
    
    2004
    
    
    2003
    
    
    2002Operating income from current properties
    
    $
    683
    
    
    $
    597
    
    
    $
    600Lease termination income and gains
    
    
    60
    
    
    
    100
    
    
    
    60Total
    
    $
    743
    
    
    $
    697
    
    
    $
    660
 COMPONENTS OF COMMERCIAL PROPERTY NET OPERATING INCOME The components of commercial property net operating income are as follows: (Millions)
    
    2004
    
    
    2003
    
    
    2002Rental revenue
    
    $
    1,074
    
    
    $
    976
    
    
    $
    943Property operating costs
    
    
    391
    
    
    
    379
    
    
    
    343Net operating income excluding lease termination income and gains
    
    
    683
    
    
    
    597
    
    
    
    600Lease termination income and gains
    
    
    60
    
    
    
    100
    
    
    
    60Net operating income
    
    $
    743
    
    
    $
    697
    
    
    $
    660
 Net operating income growth is comprised of contractual increases on in-place leases, rental
increases achieved on in-place rents when re-leased, lease-up of vacancies, acquisitions net of
dispositions, and straight-line rental income. 16




---



##### 



The growth in net operating income in each of the past three years is as follows: (Millions)
    
    2004
    
    
    2003
    
    
    2002Net operating income excluding lease termination income and gains, prior year
    
    $
    597
    
    
    $
    600
    
    
    $
    617(a) Contractual increases on in-place leases
    
    
    7
    
    
    
    16
    
    
    
    17(b) Rental increases achieved on in-place rents when re-leased
    
    
    3
    
    
    
    10
    
    
    
    8(c) Lease-up of vacancies
    
    
    1
    
    
    
    3
    
    
    
    5(d) Acquisitions, net of dispositions
    
    
    53
    
    
    
    (32
    )
    
    
    (47
    )(e) Straight-line rental income
    
    
    22
    
    
    
    
    
    
    
    683
    
    
    
    597
    
    
    
    600(f) Lease termination income and gains
    
    
    60
    
    
    
    100
    
    
    
    60Net operating income, end of year
    
    $
    743
    
    
    $
    697
    
    
    $
    660
 (a) Contractual increases on in-place leases Brookfields leases generally have clauses which provide for the collection of rental revenues in
amounts that increase every five years, with these increases negotiated at the signing of the
lease. The high-credit quality of tenants in the companys portfolio in general lowers the risk of
not realizing these increases. During the year ended December 31, 2004, net operating income
increased $7 million due to contractual increases, compared with $16 million in 2003 and $17
million in 2002. (b) Rental increases achieved on in-place rents when re-leased During 2004, higher rental rates on the re-leasing of space in the portfolio contributed $3 million
of increased net operating income over 2003. At December 31, 2004, average in-place net rents
throughout the portfolio increased to $23 per square foot compared with $22 per square foot at
December 31, 2003 and $21 per square foot at December 31, 2002. The company was able to marginally increase its in-place net rental rate, largely as result of
re-leasing initiatives which were completed at an average rental uplift of $3 per square foot on
space leased in 2001 and significant re-leasing initiatives over the past three years at equivalent
rental rates. Average market net rent was $25 per square foot in 2004, an increase of $1 over $24
per square foot in 2003. 
The following table shows the average in-place rents and estimated current
market rents for similar space in each of the companys markets: Gross
    
    
    Avg.
    
    
    Avg.
    
    
    Avg.Leaseable Area
    
    
    Lease Term
    
    
    In-place Net Rent
    
    
    Market Net Rent(000s Sq. Ft.)
    
    
    (Years)
    
    
    ($ per Sq. Ft.)
    
    
    ($ per Sq. Ft.)New York, New YorkMidtown Manhattan
    
    
    2,786
    
    
    
    20
    
    
    $
    38
    
    
    $
    52Downtown Manhattan
    
    
    8,435
    
    
    
    9
    
    
    
    32
    
    
    
    25Boston, Massachusetts
    
    
    2,163
    
    
    
    5
    
    
    
    30
    
    
    
    32Washington, D.C.
    
    
    1,557
    
    
    
    16
    
    
    
    29
    
    
    
    38Toronto, Ontario
    
    
    6,790
    
    
    
    7
    
    
    
    20
    
    
    
    21Calgary, Alberta
    
    
    6,331
    
    
    
    9
    
    
    
    13
    
    
    
    18Denver, Colorado
    
    
    3,017
    
    
    
    4
    
    
    
    14
    
    
    
    15Minneapolis, Minnesota
    
    
    3,008
    
    
    
    8
    
    
    
    9
    
    
    
    13Other
    
    
    927
    
    
    
    12
    
    
    
    9
    
    
    
    15Total*
    
    
    35,014
    
    
    
    10
    
    
    $
    23
    
    
    $
    25
   *
    
    Excludes developments (c) Lease-up of vacancies Contribution to net operating income from lease-ups was $1 million in 2004 compared with $3 million
in 2003 and $5 million in 2002. Contributions from vacancy lease-ups were greater in 2003 due to
vacancies leased in properties acquired in 2000. Brookfields total portfolio occupancy rate at
December 31, 2004 increased to 95.2% from 94.1% at December 31, 2003. Brookfields occupancy rate
in primary markets of New York, Boston, Washington, D.C., Toronto and Calgary remains consistent at
97.3% at December 31, 2004 compared with December 31, 2003. The contribution to net operating
income from vacancy lease up is expected to increase in the future as properties previously
acquired or developed with vacancies are leased up. 17




---



##### 



A summary of current and historical occupancy levels for the past three years is as follows: Dec. 31, 2004
    
    
    Dec. 31, 2003
    
    
    Dec. 31, 2002Total
    
    
    %
    
    
    Total
    
    
    %
    
    
    Total
    
    
    %(Thousands of square feet)
    
    Square Feet
    
    
    Leased
    
    
    Square Feet
    
    
    Leased
    
    
    Square Feet
    
    
    LeasedNew York, New York
    
    
    11,221
    
    
    
    98.2
    
    
    
    11,262
    
    
    
    97.7
    
    
    
    10,113
    
    
    
    97.6Boston, Massachusetts
    
    
    2,163
    
    
    
    96.8
    
    
    
    2,163
    
    
    
    97.7
    
    
    
    2,163
    
    
    
    97.4Washington, D.C.
    
    
    1,557
    
    
    
    93.2
    
    
    
    570
    
    
    
    52.8
    
    
    
    
    
    
    
    Toronto, Ontario
    
    
    6,790
    
    
    
    95.3
    
    
    
    6,884
    
    
    
    96.1
    
    
    
    6,883
    
    
    
    96.3Calgary, Alberta
    
    
    6,331
    
    
    
    98.4
    
    
    
    7,454
    
    
    
    97.6
    
    
    
    7,570
    
    
    
    97.1Denver, Colorado
    
    
    3,017
    
    
    
    85.4
    
    
    
    3,017
    
    
    
    82.9
    
    
    
    3,017
    
    
    
    90.1Minneapolis, Minnesota
    
    
    3,008
    
    
    
    85.8
    
    
    
    3,008
    
    
    
    74.1
    
    
    
    3,008
    
    
    
    84.5Other
    
    
    927
    
    
    
    90.5
    
    
    
    1,281
    
    
    
    90.5
    
    
    
    1,515
    
    
    
    97.1Total*
    
    
    35,014
    
    
    
    95.2
    
    
    
    35,639
    
    
    
    94.1
    
    
    
    34,269
    
    
    
    95.5New York/Boston/Washington/Toronto/Calgary
    
    
    28,062
    
    
    
    97.3
    
    
    
    28,333
    
    
    
    97.3
    
    
    
    26,729
    
    
    
    97.1Denver/Minneapolis/Other
    
    
    6,952
    
    
    
    86.2
    
    
    
    7,306
    
    
    
    80.4
    
    
    
    7,540
    
    
    
    89.3Total*
    
    
    35,014
    
    
    
    95.2
    
    
    
    35,639
    
    
    
    94.1
    
    
    
    34,269
    
    
    
    95.5
   *
    
    Excludes developments During 2004, Brookfield leased 3.6 million square feet of space, approximately four times the
amount of space contractually expiring. This includes two million square feet of new leases and 1.6
million square feet of renewals. In 2004, Brookfield signed the largest lease in Canada, a 331,000
square foot lease renewal with CIBC at Atrium on Bay in Toronto, and participated in two of the six
largest new office leases in the United States, consisting of an 800,000 square foot sublease to
PricewaterhouseCoopers at 300 Madison Avenue and a 460,000 square foot new lease to Cadwalader,
Wickersham & Taft at One World Financial Center in New York. The details of Brookfields leasing
activities for 2004 are as follows: December 31, 2003
    
    
    
    2004 Activities
    
    

    December 31, 2004Expiring
    
    
    
    
    
    
    LeasingAccelerated
    
    
    Net Rent
    
    
    
    
    
    
    Net Rent
    
    
    Acq.(Thousands of square feet)
    
    GLA(1)
    
    
    Leased
    
    
    
    Expiries
    
    
    Expiries
    
    
    per Sq. Ft.-$
    
    
    Leasing
    
    
    per Sq. Ft.-$
    
    
    (Disp.)
    
    
    
    GLA(1)
    
    
    LeasedNew York, New YorkMidtown
    
    
    2,834
    
    
    
    2,787
    
    
    
    
    
    
    
    
    (75
    )
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    (59
    )
    
    
    
    2,786
    
    
    
    2,749Lower Manhattan
    
    
    8,428
    
    
    
    8,226
    
    
    
    
    (171
    )
    
    
    (527
    )
    
    
    
    
    
    
    730
    
    
    
    
    
    
    
    18
    
    
    
    
    8,435
    
    
    
    8,276Boston, Massachusetts
    
    
    2,163
    
    
    
    2,120
    
    
    
    
    (37
    )
    
    
    (106
    )
    
    
    
    
    
    
    126
    
    
    
    
    
    
    
    
    
    
    
    
    2,163
    
    
    
    2,103Washington, D.C.
    
    
    570
    
    
    
    389
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    986
    
    
    
    
    1,557
    
    
    
    1,490Toronto, Ontario
    
    
    6,884
    
    
    
    6,649
    
    
    
    
    (224
    )
    
    
    (1,011
    )
    
    
    
    
    
    
    1,198
    
    
    
    
    
    
    
    (90
    )
    
    
    
    6,790
    
    
    
    6,522Calgary, Alberta
    
    
    7,454
    
    
    
    7,301
    
    
    
    
    (69
    )
    
    
    (279
    )
    
    
    
    
    
    
    354
    
    
    
    
    
    
    
    (1,060
    )
    
    
    
    6,331
    
    
    
    6,247Denver, Colorado
    
    
    3,017
    
    
    
    2,594
    
    
    
    
    (99
    )
    
    
    (145
    )
    
    
    
    
    
    
    305
    
    
    
    
    
    
    
    2
    
    
    
    
    3,017
    
    
    
    2,657Minneapolis. Minnesota
    
    
    3,008
    
    
    
    2,363
    
    
    
    
    (193
    )
    
    
    (23
    )
    
    
    
    
    
    
    507
    
    
    
    
    
    
    
    1
    
    
    
    
    3,008
    
    
    
    2,655Other
    
    
    1,281
    
    
    
    1,185
    
    
    
    
    (85
    )
    
    
    (80
    )
    
    
    
    
    
    
    153
    
    
    
    
    
    
    
    (310
    )
    
    
    
    927
    
    
    
    863Total
    
    
    35,639
    
    
    
    33,614
    
    
    
    
    (878
    )
    
    
    (2,246
    )
    
    $
    19
    (2)
    
    
    3,584
    
    
    $
    17
    (2)
    
    
    (512
    )
    
    
    
    35,014
    
    
    
    33,562
   (1)
    
    Excludes developments(2)
    
    Expiring and leasing net rates per square foot exclude the Cadwalader Wickersham &
Taft transaction (d) Acquisitions, net of dispositions The value created in Brookfields mature commercial properties provides the company with the
opportunity to generate additional gains and capital in order to reinvest in other assets at higher
returns. The acquisition of properties in Washington, D.C. and the completion of the development
project at 300 Madison Avenue in New York, net of dispositions, as well as the net leasing fee
realized upon the successful completion of the sublease of 800,000 square feet to
PricewaterhouseCoopers at 300 Madison Avenue in New York, contributed an additional $53 million of
net operating income in 2004. The sale of properties reduced net operating income by $32 million in
2003 and $47 million in 2002. In 2003, Brookfield sold a 49% interest in 245 Park Avenue in New York based on a property
valuation of $894 million for gross proceeds of $438 million resulting in a $100 million gain. In
addition, Brookfield completed the development of 300 Madison Avenue during the last quarter of
2003. This 1.2 million square foot property located in Midtown Manhattan is fully leased for 30
years to CIBC World Markets. In 2002, Brookfield sold partial interests in two of its core
properties, Exchange Tower in Toronto and Bankers Hall in Calgary, resulting in gains totaling $60
million. 18




---



##### 



(e) Straight-line rental income As a result of adopting CICA Handbook section 1100, Generally Accepted Accounting Principles,
commencing January 1, 2004, the company recognized an additional $22 million of straight-line
rental income in 2004. This adoption was on a prospective basis, and therefore no adjustments were
made to prior periods. See Note 2 to the consolidated financial statements for further discussion. (f) Lease termination income and gains During the first quarter of 2004, the company earned lease termination income of $60 million from
the cancellation of an existing lease and replacement with a new 460,000 square foot lease at One
World Financial Center in New York. The 2003 gain of $100 million was attributed to the sale of a
49% interest in 245 Park Avenue in New York and the gain of $60 million generated in 2002 related
to the sale of partial interests in Exchange Tower in Toronto and Bankers Hall in Calgary. While
these events are opportunistic and difficult to predict, the dynamic tenant base which is typical
of the companys buildings should provide Brookfield with similar opportunities in the future. TENANT RELATIONSHIPS An important characteristic of Brookfields portfolio is the strong credit quality of its
tenants. Special attention is directed at credit quality in order to ensure the long-term
sustainability of rental revenues through economic cycles. The tenant profile on average represents
an A credit rating. Major tenants with over 600,000 square feet of space in the portfolio include
Merrill Lynch, CIBC, JPMorgan Chase, RBC Financial Group, Petro-Canada and Imperial Oil. The
following list shows the largest tenants by leasable area in Brookfields portfolio and their
respective lease commitments: Primary
    
    Year of
    
    
    000s
    
    
    % of
    
    
    CreditTenant
    
    Location
    
    Expiry(1)
    
    
    Sq. Ft.(2)
    
    
    Sq. Ft. (2)
    
    
    Rating(3)RatedMerrill Lynch
    
    New York/Toronto
    
    
    2013
    
    
    
    4,363
    
    
    
    12.5
    %
    
    A+CIBC/CIBC World Markets
    
    New York/Toronto/Calgary
    
    
    2028
    
    
    
    1,979
    
    
    
    5.7
    %
    
    A+JPMorgan Chase
    
    New York
    
    
    2021
    
    
    
    1,011
    
    
    
    2.9
    %
    
    A+RBC Financial Group
    
    Five major markets
    
    
    2019
    
    
    
    958
    
    
    
    2.7
    %
    
    AA-Petro-Canada
    
    Calgary
    
    
    2013
    
    
    
    848
    
    
    
    2.4
    %
    
    BBBTarget Corporation (Dayton Hudson Corporation)
    
    Minneapolis
    
    
    2013
    
    
    
    752
    
    
    
    2.1
    %
    
    A+Imperial Oil
    
    Calgary
    
    
    2011
    
    
    
    633
    
    
    
    1.8
    %
    
    AAATalisman Energy
    
    Calgary
    
    
    2015
    
    
    
    426
    
    
    
    1.2
    %
    
    BBB+Pepco Holdings Inc.
    
    Washington, D.C.
    
    
    2028
    
    
    
    364
    
    
    
    1.0
    %
    
    BBB+Teachers Insurance Annuity Association
    
    Denver
    
    
    2008
    
    
    
    323
    
    
    
    0.9
    %
    
    AAADow Jones & Company
    
    New York
    
    
    2014
    
    
    
    323
    
    
    
    0.9
    %
    
    A-Canadian Natural Resources
    
    Calgary
    
    
    2011
    
    
    
    277
    
    
    
    0.8
    %
    
    BBB+Goldman Sachs
    
    New York
    
    
    2015
    
    
    
    274
    
    
    
    0.8
    %
    
    A+Lehman Brothers
    
    New York
    
    
    2010
    
    
    
    253
    
    
    
    0.7
    %
    
    A+Anadarko Canada Corporation
    
    Calgary
    
    
    2011
    
    
    
    235
    
    
    
    0.7
    %
    
    Baa1EnCana Corporation
    
    Calgary
    
    
    2013
    
    
    
    232
    
    
    
    0.7
    %
    
    A-Bank of Nova Scotia
    
    New York
    
    
    2014
    
    
    
    230
    
    
    
    0.7
    %
    
    AA-Bell West/Bell Canada
    
    Calgary/Toronto
    
    
    2011
    
    
    
    226
    
    
    
    0.6
    %
    
    ASovereign Bank/Fleet National Bank
    
    Boston
    
    
    2008
    
    
    
    213
    
    
    
    0.6
    %
    
    AA-TD Canada Trust
    
    Toronto/Calgary
    
    
    2009
    
    
    
    211
    
    
    
    0.6
    %
    
    A+Other investment grade
    
    Various
    
    Various
    
    
    3,938
    
    
    
    11.3
    %
    
    BBB- or higher18,069
    
    
    
    51.6
    %UnratedCadwalader, Wickersham & Taft LLP
    
    New York
    
    
    2024
    
    
    
    456
    
    
    
    1.3
    %
    
    Cleary, Gottlieb, Steen & Hamilton
    
    New York
    
    
    2012
    
    
    
    446
    
    
    
    1.3
    %
    
    Goodwin Procter
    
    Boston
    
    
    2016
    
    
    
    360
    
    
    
    1.0
    %
    
    Wellington Management
    
    Boston
    
    
    2011
    
    
    
    344
    
    
    
    1.0
    %
    
    National Assoc. of Securities Dealers (NASD)
    
    New York/Denver
    
    
    2021
    
    
    
    277
    
    
    
    0.8
    %
    
    Major League Baseball
    
    New York
    
    
    2012
    
    
    
    109
    
    
    
    0.3
    %
    
    Total
    
    
    
    
    
    
    
    
    20,061
    
    
    
    57.3
    %
   (1)
    
    Weighted average based on square feet(2)
    
    Prior to considering partnership interests in partially-owned
properties(3)
    
    From Standard & Poors, Moodys or Dominion Bond Rating
Service (DBRS) 19




---



##### 



Brookfields strategy is to sign long-term leases in order to mitigate risk and reduce overall
retenanting costs in the portfolio. The company typically commences discussions with tenants
regarding their space requirements well in advance of the contractual expiration, and while each
market is different, the majority of the companys leases, when signed, extend between 10 and
20-year terms. As a result of this strategy, approximately 5% of Brookfields leases mature
annually. 
Following is a breakdown of lease maturities by market with associated in-place rental
rates: New York/Boston/
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Denver/Minneapolis/Total Portfolio
    
    
    
    Washington, D.C.
    
    
    
    Toronto/Calgary
    
    
    
    OtherNet
    
    
    
    
    
    
    
    
    
    
    
    Net
    
    
    
    
    
    
    
    
    
    
    
    Net
    
    
    
    
    
    
    
    
    
    
    
    Net000s
    
    
    
    
    
    
    Rate per
    
    
    
    000s
    
    
    
    
    
    
    Rate per
    
    
    
    000s
    
    
    
    
    
    
    Rate per
    
    
    
    000s
    
    
    
    
    
    
    Rate perYear of Expiry
    
    Sq. Ft.
    
    
    %
    
    
    Sq. Ft.-$
    
    
    
    Sq. Ft.
    
    
    %
    
    
    Sq. Ft.-$
    
    
    
    Sq. Ft.
    
    
    %
    
    
    Sq. Ft.-$
    
    
    
    Sq. Ft.
    
    
    %
    
    
    Sq. Ft.-$Currently available
    
    
    1,452
    
    
    
    4.8
    
    
    
    
    
    
    
    
    323
    
    
    
    2.3
    
    
    
    
    
    
    
    
    352
    
    
    
    3.2
    
    
    
    
    
    
    
    
    777
    
    
    
    13.82005
    
    
    1,387
    
    
    
    4.5
    
    
    $
    24
    
    
    
    
    471
    
    
    
    3.4
    
    
    $
    37
    
    
    
    
    609
    
    
    
    5.5
    
    
    $
    18
    
    
    
    
    307
    
    
    
    5.5
    
    
    $
    142006
    
    
    1,391
    
    
    
    4.5
    
    
    
    16
    
    
    
    
    495
    
    
    
    3.6
    
    
    
    21
    
    
    
    
    492
    
    
    
    4.4
    
    
    
    16
    
    
    
    
    404
    
    
    
    7.2
    
    
    
    112007
    
    
    951
    
    
    
    3.1
    
    
    
    19
    
    
    
    
    171
    
    
    
    1.2
    
    
    
    31
    
    
    
    
    445
    
    
    
    4.0
    
    
    
    19
    
    
    
    
    335
    
    
    
    6.0
    
    
    
    142008
    
    
    1,904
    
    
    
    6.2
    
    
    
    22
    
    
    
    
    646
    
    
    
    4.7
    
    
    
    31
    
    
    
    
    594
    
    
    
    5.4
    
    
    
    21
    
    
    
    
    664
    
    
    
    11.8
    
    
    
    142009
    
    
    985
    
    
    
    3.2
    
    
    
    19
    
    
    
    
    100
    
    
    
    0.7
    
    
    
    31
    
    
    
    
    557
    
    
    
    5.0
    
    
    
    21
    
    
    
    
    328
    
    
    
    5.8
    
    
    
    122010
    
    
    2,017
    
    
    
    6.6
    
    
    
    28
    
    
    
    
    674
    
    
    
    4.9
    
    
    
    39
    
    
    
    
    1,031
    
    
    
    9.3
    
    
    
    24
    
    
    
    
    312
    
    
    
    5.5
    
    
    
    172011
    
    
    2,708
    
    
    
    8.9
    
    
    
    23
    
    
    
    
    607
    
    
    
    4.4
    
    
    
    43
    
    
    
    
    1,910
    
    
    
    17.2
    
    
    
    18
    
    
    
    
    191
    
    
    
    3.4
    
    
    
    162012 & beyond
    
    
    22,219
    
    
    
    58.2
    
    
    
    26
    
    
    
    
    11,454
    
    
    
    74.8
    
    
    
    35
    
    
    
    
    7,131
    
    
    
    46.0
    
    
    
    18
    
    
    
    
    3,634
    
    
    
    41.0
    
    
    
    1135,014
    
    
    
    100.0
    
    
    $
    23
    
    
    
    
    14,941
    
    
    
    100.0
    
    
    $
    35
    
    
    
    
    13,121
    
    
    
    100.0
    
    
    $
    18
    
    
    
    
    6,952
    
    
    
    100.0
    
    
    $
    11Weighted average market net rent
    
    
    
    
    
    $
    25
    
    
    
    
    
    
    
    
    
    
    
    $
    32
    
    
    
    
    
    
    
    
    
    
    
    $
    20
    
    
    
    
    
    
    
    
    
    
    
    $
    14
 TENANT INSTALLATION COSTS AND CAPITAL EXPENDITURES Upon the signing of the majority of its leases, Brookfield provides tenant improvements for
leased space in order to accommodate the specific space requirements of the tenant. In addition to
this capital, leasing commissions are paid to third-party brokers representing tenants in lease
negotiations. Tenant improvement costs and leasing commissions are capitalized in the year
incurred, amortized over the term of the lease and recovered through rental payments. Expenditures
for tenant improvements in 2004 totaled $82 million, compared with the $26 million expended in 2003
and $49 million in 2002 due to a higher number of leases being negotiated in the New York market
where tenant inducement costs are higher than other markets in which Brookfield operates. On an annual basis, one to two million square feet of leases expire on average with a cost to
replace these tenancies approximating $15 to $20 per square foot, with each region of operation
varying in actual cost per square foot. The average expenditure on tenant inducements across the
portfolio over the last three years was $16 per square foot. Tenant installation costs are
summarized as follows: (Millions)
    
    2004
    
    
    2003
    
    
    2002Commercial property tenant improvementsLeasing commissions
    
    $
    15
    
    
    $
    8
    
    
    $
    9Tenant improvements  first generation space
    
    
    3
    
    
    
    
    
    
    
    2Tenant improvements  second generation space
    
    
    64
    
    
    
    18
    
    
    
    38Total
    
    $
    82
    
    
    $
    26
    
    
    $
    49
 Brookfield also invests in on-going maintenance and capital improvement projects to sustain
the high quality of the infrastructure and tenant service amenities in its properties. Due to the
relatively recent construction and major renovation of Brookfields core properties as well as
high-quality construction standards, recurring capital maintenance expenditures are lower than
industry norms. Capital maintenance expenditures totaled $26 million in 2004, compared with $16
million in 2003 and $16 million in 2002. These expenditures exclude repairs and maintenance costs
which are recovered through contractual tenant cost recovery payments. 20




---



##### 



Capital expenditures include revenue-enhancing capital expenditures which represent
improvements to an asset or reconfiguration of space to increase rentable area or increase current
rental rates, and non-revenue enhancing expenditures, which are those required to maintain the
service life of an asset. The details of the companys capital expenditures are summarized as
follows: (Millions)
    
    2004
    
    
    2003
    
    
    2002Capital expendituresRevenue enhancing
    
    $
    14
    
    
    $
    9
    
    
    $
    10Non-revenue enhancing
    
    
    12
    
    
    
    7
    
    
    
    6Total
    
    $
    26
    
    
    $
    16
    
    
    $
    16
 DEVELOPMENT AND RESIDENTIAL OPERATIONS Brookfields residential land development operations are focused in five markets: Calgary,
Alberta; Edmonton, Alberta; Toronto, Ontario; Denver, Colorado and Austin, Texas. Most of the land
holdings were purchased in the mid-1990s, and as a result have an embedded cost advantage over
many companies which are acquiring land today at much higher prices. In addition, the companys
development and residential operations continued to benefit from the low interest rate environment
and strong demand in the North American housing market. Development and residential operations contributed $42 million of income in 2004, an increase of
$11 million over 2003 and $20 million over 2002. (Millions)
    
    2004
    
    
    2003
    
    
    2002Sales revenue
    
    $
    261
    
    
    $
    225
    
    
    $
    321Operating costs
    
    
    219
    
    
    
    194
    
    
    
    299Total
    
    $
    42
    
    
    $
    31
    
    
    $
    22
 Lot and home sales for the past two years, including lots sold to third-party homebuilders are as follows: Home sales
    
    
    
    Lot sales(Units)
    
    2004
    
    
    2003
    
    
    
    2004
    
    
    2003Alberta
    
    
    496
    
    
    
    479
    
    
    
    
    1,937
    
    
    
    1,712Ontario
    
    
    339
    
    
    
    318
    
    
    
    
    
    
    
    
    Colorado
    
    
    
    
    
    
    
    
    
    
    
    468
    
    
    
    448Total
    
    
    835
    
    
    
    797
    
    
    
    
    2,405
    
    
    
    2,160
 INTEREST AND OTHER Interest and other income includes interest charged on loans receivable, interest received on
cash balances and transactional gains and losses realized on the disposal of non-core assets.
Interest and other income decreased to $47 million in 2004 compared with $62 million in 2003
primarily due to the completion of the companys residential condominium development project in
Toronto. UNALLOCATED COSTS Unallocated costs were $331 million for the year ended December 31, 2004, compared with $330
million in 2003. The amounts are comprised of interest expense, administrative and development
expenses and minority interests of others in properties, as follows: (a) Interest expense Interest expense increased 2% to $270 million in 2004, compared with $265 million in 2003. This
increase is a result of debt assumed on the purchase of 701 9th Street and the financing of 1625
Eye Street and Potomac Tower in Washington, D.C., the placement of higher levels of
investment-grade debt on properties, offset by a decrease in the refinancing interest rate on
Republic Plaza in Denver, reduction of debt through amortization and the sale of a 49% interest in
245 Park Avenue in New York in October 2003. (b) Administrative and development expenses Administrative costs during the year ended 2004 decreased to $41 million from $44 million in 2003
as the company successfully implemented cost reduction initiatives. (c) Minority interests of others in properties Minority interests of others in properties consist of earnings attributable to interests not owned
by Brookfield in BPO Properties Ltd. and Brookfield Financial Properties L.P., as well as dividends
on shares issued by BPO Properties Ltd. and 100%-owned subsidiaries. For the year ended December
31, 2004, other shareholders interests expenses of $20 million decreased by $1 million from the
same period in 2003. Dividends paid on shares issued by the companys subsidiaries increased to $48
million in 2004 from $14 million 21




---



##### 



in 2003 and minority interests of others in BPO Properties Ltd. decreased by $35 million in
2004 from $5 million in 2003 primarily from a payment of a special dividend during the first
quarter of 2004. The following table outlines the dividends and earnings paid or attributable to other shareholders
of subsidiaries of Brookfield: (Millions)
    
    Type
    
    2004
    
    
    2003
    
    
    2002BPO Properties Ltd.
    
    Redeemable preferred shares*
    
    $
    8
    
    
    $
    9
    
    
    $
    7BPO Properties Ltd.
    
    Common shares
    
    
    37
    
    
    
    1
    
    
    
    100%-owned subsidiaries
    
    Redeemable preferred shares*
    
    
    3
    
    
    
    4
    
    
    
    4Dividends  shares of subsidiaries
    
    
    
    
    48
    
    
    
    14
    
    
    
    11BPO Properties Ltd.
    
    Participating interests
    
    
    (30
    )
    
    
    5
    
    
    
    12Brookfield Financial Properties L.P.
    
    Participating interests
    
    
    2
    
    
    
    2
    
    
    
    7Minority interests of others in subsidiary earnings
    
    
    
    
    (28
    )
    
    
    7
    
    
    
    19Total
    
    
    
    $
    20
    

    
    $
    21
    
    
    $
    30
   *
    
    Non-participating DEPRECIATION EXPENSE Depreciation for the year ended December 31, 2004 increased by $64 million to $143 million.
The majority of this increase was due to additional depreciation recognized with the adoption of
CICA Handbook section 1100 requiring a change to a straight-line basis. See Note 2 to the
consolidated financial statements for further discussion. NET INCOME Brookfields net income per share from continuing operations decreased to $1.28 per share
including gains or $1.06 per share excluding gains, due to a smaller gain in 2004 and the change in
accounting policy for depreciation previously discussed. Brookfields net income per share is
calculated as follows: Including Lease Termination
    
    
    
    Excluding Lease TerminationIncome and Gains
    
    
    
    Income and Gains(Millions, except per share amounts)
    
    2004
    
    
    2003
    
    
    2002
    
    
    
    2004
    
    
    2003
    
    
    2002Net income from continuing operations
    
    $
    242
    
    
    $
    279
    
    
    $
    236
    
    
    
    $
    206
    
    
    $
    209
    
    
    $
    194Preferred share dividends
    
    
    (41
    )
    
    
    (20
    )
    
    
    (19
    )
    
    
    
    (41
    )
    
    
    (20
    )
    
    
    (19
    )Net income available to common shareholders
    
    $
    201
    
    
    $
    259
    
    
    $
    217
    
    
    
    $
    165
    
    
    $
    189
    
    
    $
    175Weighted average shares outstanding  diluted
    
    
    157.1
    
    
    
    158.6
    
    
    
    162.3
    
    
    
    
    157.1
    
    
    
    158.6
    
    
    
    162.3Net income per share  diluted
    
    $
    1.28
    
    
    $
    1.63
    
    
    $
    1.34
    
    
    
    $
    1.06
    
    
    $
    1.19
    
    
    $
    1.09
 It should be noted that challenges of comparability of net income exist among various real
estate companies, as those entities structured as corporations, such as Brookfield, are required to
charge their earnings with tax expense, despite the presence of tax losses which reduce the cash
tax obligation. This differs from those entities which operate as real estate investment trusts
(REITs), as REITs are not subject to taxation, provided they remain in compliance with specific
tax codes. 22




---



##### 



QUARTERLY RESULTS The 2004 and 2003 results by quarter are as follows: Q1
    
    
    
    Q2
    
    
    
    Q3
    
    
    
    Q4(Millions, except per share amounts)
    
    2004
    
    
    2003
    
    
    
    2004
    
    
    2003
    
    
    
    2004
    
    
    2003
    
    
    
    2004
    
    
    2003Total revenue and gains
    
    $
    326
    
    
    $
    295
    
    
    
    $
    381
    
    
    $
    301
    
    
    
    $
    345
    
    
    $
    320
    
    
    
    $
    390
    
    
    $
    447Net operating incomeCommercial property operationsOperating income from current properties
    
    
    179
    
    
    
    142
    
    
    
    
    166
    
    
    
    141
    
    
    
    
    168
    
    
    
    141
    
    
    
    
    170
    
    
    
    144Operating income from properties sold
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    Lease termination income and gains
    
    
    
    
    
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100Total commercial property operations
    
    
    179
    
    
    
    150
    
    
    
    
    226
    
    
    
    152
    
    
    
    
    168
    
    
    
    151
    
    
    
    
    170
    
    
    
    244Development and residential income
    
    
    8
    
    
    
    7
    
    
    
    
    10
    
    
    
    7
    
    
    
    
    11
    
    
    
    7
    
    
    
    
    13
    
    
    
    10Interest and other
    
    
    14
    
    
    
    15
    
    
    
    
    11
    
    
    
    14
    
    
    
    
    11
    
    
    
    16
    
    
    
    
    11
    
    
    
    17201
    
    
    
    172
    
    
    
    
    247
    
    
    
    173
    
    
    
    
    190
    
    
    
    174
    
    
    
    
    194
    
    
    
    271ExpensesInterest
    
    
    66
    
    
    
    70
    
    
    
    
    68
    
    
    
    67
    
    
    
    
    67
    
    
    
    66
    
    
    
    
    69
    
    
    
    62Administrative and development
    
    
    10
    
    
    
    11
    
    
    
    
    11
    
    
    
    11
    
    
    
    
    10
    
    
    
    11
    
    
    
    
    10
    
    
    
    11Minority interests of others in properties
    
    
    5
    
    
    
    5
    
    
    
    
    6
    
    
    
    5
    
    
    
    
    5
    
    
    
    6
    
    
    
    
    4
    
    
    
    5Income before undernoted
    
    
    120
    
    
    
    86
    
    
    
    
    162
    
    
    
    90
    
    
    
    
    108
    
    
    
    91
    
    
    
    
    111
    
    
    
    193Depreciation and amortization
    
    
    34
    
    
    
    18
    
    
    
    
    35
    
    
    
    20
    
    
    
    
    36
    
    
    
    20
    
    
    
    
    38
    
    
    
    21Taxes and other non-cash items
    
    
    30
    
    
    
    18
    
    
    
    
    47
    
    
    
    17
    
    
    
    
    22
    
    
    
    21
    
    
    
    
    17
    
    
    
    46Net income
    
    $
    56
    
    
    $
    50
    
    
    
    $
    80
    
    
    $
    53
    
    
    
    $
    50
    
    
    $
    50
    
    
    
    $
    56
    
    
    $
    126Funds from operations per share - diluted*Excluding lease termination income and gains
    
    $
    0.70
    
    
    $
    0.51
    
    
    
    $
    0.60
    
    
    $
    0.53
    
    
    
    $
    0.62
    
    
    $
    0.55
    
    
    
    $
    0.63
    
    
    $
    0.56Lease termination income and gains
    
    
    
    
    
    
    
    
    
    
    
    0.38
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.63$
    0.70
    
    
    $
    0.51
    
    
    
    $
    0.98
    
    
    $
    0.53
    
    
    
    $
    0.62
    
    
    $
    0.55
    
    
    
    $
    0.63
    
    
    $
    1.19Net income per share - basic*Excluding lease termination income and gains
    
    $
    0.30
    
    
    $
    0.29
    
    
    
    $
    0.24
    
    
    $
    0.30
    
    
    
    $
    0.25
    
    
    $
    0.29
    
    
    
    $
    0.28
    
    
    $
    0.32Lease termination income and gains
    
    
    
    
    
    
    
    
    
    
    
    0.22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.44$
    0.30
    
    
    $
    0.29
    
    
    
    $
    0.46
    
    
    $
    0.30
    
    
    
    $
    0.25
    
    
    $
    0.29
    
    
    
    $
    0.28
    
    
    $
    0.76Net income per share - diluted*Excluding lease termination income and gains
    
    $
    0.30
    
    
    $
    0.29
    
    
    
    $
    0.23
    
    
    $
    0.30
    
    
    
    $
    0.25
    
    
    $
    0.29
    
    
    
    $
    0.28
    
    
    $
    0.31Lease termination income and gains
    
    
    
    
    
    
    
    
    
    
    
    0.22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.44$
    0.30
    
    
    $
    0.29
    
    
    
    $
    0.45
    
    
    $
    0.30
    
    
    
    $
    0.25
    
    
    $
    0.29
    
    
    
    $
    0.28
    
    
    $
    0.75
   *
    
    Per share amount before giving effect to stock dividend Operating income from current properties in the fourth quarter of 2004 remained consistent
with previous quarters in 2004. Operating income from current properties for 2004 increased
compared to 2003 due to acquisitions of 1625 Eye Street, 701 9th Street and Potomac Tower in
Washington, D.C. and the completion of the development project at 300 Madison Avenue in New York.
The gain realized in the second quarter of 2004 of $60 million in lease termination income is a
result of the termination of a previously existing lease and the commencement of a new lease at One
World Financial Center in New York. The gain realized in the fourth quarter of 2003 of $100 million
is related to the sale of a 49% interest in 245 Park Avenue in New York. Development and residential income increased in the fourth quarter of 2004 compared with previous
quarters in 2004 and 2003 due to the continued strength of the North American housing markets.
Interest and other income decreased in each quarter in 2004 as the 2003 results included a
contribution from the companys now-complete residential condominium project. Interest expense increased in the fourth quarter of 2004 as a result of the financing of 1625 Eye
Street and Potomac Tower in Washington, D.C., partially offset by the repayment of corporate debt
with the proceeds received from the issuance of preferred shares. Administrative and development
expenses and minority interests of others in properties remained consistent with prior quarters.
Taxes and other non-cash items as well as net income decreased in the fourth quarter of 2004
compared to the fourth quarter of 2003 due to the gain on the sale of 49% interest in 245 Park
Avenue recognized in the fourth quarter of 2003. 23




---



##### 



ASSET PROFILE Total assets increased by approximately $394 million to $8.5 billion at December 31, 2004. The
increase in total assets is primarily attributable to the acquisition of 701 9th Street, N.W. and
Potomac Tower in Washington, D.C., and the impact of the higher Canadian dollar on Canadian assets.
The following is a summary of the companys assets over the past three years: (Millions)
    
    2004
    
    
    2003
    
    
    2002*AssetsCommercial properties
    
    $
    6,693
    
    
    $
    6,297
    
    
    $
    5,661Development properties
    
    
    716
    
    
    
    684
    
    
    
    944Receivables and other
    
    
    685
    
    
    
    717
    
    
    
    769Marketable securities
    
    
    285
    
    
    
    267
    
    
    
    Cash and cash equivalents
    
    
    112
    
    
    
    132
    
    
    
    76Total
    
    $
    8,491
    
    
    $
    8,097
    
    
    $
    7,450
   *
    
    Excludes Brookfield Homes Corporation which was distributed to common shareholders on January 6, 2003 COMMERCIAL PROPERTIES The acquisition of two premier assets in Washington, D.C. accounts for most of the increase in
book value of commercial properties from December 31, 2003. 701 9th Street, N.W. was purchased for
$167 million in the first quarter of 2004 and Potomac Tower was purchased for $106 million in the
third quarter of 2004. These two assets, and 1625 Eye Street, N.W., which was acquired in December
2003, comprise 1.6 million square feet in the Washington, D.C. market. These additions were offset
by the sale of the companys non-core retail asset Chicago Place for proceeds totaling $39 million.
The consolidated carrying value of the companys North American properties is approximately $250
per square foot, significantly less than the estimated replacement cost of these assets.
Brookfields core properties are on average of 1.4 million square feet in size. A breakdown of the
companys commercial properties by region is as follows: Brookfield
    
    
    2004
    
    
    2003Leaseable Area
    
    
    Owned Interest
    
    
    Book Value
    
    
    Book ValueRegion
    
    (000s Sq. Ft.)
    
    
    (000s Sq. Ft.)
    
    
    (Millions)
    
    
    (Millions)New York, New York
    
    
    11,221
    
    
    
    9,506
    
    
    $
    3,542
    
    
    $
    3,531Boston, Massachusetts
    
    
    2,163
    
    
    
    1,103
    
    
    
    328
    
    
    
    333Washington, D.C.
    
    
    1,557
    
    
    
    1,557
    
    
    
    439
    
    
    
    161Toronto, Ontario
    
    
    6,790
    
    
    
    4,777
    
    
    
    1,068
    
    
    
    928Calgary, Alberta
    
    
    6,331
    
    
    
    3,166
    
    
    
    448
    
    
    
    450Denver, Colorado
    
    
    3,017
    
    
    
    2,811
    
    
    
    370
    
    
    
    372Minneapolis, Minnesota
    
    
    3,008
    
    
    
    3,008
    
    
    
    414
    
    
    
    400Other
    
    
    927
    
    
    
    927
    
    
    
    84
    
    
    
    122Total*
    
    
    35,014
    
    
    
    26,855
    
    
    $
    6,693
    
    
    $
    6,297
   *
    
    Excludes developments DEVELOPMENT PROPERTIES Development properties consist of commercial property development sites, density rights and
related infrastructure, as well as residential land and infrastructure in the companys land
development business. The total book value of this development land and infrastructure was $716
million at December 31, 2004, an increase of $32 million from $684 million in 2003. The increase is
primarily attributable to additional capitalized costs on the companys commercial development
properties, offset by a reduction in residential development inventory. In 2004, the company
capitalized approximately $36 million related to the Three World Financial Center project. 24




---



##### 



The details of the development property portfolio are as follows: Buildable
    
    
    Book Value
    
    
    Book ValueRegion
    
    Sq. Ft.
    
    
    2004
    
    
    2003
    
    
    ChangeCommercial developments and infrastructureThree World Financial Center, New York
    
    
    1,200,000
    
    
    $
    248
    
    
    $
    212
    
    
    $
    36Bay-Adelaide Centre, Toronto
    
    
    1,800,000
    
    
    
    101
    
    
    
    90
    
    
    
    11Hudsons Bay Centre, Toronto
    
    
    1,092,000
    
    
    
    29
    
    
    
    26
    
    
    
    3Other:401 West 31st Street, New York
    
    
    2,500,000BCE Place III, Toronto
    
    
    800,000Bankers Hall, Calgary
    
    
    500,000Republic Plaza, Denver
    
    
    400,0004,200,000
    
    
    
    21
    
    
    
    21
    
    
    
    8,292,000
    *
    
    $
    399
    
    
    $
    349
    
    
    $
    50Residential development land and infrastructureUnder development
    
    
    
    
    
    
    132
    
    
    
    210
    
    
    
    (78
    )Held for development
    
    
    
    
    
    
    185
    
    
    
    125
    
    
    
    60Total
    
    
    
    
    
    $
    716
    
    
    $
    684
    
    
    $
    32
   * Excludes rights which Brookfield holds on Site 26 at the World Financial Center in New York (a) Commercial developments and infrastructure Although Brookfield is not a speculative developer, the company is a full-service real estate
company with in-house development expertise. With approximately eight million square feet of
high-quality, centrally-located development properties in New York, Toronto, Calgary and Denver,
the company generally undertakes developments only when the risk-adjusted returns are adequate and
significant pre-leasing for at least 50% to 60% of the space has been achieved. In September 2002, Brookfield acquired 1.2 million square feet of space in the 2.1 million square
foot Three World Financial Center tower in New York which is home to the world headquarters of
co-owner American Express. Brookfield has exclusive rights to lease 1.2 million square feet of
space and is not entitled to rents attributable to the space owned by American Express. Brookfield
acquired this property vacant at a substantial discount to replacement value and is currently in
the process of securing tenants for the portion owned by the company. As at December 31, 2004, this
property was classified as a property under development, and all direct costs of the building,
including interest costs and property taxes, were capitalized to the asset. In February 2001, Brookfield acquired a 50% interest in the Bay-Adelaide Centre office and
residential development project, located at the corner of Bay and Adelaide Streets in downtown
Toronto. Brookfield subsequently acquired two small buildings adjacent to the site fronting Bay
Street to further enhance the value of the project. This project included full below-grade
infrastructure for 1.8 million square feet of office and residential space and a fully operational
underground revenue-generating parking facility. Brookfield also owns expansion rights for a third
office tower at BCE Place, the companys flagship Toronto office complex, which includes approximately 800,000 square feet of density. Brookfield has similar rights to
develop 2.5 million square feet at 401 West 31st Street in Midtown Manhattan, New York, 500,000
square feet of office space at Bankers Hall in Calgary, and 400,000 square feet at Republic Plaza
in Denver. 25




---



##### 



The status of each development project is as follows: Location
    
    Ownership
    

Sq. Ft.
    
    StatusNew York, New YorkThree World Financial Center
    
    200 Vesey Street at West Street
    
    
    100
    %
    
    
    1,200,000
    
    
    - Under redevelopment401 West 31st Street
    
    West 31st Street at Ninth Avenue
    
    
    100
    %
    
    
    2,500,000
    
    
    - Being zoned for potentially2.5 million square feet of officeToronto, OntarioBay-Adelaide Centre
    
    Bay and Adelaide Streets
    
    
    50
    %
    
    
    1,800,000
    
    
    - PlanningBCE Place III
    
    Third tower of currentBCE Place project
    
    
    65
    %
    
    
    800,000
    
    
    - PlanningHudsons Bay Centre
    
    Yonge and Bloor Streets
    
    
    25
    %
    
    
    1,092,000
    
    
    - Office and retail projectsunder redevelopmentCalgary, AlbertaBankers Hall
    
    East and West Parkades
    
    
    50
    %
    
    
    500,000
    
    
    - PlanningDenver, ColoradoRepublic Plaza
    
    Downtown Denver
    
    
    100
    %
    
    
    400,000
    
    
    - Planning8,292,000
    *
   *
    
    Excludes rights which Brookfield holds on Site 26 at the World Financial Center in New York (b) Residential development land and infrastructure Brookfields land development operations are focused in five markets: Calgary, Alberta; Toronto,
Ontario; Edmonton, Alberta; Denver, Colorado and Austin, Texas. The book value of these investments
at December 31, 2004 was $317 million, compared with $335 million at the end of 2003. The decrease
was primarily attributable to residential development inventory sold, offset by acquisitions. The
details of the residential development land under development and held for development are as
follows: Under Development
    
    
    
    Held for DevelopmentNumber
    
    
    Book Value
    
    
    
    Number
    
    
    Book Valueof Lots
    
    
    (Millions)
    
    
    
    of Lots
    
    
    (Millions)Alberta
    
    
    2,585
    
    
    $
    90
    
    
    
    
    22,795
    
    
    $
    125Ontario
    
    
    1,593
    
    
    
    16
    
    
    
    
    4,893
    
    
    
    28Colorado
    
    
    818
    
    
    
    22
    
    
    
    
    3,222
    
    
    
    24Texas and other
    
    
    30
    
    
    
    4
    
    
    
    
    2,080
    
    
    
    8Total
    
    
    5,026
    
    
    $
    132
    
    
    
    
    32,990
    
    
    $
    185
 RECEIVABLES AND OTHER Receivables and other assets decreased to $685 million at December 31, 2004 from $717 million
at December 31, 2003. Receivables and real estate mortgages decreased by $64 million to $435
million at December 31, 2004 from a deposit on the acquisition of a land lease on one of the
companys Canadian commercial properties, offset by an increase in straight line rent receivable
due to accounting changes and the acquisition of a $27 million, seven-year, 11.2% fixed rate
mezzanine debt investment on the Bank of America Center in San Francisco. This investment comprises
the junior-most tier of a $750 million financing for the 1.78 million square foot building, giving
the company a toehold in this attractive market. Prepaid expenses and other assets increased by $34
million to $246 million at December 31, 2004 as the company classified $29 million of restricted
cash held for tenant improvements or required under debt covenants to Other Assets. The components
of receivables and other assets are as follows: (Millions)
    
    2004
    
    
    2003
    
    
    2002Receivables and real estate mortgages
    
    $
    435
    
    
    $
    499
    
    
    $
    465Prepaid expenses and other assets
    
    
    246
    
    
    
    212
    
    
    
    210Non-core real estate assets held for sale
    
    
    4
    
    
    
    6
    
    
    
    51Future income tax asset
    
    
    
    
    
    
    
    
    
    
    43Total
    
    $
    685
    
    
    $
    717
    
    
    $
    769
 26




---



##### 



CAPITAL RESOURCES AND LIQUIDITY Brookfield employs a broad range of financing strategies to facilitate growth and manage
financial risk, with particular focus on the overall reduction of the weighted average cost of
capital, thereby enhancing returns for common shareholders. Funds from operations represent the primary source of liquidity to fund debt service, dividend
payments, and recurring capital and leasing costs in the companys commercial property portfolio.
Sufficient cashflows are generated by the companys properties to service these obligations.
Brookfield seeks to increase income from the companys existing properties by maintaining quality
standards which promote high occupancy rates and permit increases in rental rates while reducing
tenant turnover and controlling operating expenses. Other sources of revenue include third-party
fees generated by the companys real estate management, leasing and development businesses. In
addition, Brookfields tax status as a corporation and substantial tax loss pools allow the company
to reinvest and retain cash generated by operations without incurring cash taxes.
 Brookfields commercial property debt is primarily fixed-rate and non-recourse to the company. These
investment-grade financings are typically structured on a 50% to 60% loan-to-appraised-value basis.
In addition, in certain circumstances when a building is leased almost exclusively to a
high-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 the companys
equity requirements to finance commercial property, and as a result, enhances equity returns. As at December 31, 2004, Brookfield had approximately $216 million (December 31, 2003  $562
million) of indebtedness outstanding to Brascan Corporation and its affiliates. During the first
quarter of 2004, the company, based on an agreement signed in 1997, purchased the land lease on one
of its Canadian properties for an amount equal to its carrying value of $80 million from Brascan
Corporation. CASH AND MARKETABLE SECURITIES Brookfield maintains high levels of liquidity to ensure that it can react quickly to potential
investment opportunities. This liquidity consists of cash and marketable securities which
contribute investment returns, as well as committed lines of credit. To ensure the company
maximizes its returns, cash balances are generally carried at a modest level, and excess cash is
used to repay revolving credit lines and invested in short-term marketable securities, which
provide a source of liquidity to fund investment initiatives. Marketable securities are comprised
of a portfolio of fixed-rate corporate bonds which are carried at amortized cost with a fair value
which approximates their book value and an average yield of 2.6%. The portfolio matures over the
period of 2005 to 2007. As at December 31, 2004, cash balances decreased to $112 million from $132
million at December 31, 2003 and marketable securities increased to $285 million from $267 million
at December 31, 2003, as excess funds were invested in additional investment-grade corporate bonds.
In addition, the company classified $29 million of restricted cash held for tenant improvements or
required under debt covenants to Other Assets. UTILIZATION OF CASH RESOURCES The following table illustrates the utilization of free cashflow generated by the companys
operations and financing initiatives as well as the reallocation of capital and the repurchase of
common equity and minority interests of others in properties: (Millions)
    
    2004
    
    
    2003
    
    
    2002
    
    
    TotalCashflow from operations
    
    $
    477
    
    
    $
    334
    
    
    $
    250
    
    
    $
    1,061FinancingBorrowings, net of repayments
    
    
    (182
    )
    
    
    7
    
    
    
    (134
    )
    
    
    (309
    )Net issuance (repurchase) of preferred shares
    
    
    261
    
    
    
    334
    
    
    
    (3
    )
    
    
    592Net repurchase of common shares
    
    
    (33
    )
    
    
    (98
    )
    
    
    (25
    )
    
    
    (156
    )Shareholder distributions
    
    
    (300
    )
    
    
    (114
    )
    
    
    (113
    )
    
    
    (527
    )(254
    )
    
    
    129
    
    
    
    (275
    )
    
    
    (400
    )InvestingMarketable securities
    
    
    (18
    )
    
    
    (267
    )
    
    
    
    
    
    
    (285
    )(Acquisitions) dispositions of real estate, net
    
    
    (144
    )
    
    
    50
    
    
    
    114
    
    
    
    20Development and redevelopment
    
    
    (55
    )
    
    
    (174
    )
    
    
    (206
    )
    
    
    (435
    )Capital expenditures
    
    
    (26
    )
    
    
    (16
    )
    
    
    (16
    )
    
    
    (58
    )(243
    )
    
    
    (407
    )
    
    
    (108
    )
    
    
    (758
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    14Increase (decrease) in cash
    
    $
    (20
    )
    
    $
    56
    
    
    $
    (119
    )
    
    $
    (83
    )
 27




---



##### 



LIABILITIES AND SHAREHOLDERS INTERESTS Brookfields asset base of $8.5 billion is financed with a combination of debt, preferred
shares and common equity. The increase in total liabilities and shareholders interests is
primarily attributable to the issuance of 8,000,000 Class AAA, Series J preferred shares and
6,000,000 Class AAA, Series K preferred shares for total proceeds of C$350 million. The components
of Brookfields liabilities and shareholders interests are as follows: (Millions)
    
    2004
    
    
    2003
    
    
    2002*LiabilitiesCommercial property debt
    
    $
    4,550
    
    
    $
    4,537
    
    
    $
    4,588Accounts payable and other liabilities
    
    
    591
    
    
    
    545
    
    
    
    429Future income tax liability
    
    
    96
    
    
    
    18
    
    
    
    Shareholders interestsMinority interests of others in properties
    
    
    53
    
    
    
    81
    
    
    
    84Preferred sharesSubsidiaries
    
    
    320
    
    
    
    415
    
    
    
    341Corporate
    
    
    854
    
    
    
    586
    
    
    
    238Common shares
    
    
    2,027
    
    
    
    1,915
    
    
    
    1,770Total
    
    $
    8,491
    
    
    $
    8,097
    
    
    $
    7,450
   *
    
    Excludes Brookfield Homes Corporation which was distributed to common shareholders on January 6,
2003 COMMERCIAL PROPERTY DEBT Commercial property debt totaled $4.6 billion at December 31, 2004, compared with $4.5 billion
at December 31, 2003 and $4.6 billion at December 31, 2002. The increase during the year is
primarily related to the financings of 1625 Eye Street and Potomac Tower in Washington, D.C. and
the impact of the higher Canadian dollar on Canadian-denominated commercial property debt, offset
by the repayment of corporate debt with the proceeds received from the issuance of C$350 million
preferred shares during 2004, and amortization. Commercial property debt at December 31, 2004 had
an average interest rate of 6.5% and an average term to maturity of 12 years. Predominantly all of
Brookfields commercial property debt is recourse only to specific properties, thereby reducing the
overall financial risk to the company. 28




---



##### 



Commercial property debt, in order of maturity, is as follows: Interest
    
    
    
    
    
    
    BrookfieldRate
    
    
    Maturity
    
    
    Proportionate ShareCommercial Property
    
    Location
    
    %
    
    
    Date
    
    
    (Millions)
    
    
    DetailsOne World Financial Center
    
    New York
    
    
    3.71
    
    
    
    2007
    
    
    $
    300
    
    
    Recourse, floating rateTD Canada Trust Tower
    
    Toronto
    
    
    6.53
    
    
    
    2007
    
    
    
    108
    
    
    Non-recourse, fixed rateTrade Center
    
    Denver
    
    
    7.00
    
    
    
    2007
    
    
    
    52
    
    
    Non-recourse, fixed ratePetro-Canada Centre
    
    Calgary
    
    
    6.43
    
    
    
    2008
    
    
    
    111
    
    
    Non-recourse, fixed rateOne Liberty Plaza
    
    New York
    
    
    6.75
    
    
    
    2011
    
    
    
    413
    
    
    Non-recourse, fixed rate245 Park Avenue
    
    New York
    
    
    6.65
    
    
    
    2011
    
    
    
    248
    
    
    Non-recourse, fixed ratePotomac Tower
    
    Washington, D.C.
    
    
    4.72
    
    
    
    2011
    
    
    
    75
    
    
    Non-recourse, fixed rateFifth Avenue Place
    
    Calgary
    
    
    7.59
    
    
    
    2011
    
    
    
    65
    
    
    Non-recourse, fixed rateExchange Tower
    
    Toronto
    
    
    6.83
    
    
    
    2012
    
    
    
    56
    
    
    Non-recourse, fixed rateTwo World Financial Center
    
    New York
    
    
    6.91
    
    
    
    2013
    
    
    
    707
    
    
    Non-recourse, fixed rateFour World Financial Center
    
    New York
    
    
    6.95
    
    
    
    2013
    
    
    
    373
    
    
    Non-recourse, fixed rateBay Wellington Tower
    
    Toronto
    
    
    6.49
    
    
    
    2013
    
    
    
    299
    
    
    Non-recourse, fixed rateBankers Hall
    
    Calgary
    
    
    7.20
    
    
    
    2013
    
    
    
    152
    
    
    Non-recourse, fixed rateRepublic Plaza
    
    Denver
    
    
    5.15
    
    
    
    2014
    
    
    
    170
    
    
    Non-recourse, fixed rate1625 Eye Street
    
    Washington, D.C.
    
    
    6.00
    
    
    
    2014
    
    
    
    130
    
    
    Non-recourse, fixed rateRoyal Centre
    
    Vancouver
    
    
    7.50
    
    
    
    2022
    
    
    
    44
    
    
    Non-recourse, fixed rate53 State Street
    
    Boston
    
    
    6.91
    
    
    
    2023
    
    
    
    74
    
    
    Non-recourse, fixed rate33 South Sixth Street
    
    Minneapolis
    
    
    6.72
    
    
    
    2027
    
    
    
    99
    
    
    Non-recourse, fixed rateDain Plaza
    
    Minneapolis
    
    
    7.37
    
    
    
    2027
    
    
    
    84
    
    
    Non-recourse, fixed rate701 9th Street
    
    Washington, D.C.
    
    
    6.73
    
    
    
    2028
    
    
    
    152
    
    
    Non-recourse, fixed rate75 State Street
    
    Boston
    
    
    7.00
    
    
    
    2028
    
    
    
    88
    
    
    Non-recourse, fixed rate300 Madison Avenue
    
    New York
    
    
    7.26
    
    
    
    2032
    
    
    
    526
    
    
    Non-recourse, fixed rateDevelopment and other debt
    
    
    
    
    
    
    
    
    
    
    
    
    204
    
    
    Various termsCorporate credit facility
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    Recourse, floating rateTotal
    
    
    
    
    6.50
    %
    
    
    
    
    
    $
    4,550
 During 2004, Brookfield financed or refinanced $375 million of commercial property debt. The
details are as follows: Financed / RefinancedMortgage
    
    
    Interest Rate(Millions)
    
    
    %Republic Plaza, Denver
    
    $
    170
    
    
    
    5.151625 Eye Street, Washington, D.C.
    
    
    130
    
    
    
    6.00Potomac Tower, Washington, D.C.
    
    
    75
    
    
    
    4.72Total
    
    $
    375
    
    
    
    5.36
    %
 Commercial property debt maturities for the next five years and thereafter are as follows: Weighted Average(Millions)
    
    Scheduled
    
    
    
    
    
    
    
    
    
    
    Interest Rate atYear
    
    Amortization
    
    
    Maturities
    
    
    Total
    
    
    Dec. 31, 20042005
    
    $
    142
    
    
    $
    135
    
    
    $
    277
    
    
    
    7.2
    %2006
    
    
    155
    
    
    
    20
    
    
    
    175
    
    
    
    7.3
    %2007
    
    
    157
    
    
    
    475
    
    
    
    632
    
    
    
    5.2
    %2008
    
    
    168
    
    
    
    110
    
    
    
    278
    
    
    
    6.7
    %2009
    
    
    181
    
    
    
    12
    
    
    
    193
    
    
    
    6.8
    %2010 and thereafter
    
    
    
    
    
    
    2,995
    
    
    
    2,995
    
    
    
    6.5
    %Total
    
    $
    803
    
    
    $
    3,747
    
    
    $
    4,550
    
    
    
    6.5
    %
 During 2004, the company refinanced Republic Plaza in Denver with a $170 million, ten-year,
fixed-rate mortgage at 5.15% interest. This refinancing represents a reduction of approximately 400
basis points from the prior fixed-rate mortgage. The company also financed 1625 Eye Street in
Washington, D.C. with a $130 million, ten-year, 6% fixed rate mortgage. The financing was comprised
of two-stage funding, with $74 million funded in September 2004 and $56 million funded in December
2004. The company also
financed Potomac Tower which was acquired in the third quarter of 2004 with a $75 million,
seven-year, 4.72% fixed rate mortgage. 29




---



##### 

\

The only significant maturity in the next five years is the floating-rate recourse mortgage which
was placed on One World Financial Center in 2003 in order to facilitate flexibility in tenant
discussions on this project and to minimize borrowing costs. It is expected this facility will be
refinanced in the future with long-term, fixed-rate debt. The companys bank credit facility is in the form of a three-year revolving facility totaling $150
million. This facility had a floating interest rate of approximately 3.7% and was drawn in the
amount of $20 million as at December 31, 2004. CONTRACTUAL OBLIGATIONS The following table presents contractual obligations of the company over the next five years: Payments Due By Period(Millions)
    
    Total
    
    
    1 - 3 Years
    
    
    4 - 5 Years
    
    
    After 5 YearsCommercial property debt
    
    $
    4,550
    
    
    $
    1,084
    
    
    $
    471
    
    
    $
    2,995Other obligations
    
    
    302
    
    
    
    135
    
    
    
    
    
    
    
    167Total
    
    $
    4,852
    
    
    $
    1,219
    
    
    $
    471
    
    
    $
    3,162
 Other obligations include retractable preferred shares and debt attributable to the land
development operations. See Accounts Payable and Other Liabilities and Note 9 of the consolidated
financial statements for further discussion on other obligations. The company also has properties
situated on land held under leases or other agreements largely expiring after the year 2069.
Minimum rental payments on land leases are approximately $22 million annually for the next five
years and $973 million in total on an undiscounted basis. CORPORATE GUARANTEES AND CONTINGENT OBLIGATIONS Brookfield conducts its operations through entities that are fully or proportionately
consolidated in the financial statements except for its investment in Brookfield LePage Johnson
Controls, which is equity accounted. Brookfield LePage Facilities Management, one of the largest
facilities management operations in Canada, is owned 40% by Brookfield in partnership with Johnson
Controls, the largest facilities management operator in the world. This joint venture manages close
to 100 million square feet of premises for major corporations and governments, and continues to
benefit from the trend towards outsourcing of facilities management worldwide. The company may be
contingently liable with respect to litigation and claims that arise in the normal course of
business. In addition, the company may execute agreements that provide for indemnifications and
guarantees to third parties. Disclosure of commitments, guarantees and contingencies can be found
in Note 17 to the consolidated financial statements. CREDIT RATINGS Brookfield is currently rated by two agencies. The company is committed to arranging its
affairs to maintain these ratings as well as to improve them further over time. The credit ratings
for the company at December 31, 2004 and at the date of this report were as follows: DBRS
    
    
    S&PCorporate rating
    
    BBB(high)
    
    BBBPreferred shares
    
    Pfd-3(high)
    
    P3(high)
 ACCOUNTS PAYABLE AND OTHER LIABILITIES Accounts payable and other liabilities totaled $591 million, compared with $545 million in
2003. The increase is due to tenant inducements and the impact of the higher Canadian dollar on
Canadian liabilities. Also included in accounts payable and other liabilities are Class AAA Series
E retractable preferred shares, which have a cumulative dividend rate of 70% of bank prime. Total
debt attributable to the land development business at December 31, 2004 was $135 million, compared
with $150 million in 2003. This financing is primarily recourse in nature to subsidiaries of the
company and relates to construction and development loans, which are repaid from the sales proceeds
of building lots and homes, and other short-
term advances. As new homes are constructed, loans are funded on a rolling basis. This financing
carried an average interest rate of 4.2% (2003 - 4.4%). The company also has a revolving five-year
term facility with a shareholder which bears interest based on the prime rate. This revolving
facility is convertible at either partys option into a fixed-rate financing at 9.75% repayable in
2015. This facility was undrawn at December 31, 2004. A breakdown of accounts payable and other
liabilities is as follows: (Millions)
    
    2004
    
    
    2003
    
    
    2002Accounts payable
    
    $
    289
    
    
    $
    241
    
    
    $
    217AdvancesRetractable preferred shares
    
    
    167
    
    
    
    154
    
    
    
    127Other
    
    
    135
    
    
    
    150
    
    
    
    85Total
    
    $
    591
    
    
    $
    545
    
    
    $
    429
 30




---



##### 



FUTURE INCOME TAXES At December 31, 2004, the company had a future income tax liability of $96 million compared to
$18 million at December 31, 2003, an increase of $78 million with the deferred tax expense
generated on the utilization of tax losses during the year. MINORITY INTERESTS OF OTHERS IN PROPERTIES In addition to 100% owned subsidiaries, Brookfield conducts its commercial property operations
through BPO Properties Ltd. (BPO Properties) in Canada which holds substantially all of the
companys Canadian assets other than BCE Place, and through Brookfield Financial Properties L.P.
(Brookfield Financial Properties) in the U.S., which holds substantially all of the companys
interests in its New York, Boston and Washington, D.C. assets. The following table details the components of minority interests of others in properties: (Millions)
    
    2004
    
    
    2003
    
    
    2002BPO Properties
    
    $
    42
    
    
    $
    72
    
    
    $
    64Brookfield Financial Properties
    
    
    11
    
    
    
    9
    
    
    
    20Total
    
    $
    53
    
    
    $
    81
    
    
    $
    84
 Minority interests of others in BPO Properties decreased to $42 million at December 31, 2004
from $72 million at December 31, 2003 as a result of the payment of a special dividend by that
entity during the first quarter of 2004. Minority interests of others in Brookfield Financial
Properties increased by $2 million to $11 million at December 31, 2004 primarily due to increased
earnings in the year, including the proportionate share of interests of others in the lease
termination income earned in the second quarter of 2004.
 During 2003, Brookfield Financial
Properties completed the redemption of certain of its outstanding Partnership Units from minority
interest owners for cash consideration of $10 million. In 2002, redemptions totaled $56 million. As
a result of such redemptions, each remaining partners percentage interest increased on a pro rata
basis. The company currently holds 99.4% of the outstanding Partnership Units of Brookfield
Financial Properties. Also during 2003, the company acquired an additional 574,900 voting common shares of BPO Properties
in a private transaction at a cost of C$27.00 per BPO Properties share. The transaction increased
Brookfields equity interest in BPO Properties from 87% to 89%. A wholly-owned subsidiary of
Brookfield acquired these additional shares by issuing C$15.5 million of retractable preferred
shares. These retractable preferred were redeemed during 2004 for cash of approximately C$30
million. PREFERRED SHARES  SUBSIDIARIES AND CORPORATE The company has $1.2 billion of preferred equity outstanding at December 31, 2004 consisting
of $854 million issued by Brookfield and $320 million issued by its consolidated subsidiaries. This
equity represents low cost capital for the company, without dilution to the common equity base.
Dividends paid on preferred shares issued by the company are accounted for as capital distributions
while dividends paid on preferred shares issued by subsidiaries are a component of minority
interests of others in properties. (a) Subsidiaries The companys subsidiaries have the following preferred shares outstanding: Shares
    
    
    Preferred
    
    
    Cumulative(Millions except share information)
    
    Outstanding
    
    
    Share Series
    
    
    Dividend Rate
    
    
    2004
    
    
    2003
    
    
    2002BPO Properties1,805,489
    
    
    Series G
    
    70% of bank prime
    
    $
    38
    
    
    $
    35
    
    
    $
    283,816,527
    
    
    Series J
    
    70% of bank prime
    
    
    80
    
    
    
    74
    
    
    
    61300
    
    
    Series K
    
    30-day BA + 0.4%
    
    
    124
    
    
    
    115
    
    
    
    952,847,711
    
    
    Series M
    
    70% of bank prime
    
    
    59
    
    
    
    55
    
    
    
    45800,000
    
    
    Series N
    
    30-day BA + 0.4%
    
    
    17
    
    
    
    15
    
    
    
    12$
    318
    
    
    $
    294
    
    
    $
    241100%-owned subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    121
    
    
    
    100Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    320
    
    
    $
    415
    
    
    $
    341
 During 2004, the company redeemed preferred shares issued by its 100%-owned subsidiaries
totaling approximately C$155 million held by Brascan Corporation. 31




---



##### 



(b) Corporate The company has the following preferred shares outstanding: Shares
    
    
    Cumulative(Millions except share information)
    
    Outstanding
    
    
    Dividend Rate
    
    
    2004
    
    
    2003
    
    
    2002Class A redeemable voting
    
    
    6,312,000
    
    
    
    7.50
    %
    
    $
    11
    
    
    $
    11
    
    
    $
    11Class AA Series E
    
    
    2,000,000
    
    
    70% of bank prime
    
    
    34
    
    
    
    34
    
    
    
    34Class AAA Series C and D
    
    
    
    
    
    
    8.00
    %
    
    
    
    
    
    
    
    
    
    
    67Class AAA Series F
    
    
    8,000,000
    
    
    
    6.00
    %
    
    
    126
    
    
    
    126
    
    
    
    126Class AAA Series G
    
    
    4,400,000
    
    
    
    5.25
    %
    
    
    110
    
    
    
    110
    
    
    
    Class AAA Series H
    
    
    8,000,000
    
    
    
    5.75
    %
    
    
    151
    
    
    
    151
    
    
    
    Class AAA Series I
    
    
    8,000,000
    
    
    
    5.20
    %
    
    
    154
    
    
    
    154
    
    
    
    Class AAA Series J
    
    
    8,000,000
    
    
    
    5.00
    %
    
    
    146
    
    
    
    
    
    
    
    Class AAA Series K
    
    
    6,000,000
    
    
    
    5.20
    %
    
    
    122
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    $
    854
    
    
    $
    586
    
    
    $
    238
 During 2004, the company issued 8,000,000 Class AAA, Series J preferred shares and 6,000,000
Class AAA, Series K preferred shares for total proceeds of C$350 million. Proceeds were used for
general corporate purposes including the repayment of existing floating-rate preferred shares and
debt held by Brascan Corporation. During 2003, the company issued 4,400,000 Class AAA, Series G preferred shares, 8,000,000 Class
AAA, Series H preferred shares, and 8,000,000 Class AAA, Series I preferred shares for total
proceeds of $415 million. In June 2003, 4,000,000 Class AAA, Series C and D preferred shares were
redeemed for $74 million. During 2002, the company issued 8,000,000 Class AAA, Series F preferred shares for proceeds of $126
million. Proceeds of the issue were utilized to redeem 3,000,000 Class AAA, Series A preferred
shares, 3,000,000 Class AAA, Series B preferred shares and 2,000,000 Class AAA, Series C preferred
shares for total cash of $126 million. Dividends paid on preferred shares issued by the company are accounted for as capital
distributions. In 2004, the company paid preferred dividends of $41 million compared with $20
million in 2003. The increase relates to dividends paid on $683 million of preferred shares issued
during 2003 and 2004 through five offerings with favorable dividend rates averaging 5.3%. As a result of new accounting requirements, the company will reclassify as financial obligations
preferred equity securities that are convertible into common shares at the option of the holders at
market prices, notwithstanding the companys right to redeem the securities for cash prior to
conversion. This change will be implemented January 1, 2005. COMMON SHARES As at December 31, 2004, the company had 155,591,853 issued and outstanding common shares. On
a fully diluted basis, the company had 158,720,432 common shares outstanding, calculated as
follows: 2004
    
    
    2003
    
    
    2002Common shares outstanding
    
    
    155,591,853
    
    
    
    156,246,701
    
    
    
    160,364,416Unexercised options
    
    
    3,128,579
    
    
    
    3,306,240
    
    
    
    3,568,791Common
shares outstanding - fully diluted
    
    
    158,720,432
    
    
    
    159,552,941
    
    
    
    163,933,207Common shares repurchased
    
    
    1,409,900
    
    
    
    5,006,700
    
    
    
    1,385,900
 The diluted book value per common share at December 31, 2004 was $13.19 compared with $12.31
at December 31, 2003. During the year ended December 31, 2004, the company repurchased 1.4 million
shares under its normal course issuer bid at an average price of $30.54 per share. Since the
inception of the normal course issuer bid in 1999, 12.2 million shares have been repurchased at an
average price of $19.69 per share. The book value of Brookfields common equity was $2.0 billion at
December 31, 2004, compared with a market equity capitalization of $5.8 billion, calculated as
total common shares outstanding
multiplied by $37.40, the closing price per common share on the New York Stock Exchange on December
31, 2004. On February 9, 2005, the Board of Directors approved a three-for-two stock split. The stock split
will be in the form of a stock dividend. Shareholders will receive one Brookfield common share for
each two common shares held. The stock dividend will be payable on March 31, 2005 to shareholders
of record at the close of business on March 15, 2005. The stock split will not change the economic
value of the common shares issued and outstanding. Effectively, the number of common shares
increases by one-half and the earnings per share decreases by one-third. 32




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##### 



COST OF CAPITAL Brookfield continually strives to reduce its weighted average cost of capital and improve
common shareholders equity returns through value-enhancement initiatives and the consistent
monitoring of the balance between debt and equity financing. Brookfields weighted average cost of capital, utilizing a 20% return on equity, is 9.2%.
Brookfields cost of capital is lower than many of its peers because of the greater amount of
investment-grade financing which can be placed on the companys assets, a function of the
high-quality assets and tenant base which comprise Brookfields portfolio. FOREIGN EXCHANGE FLUCTUATIONS While approximately 25% of Brookfields assets and revenues originate in Canada, Brookfield
has substantially matched its Canadian assets with Canadian liabilities. As a result, Brookfield
has generally not been materially impacted by the movement in the Canadian to U.S. dollar exchange
rate. REAL ESTATE INDUSTRY AND RISKS Brookfields strategy is to invest in high-quality commercial properties defined by the
physical characteristics of the asset, but more importantly, the certainty of receiving rental
payments from the tenants of those assets. Brookfield remains exposed to certain risks inherent in
the commercial property business. In evaluating Brookfield and its business, the following is a brief review of the potential impact
these different factors may have on the companys operations. Further discussion of the risk
factors that should be considered can be found in Brookfields Annual Information Form posted on
the companys Web site at www.brookfieldproperties.com, or on www.sedar.com or www.sec.gov. Real estate investments are generally subject to varying degrees of risk depending on the nature of the
property. These risks include changes in general economic conditions (such as the availability and
cost of mortgage funds), local conditions (such as an oversupply of space or a reduction in demand
for real estate in the markets in which the company operates), the attractiveness of the properties
to tenants, competition from others with available space and the ability of the owner to provide
adequate maintenance at an economical cost. Certain significant expenditures, including property taxes, maintenance costs, mortgage payments,
insurance costs and related charges must be made regardless of whether or not a property is
producing sufficient income to service these expenses. Brookfields commercial properties are
subject to mortgages, which require significant debt service payments. If the company is unable or
unwilling to meet mortgage payments on any property, losses could be sustained as a result of the
mortgagees exercise of its rights of foreclosure or sale. Real estate is relatively illiquid. Such illiquidity will tend to limit Brookfields ability to vary its portfolio promptly in response to
changing economic or investment conditions. Also, financial difficulties of other property owners
resulting in distressed sales could depress real estate values in the markets in which Brookfield
operates. Brookfields commercial properties generate a relatively stable source of income from contractual
tenant rent payments. Continued growth of rental income is dependent on strong leasing markets to
ensure expiring leases are renewed and new tenants are found promptly to fill vacancies. While the outlook for commercial office rents is positive in the longer term, 2005 may not provide
the same level of increases in rental rates on renewal as compared to previous years. The company
is, however, substantially protected against these short-term market conditions, since most of the
companys leases are long-term in nature with an average term of ten years. A protracted disruption
in the economy, such as the onset of a severe recession, could place downward pressure on overall
occupancy levels and net effective rents. Brookfields commercial properties operations have
insurance covering certain acts of terrorism for up to $600 million of damage and business
interruption costs. The company continues to seek additional coverage equal to the full replacement
cost of its assets; however, until this type of coverage becomes commercially available on an
economically reasonable basis, any damage or business interruption costs as a result of uninsured
acts of terrorism could result in a material cost to the company. DERIVATIVE FINANCIAL INSTRUMENTS The company and its subsidiaries utilize derivative financial instruments primarily to manage
financial risks, including interest rate, commodity and foreign exchange risks. The use of
derivative contracts is governed by documented risk management policies and approved limits. Hedge
accounting is applied where the derivative is designated as a hedge of a specific exposure and
there is reasonable assurance the hedge will be effective. Realized and unrealized gains and losses
on forward exchange contracts designated as hedges of currency risks are included in the cumulative
translation account when the currency risk being hedged relates to a net investment in a
self-sustaining subsidiary. Otherwise, realized and unrealized gains and losses on derivative
financial instruments designated as hedges of financial risks are included in income as an offset
to the hedged item in the period the underlying asset, liability or anticipated transaction affects
income. At December 31, 2004, the company had foreign exchange contracts to sell a notional amount 33




---



##### 



of C$711 million at a weighted average exchange rate of C$1.00 = US$0.76, maturing in January 2005,
designated as hedges for accounting purposes to manage the companys foreign exchange risk in
respect to its Canadian-denominated net investments. The fair value of these contracts at December
31, 2004 was a loss of $52 million which is reflected in the cumulative translation adjustment
account. The companys self-sustaining subsidiaries also had foreign exchange contracts to sell a
notional amount of US$310 million at a weighted average exchange rate of US$1.00 = C$1.33, maturing
in January 2005, which have not been designated as hedges for financial reporting purposes. The
aggregate fair value of these contracts at December 31, 2004 was a gain of $30 million. DISCONTINUED OPERATIONS On October 29, 2002, the Board of Directors approved the special distribution of Brookfield
Homes, the companys U.S. residential home building business. Brookfield Homes commenced trading on
the NYSE under the symbol BHS on January 7, 2003. This transaction allowed Brookfield to focus on
its core business of owning and operating premier office properties in select North American city
centers, as well as enabling shareholders to maximize the value of their interest in Brookfields
U.S. residential home building operations by remaining as a shareholder or monetizing their
investment. Common shareholders of record on January 2, 2003 received a special distribution equivalent to
one-fifth of a Brookfield Homes share for each Brookfield common share that they owned. The value
of the special dividend, based on a book value of $323 million of equity, was $2.00 per Brookfield
common share and resulted in a reduction in the stated value of the companys common equity of $323
million, as approved by the companys shareholders on December 16, 2002. The company has not
retained any common share ownership of Brookfield Homes; however, it did retain a $98 million
subordinated note receivable that was set to mature on December 31, 2005, which bore interest at
10%. This note was subsequently repaid by Brookfield Homes in 2003. At December 31, 2002, total assets of Brookfield Homes included in the companys assets were $879
million, an increase of $7 million over 2001. These assets were financed at the asset level by $556
million in construction debt facilities, payables and subordinated debt at December 31, 2002. Reflecting the distribution as if it were completed at December 31, 2002, the pro forma balance
sheet of Brookfield Homes was as follows: (Millions)
    
    2002AssetsResidential housing inventory
    
    $
    734Development properties
    
    
    40Receivables and other
    
    
    105$
    879LiabilitiesResidential construction financing
    
    $
    345Accounts payable and other liabilities
    
    
    113Subordinated debt
    
    
    98Common shares
    
    
    323$
    879
 Contributions to income from discontinued operations was comprised entirely of the results of
operations from Brookfields U.S. residential home building business. This contribution to total
funds from operations increased to $73 million in 2002 from $65 million in 2001 as continued low
interest rates increased demand for homes in Brookfield Homes markets throughout California and
Northern Virginia. After considering the impact of future income taxes, Brookfield Homes
contributed $44 million to net income in 2002, an increase of 13% over 2001. Pursuant to the distribution of Brookfield Homes on January 6, 2003, the Board of Directors
approved a methodology for adjusting downward the exercise price of all outstanding stock options
at that date, to give effect to this distribution. This methodology, developed in consultation with
the Toronto Stock Exchange, resulted in a reduction of the exercise price of all outstanding stock
options by $1.00 effective February 4, 2003. The Company recognized an expense as a result of
reducing the strike price of outstanding stock options measured as the difference between the fair
value of the modified options determined using the Black-Scholes model of valuation and the value
of the old options immediately before their terms were modified, determined based on the expected
remaining life of the outstanding revalued stock options. SEGMENTED INFORMATION The company and its subsidiaries operate in the U.S. and Canada within the commercial property
business and the residential land development business. The commercial markets in which the company
operates are primarily New York, Boston, Washington, D.C., Denver and Minneapolis in the U.S., and
Toronto and Calgary in Canada. Approximately 73% of the companys net operating income 34




---



##### 



or 69% of the companys funds from operations are derived from the U.S. The companys residential
land development operations are focused in five markets: Calgary, Edmonton, and Toronto in Canada
and Denver and Austin in the U.S. Details of the segmented financial information for the companys
principal areas of business by industry and geographic location are provided in Note 19 of the
consolidated financial statements. The details of the contribution to net operating income and funds from operations by region are as
follows: By Contribution to Net
    
    
    By Contribution toRegion
    
    Operating Income
    
    
    Funds from OperationsNew York, New York
    
    
    56
    %
    
    
    51
    %Boston, Massachusetts
    
    
    6
    %
    
    
    7
    %Washington, D.C.
    
    
    3
    %
    
    
    3
    %Toronto, Ontario
    
    
    13
    %
    
    
    14
    %Calgary, Alberta
    
    
    8
    %
    
    
    10
    %Denver, Colorado
    
    
    5
    %
    
    
    5
    %Minneapolis, Minnesota
    
    
    3
    %
    
    
    3
    %Other
    
    
    6
    %
    
    
    7
    %Total
    
    
    100
    %
    
    
    100
    %
 CHANGES IN ACCOUNTING POLICIES Effective January 1, 2004, the company adopted CICA Handbook section 1100, Generally Accepted
Accounting Principles. The section establishes standards for financial reporting in accordance
with Canadian GAAP, and provides guidance on sources to consult when selecting accounting policies
and determining appropriate disclosures when a matter is not dealt with explicitly in the primary
sources of Canadian GAAP. In particular, this section requires the company to record income arising
from tenant leases and depreciation on buildings on a straight-line basis. Adoption of this section
resulted in recognition of additional straight-line rental revenue of $22 million and additional
depreciation of $58 million before any tax effects for the year ended December 31, 2004.
Previously, the company recorded rental revenue as it was contractually due and payable, and
recorded depreciation on buildings using the sinking fund method. Effective January 1, 2004, the company adopted CICA Handbook section 3063, Impairment of
Long-Lived Assets. The section provides that an impairment loss be recognized when the carrying
value of an asset exceeds the total undiscounted cash flows expected from its use and eventual
disposition. The impairment recognized is measured as the amount by which the carrying value
exceeds its fair value. The adoption of section 3063 did not have a significant impact on the
companys consolidated financial statements. Previously, the impairment was measured as the excess
of the carrying value over the sum of the total undiscounted cash flows. Effective January 1, 2004, the company adopted CICA Handbook section 3110, Asset Retirement Obligations. The section
addresses the recognition and re-measurement of obligations associated with the retirement of a
tangible long-lived asset. This standard provides that obligations associated with the retirement
of tangible long-lived assets be recorded as liabilities when those obligations are incurred, with
the amount of the liability initially measured at fair value. These obligations are capitalized to
the book value of the related long-lived assets and are depreciated over the useful life of the
related asset. The adoption of section 3110 did not have a significant impact on the companys
consolidated financial statements. Effective January 1, 2004, the company adopted Accounting Guideline 13, Hedging Relationships,
(AcG 13), a new accounting guideline issued by the Accounting Standards Board (AcSB) of the CICA
addressing identification, designation, documentation and effectiveness of hedging relationships
for the purposes of applying hedge accounting. Under AcG 13, hedge designation of derivative
financial instruments is only allowed if, both at the inception of the hedge and throughout the
hedge period, the changes in the fair value or cash flows of the derivative instruments are
expected to substantially offset the fair value or cash flows of the underlying asset, liability or
anticipated transaction. Realized and unrealized gains and losses on derivative financial
instruments designated as hedges of financial risks are included in income in the same period as
when the underlying asset, liability or anticipated transaction affects income. The company has adopted CICA Emerging Issue Committee Abstract 140, Accounting for Operating
Leases Acquired in Either an Asset Acquisition or Business Combination, (EIC 140), issued in
September 2003. EIC 140 requires that when a company acquires real estate in either an asset
acquisition or business combination, a portion of the purchase price should be allocated to the
in-place leases to reflect the intangible amounts of leasing costs, above or below market leases
and tenant relationship values, if any. These intangible costs are amortized over their respective
lease terms. The adoption of EIC 140 did not have a significant impact on the companys
consolidated financial statements. 35




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##### 



USE OF ESTIMATES The preparation of financial statements in conformity with Canadian generally accepted
accounting principles requires estimates and assumptions that affect the carried amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from estimates. Significant estimates are required in the determination of:
future cash flows and probabilities in assessing net recoverable amounts and net realizable value,
the allocation of the purchase price to components of commercial properties acquired, depreciation
and amortization, the companys ability to utilize tax losses, hedge effectiveness, and fair value
for disclosure purposes. These estimates are impacted by, among other things, movements in interest
rates and other factors as described in the analysis of business environment and risks included on
page 33. The interrelated and complex nature of these factors prevents us from quantifying the
overall impact of movements on the companys financial statements. OUTLOOK We are optimistic as we look to 2005. The leasing markets within which we operate are
continuing to improve on a measured basis and the general economic environment has strengthened,
although there are some conditions that warrant continued caution. The company remains focused on
delivering on its performance targets and creating shareholder value. With a strong balance sheet,
over six million square feet of development opportunities, significant financial flexibility, a
solid growth strategy and a dedicated team, Brookfield is well positioned to continue to deliver on
its commitments to shareholders. -s- Craig J. Laurie Craig J. LaurieSenior Vice President and Chief Financial Officer February 9, 2005 DIVIDENDS PAID Dividends paid per share by the company during the year ended December 31, 2004 and in the past three fiscal years are as follows: 2004
    
    
    2003
    
    
    2002
    
    
    2001Common shares (US$)
    
    $
    0.6200
    
    
    $
    2.5000
    (1)
    
    $
    0.4000
    
    
    $
    0.3300Class A preferred shares (C$)
    
    
    0.1875
    
    
    
    0.1875
    
    
    
    0.1875
    
    
    
    0.1875Class AA Series E preferred shares (C$)
    
    
    0.7061
    
    
    
    0.8202
    
    
    
    0.7272
    
    
    
    1.1009Class AAA Series A preferred shares (C$)
    
    
    
    
    
    
    
    
    
    
    1.6521
    
    
    
    2.2500Class AAA Series B preferred shares (C$)
    
    
    
    
    
    
    
    
    
    
    1.6521
    
    
    
    2.2500Class AAA Series C preferred shares (C$)
    
    
    
    
    
    
    1.2356
    
    
    
    2.0000
    
    
    
    2.0000Class AAA Series D preferred shares (C$)
    
    
    
    
    
    
    1.2356
    
    
    
    2.0000
    
    
    
    2.0000Class AAA Series F preferred shares (C$)
    
    
    1.5000
    
    
    
    1.5000
    
    
    
    0.3986
    
    
    
    Class AAA Series G preferred shares (US$)
    
    
    1.3125
    
    
    
    0.7237
    
    
    
    
    
    
    
    Class AAA Series H preferred shares (C$)
    
    
    1.4375
    
    
    
    0.3033
    
    
    
    
    
    
    
    Class AAA Series I preferred shares (C$)
    
    
    1.3000
    
    
    
    
    
    
    
    
    
    
    
    Class AAA Series J preferred shares (C$)
    
    
    0.8333
    
    
    
    
    
    
    
    
    
    
    
    Class AAA Series K preferred shares (C$)
    
    
    0.2486
    
    
    
    
    
    
    
    
    
    
    
    
   (1) Includes the distribution of Brookfield Homes
Corporation valued at $2.00 per common share
 36




---



##### 



ManagementS Responsibility for the Financial Statements The consolidated financial statements and managements financial analysis and review contained
in this annual report are the responsibility of the management of the company. To fulfill this
responsibility, the company maintains a system of internal controls to ensure that its reporting
practices and accounting and administrative procedures are appropriate, and provide assurance that
relevant and reliable financial information is produced. The consolidated financial statements have
been prepared in conformity with Canadian generally accepted accounting principles and, where
appropriate, reflect estimates based on managements best judgment in the circumstances. The
financial information presented throughout this annual report is consistent with the information
contained in the consolidated financial statements. Deloitte & Touche LLP, the independent auditors appointed by the shareholders, have audited the
consolidated financial statements in accordance with Canadian generally accepted auditing standards
to enable them to express to the shareholders their opinion on the consolidated financial
statements. Their report as auditors is set out below. The consolidated financial statements have been further examined by the Board of Directors and by
its Audit Committee, which meets with the auditors and management to review the activities of each
and reports to the Board of Directors. The auditors have direct and full access to the Audit
Committee and meet with the committee both with and without management present. The Board of
Directors, directly and through its Audit Committee, oversees management responsibilities and is
responsible for reviewing and approving the financial statements. -s- Richard B. Clark
    
    -s- Craig J. LaurieRichard B. Clark
    
    Craig J. LauriePresident and Chief Executive Officer
    
    Senior Vice President and Chief Financial OfficerFebruary 9, 2005
 Auditors Report To the Shareholders, We have audited the consolidated balance sheets of Brookfield Properties Corporation as at December
31, 2004 and 2003 and the consolidated statements of income, retained earnings and cashflow for the
years then ended. These financial statements are the responsibility of the companys management.
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects,
the financial position of the company as at December 31, 2004 and 2003 and the results of its
operations and its cashflows for the years then ended in accordance with Canadian generally
accepted accounting principles. The company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
companys internal control over financial reporting. Accordingly, we express no such opinion. Toronto, CanadaFebruary 9, 2005
    

(DELOITTE & TOUCHE LLP)Chartered Accountants
 37




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##### 



Consolidated Balance Sheet December 31 (US Millions)
    
    Note
    
    
    2004
    
    
    2003AssetsCommercial properties
    
    
    4
    
    
    $
    6,693
    
    
    $
    6,297Development properties
    
    
    5
    
    
    
    716
    
    
    
    684Receivables and other
    
    
    6
    
    
    
    685
    
    
    
    717Marketable securities
    
    
    7
    
    
    
    285
    
    
    
    267Cash and cash equivalents
    
    
    
    
    
    
    112
    
    
    
    132$
    8,491
    
    
    $
    8,097LiabilitiesCommercial property debt
    
    
    8
    
    
    $
    4,550
    
    
    $
    4,537Accounts payable and other liabilities
    
    
    9
    
    
    
    591
    
    
    
    545Future income tax liability
    
    
    10
    
    
    
    96
    
    
    
    18Shareholders interestsMinority interests of others in properties
    
    
    11
    
    
    
    53
    
    
    
    81Preferred sharesSubsidiaries
    
    
    12
    
    
    
    320
    
    
    
    415Corporate
    
    
    12
    
    
    
    854
    
    
    
    586Common shares
    
    
    13
    
    
    
    2,027
    
    
    
    1,915$
    8,491
    
    
    $
    8,097
 See accompanying notes to the consolidated financial statements On behalf of the Board, -s- Gordon E. Arnell
    
    -s- Richard B. ClarkGordon E. Arnell
    
    Richard B. ClarkChairman
    
    President and Chief Executive Officer
 38




---



##### 



Consolidated Statement of Income December 31 (US Millions, except per share amounts)
    
    Note
    
    
    2004
    
    
    2003Total revenue and gains
    
    
    15
    
    
    $
    1,442
    
    
    $
    1,363Net operating incomeCommercial property operations
    
    
    15Operating income from properties
    
    
    
    
    
    $
    683
    
    
    $
    597Lease termination income and gains
    
    
    
    
    
    
    60
    
    
    
    100Total commercial property operations
    
    
    
    
    
    
    743
    
    
    
    697Development and residential operations
    
    
    15
    
    
    
    42
    
    
    
    31Interest and other
    
    
    
    
    
    
    47
    
    
    
    62832
    
    
    
    790ExpensesInterest
    
    
    
    
    
    
    270
    
    
    
    265Administrative and development
    
    
    
    
    
    
    41
    
    
    
    44Minority interests of others in properties
    
    
    
    
    
    
    20
    
    
    
    21Income before undernoted
    
    
    
    
    
    
    501
    
    
    
    460Depreciation and amortization
    
    
    
    
    
    
    143
    
    
    
    79Taxes and other non-cash items
    
    
    10
    
    
    
    116
    
    
    
    102Net income
    
    
    
    
    
    $
    242
    
    
    $
    279Net income per share
    
    
    13Basic
    
    
    
    
    
    $
    1.29
    
    
    $
    1.64Diluted
    
    
    
    
    
    $
    1.28
    
    
    $
    1.63Net income per share  after giving effect to stock dividend
    
    
    13Basic
    
    
    
    
    
    $
    0.86
    
    
    $
    1.09Diluted
    
    
    
    
    
    $
    0.85
    
    
    $
    1.08
 See accompanying notes to the consolidated financial statements Consolidated Statement of Retained Earnings December 31 (US Millions)
    
    Note
    
    
    2004
    
    
    2003Retained earnings  beginning
of year
    
    
    
    
    
    $
    797
    
    
    $
    630Net income
    
    
    
    
    
    
    242
    
    
    
    279Shareholder distributionsPreferred shares dividends
    
    
    
    
    
    
    (41
    )
    
    
    (20
    )Common share dividends
    
    
    
    
    
    
    (96
    )
    
    
    (79
    )Amount paid in excess of the
book value of common
shares purchased for
cancellation
    
    
    
    
    
    
    (35
    )
    
    
    (13
    )Retained earnings  end of
year
    
    
    13
    
    
    $
    867
    
    
    $
    797
 39




---



##### 



Consolidated Statement of Cashflow December 31 (US Millions)
    
    Note
    
    
    2004
    
    
    2003Operating activitiesNet income
    
    
    
    
    
    $
    242
    
    
    $
    279Depreciation and amortization
    
    
    
    
    
    
    143
    
    
    
    79Taxes and other non-cash items
    
    
    
    
    
    
    116
    
    
    
    102501
    
    
    
    460Property disposition gains
    
    
    
    
    
    
    
    
    
    
    (100
    )Commercial property tenant improvements
    
    
    
    
    
    
    (82
    )
    
    
    (26
    )Other
    
    
    
    
    
    
    58
    
    
    
    Cashflow provided from operating activities
    
    
    
    
    
    
    477
    
    
    
    334Financing activities and capital distributionsCommercial property debt arranged
    
    
    
    
    
    
    452
    
    
    
    735Commercial property debt repayments
    
    
    
    
    
    
    (626
    )
    
    
    (727
    )Subordinated note receivable
    
    
    
    
    
    
    
    
    
    
    98Other advances
    
    
    
    
    
    
    (8
    )
    
    
    (99
    )Common shares issued
    
    
    
    
    
    
    10
    
    
    
    8Common shares of Brookfield repurchased
    
    
    
    
    
    
    (43
    )
    
    
    (106
    )Preferred shares issued, net
    
    
    
    
    
    
    261
    
    
    
    408Preferred shares redeemed
    
    
    
    
    
    
    
    
    
    
    (74
    )Cashflow distributed to other shareholders of subsidiaries
    
    
    
    
    
    
    (163
    )
    
    
    (15
    )Preferred share dividends
    
    
    
    
    
    
    (41
    )
    
    
    (20
    )Common share dividends
    
    
    
    
    
    
    (96
    )
    
    
    (79
    )Cashflow (used in) provided from financing activities and
capital distributions
    
    
    
    
    
    
    (254
    )
    
    
    129Investing activitiesMarketable securities
    
    
    
    
    
    
    (18
    )
    
    
    (267
    )Acquisitions of real estate, net
    
    
    18
    
    
    
    (207
    )
    
    
    (172
    )Dispositions of real estate, net
    
    
    18
    
    
    
    63
    
    
    
    222Development and redevelopment investments
    
    
    
    
    
    
    (55
    )
    
    
    (174
    )Capital expenditures
    
    
    
    
    
    
    (26
    )
    
    
    (16
    )Cashflow used in investing activities
    
    
    
    
    
    
    (243
    )
    
    
    (407
    )(Decrease) increase in cash resources
    
    
    
    
    
    
    (20
    )
    
    
    56Opening cash and cash equivalents
    
    
    
    
    
    
    132
    
    
    
    76Closing cash and cash equivalents
    
    
    
    
    
    $
    112
    
    
    $
    132
 See accompanying notes to the consolidated financial statements 40




---



##### 



Notes to the Consolidated Financial Statements NOTE 1: SIGNIFICANT ACCOUNTING POLICIES  (a)
    General The consolidated financial statements of Brookfield Properties Corporation (the company) are
prepared in accordance with generally accepted accounting principles as prescribed by the Canadian
Institute of Chartered Accountants (CICA).  (b)
    Principles of consolidationThe consolidated financial statements include:  (i)
    the accounts of all subsidiaries of the company including its
wholly-owned operations, as well as BPO Properties Ltd. (BPO Properties) and
Brookfield Financial Properties L.P. (Brookfield Financial Properties); and(ii)
    the accounts of all subsidiaries incorporated and unincorporated
joint ventures and
partnerships to the extent of the companys proportionate interest in their
respective assets, liabilities, revenue and expenses.  The companys ownership interests in operating entities which are not wholly owned are as
follows:  (i)
    Brookfield Financial Properties L.P.: The company owns a 99.4%
limited partnership interest and general partnership interest in Brookfield
Financial Properties L.P.(ii)
    BPO Properties Ltd.: The company owns 89% on an equity basis and
54.3% on a voting basis of the common shares of BPO Properties Ltd.  (c)
    Properties  (i)
    Commercial propertiesCommercial properties held for investment are carried at cost less accumulated
depreciation. Upon acquisition, the company allocates the purchase price to the
components of the commercial properties acquired: the amount allocated to land is
based on its estimated fair value; buildings and existing tenant improvements are
recorded at depreciated replacement cost; above and below market in-place leases
are determined based on the present value of the difference between the rents
payable under the terms of the respective leases and estimated market rents; lease
origination costs for in-place leases are determined based on the estimated costs
that would be incurred to put the existing leases in place under the same terms and
conditions; and tenant relationships are measured based on the present value of the
estimated avoided costs if a tenant were to renew its lease at expiry, discounted
by the probability of such renewal.Depreciation on buildings is provided during the year ended December 31, 2004 on a
straight-line basis and on the sinking fund basis in previous years, in each case
over the useful lives of the properties to a maximum of 60 years. Depreciation is
determined with reference to each rental propertys carried value, remaining
estimated useful life and residual value.
Acquired tenant improvements, above and below market in-place leases and lease
origination costs are amortized over the remaining terms of the related in-place
leases. The value associated with tenant relationships is amortized over the
expected term of the relationships. All other tenant improvements and re-leasing
costs are deferred and amortized over the lives of the leases to which they relate.For commercial properties, an impairment loss is recognized when a propertys
carrying value exceeds its undiscounted future net cash flow. Properties are
reviewed for impairment whenever events or changes in circumstances indicate the
carrying value may not be recoverable. The impairment is measured as the amount by
which the carrying value exceeds the estimated fair value. Projections of future
cashflow take into account the specific business plan for each property and
managements best estimate of the most probable set of economic conditions
anticipated to prevail in the market.(ii)
    Development propertiesCommercial properties under development consist of properties for which a major
repositioning program is being conducted and properties which are under
construction. These properties are recorded at cost, including pre-development
expenditures.
For development properties, an impairment loss is recognized when a propertys
carrying value exceeds its undiscounted future net cashflow. Properties are
reviewed for impairment whenever events or changes in circumstances indicate the
carrying value may not be recoverable. The impairment is measured as the amount by
which the carrying value exceeds the estimated fair value. Projections of future
cashflow take into account the specific business plan for each property and managements best estimate of the most probable set of economic conditions anticipated to
prevail in the market.Development land is held for residential development and is recorded at the lower
of cost and estimated net realizable value.
Costs are allocated to the saleable acreage of each project or subdivision in
proportion to the anticipated revenue. 41




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##### 



(d) Capitalized costs Costs capitalized to commercial and residential properties which are under development and other
properties held for sale include all expenditures incurred in connection with the acquisition,
development, construction and initial predetermined leasing period. These expenditures consist of
all direct costs, interest and certain administrative expenses. Administrative costs are those
directly attributable to development projects and include salaries and benefits of employees
directly associated with the development projects, such as architects, engineers, designers and
development project managers. Ancillary income relating specifically to such properties during the
development period is treated as a reduction of costs. (e) Stock-based compensation The company accounts for stock options using the fair value method. Under this method, compensation
expense for stock options that are direct awards of stock is measured at fair value at the grant
date using the Black-Scholes option pricing model and recognized over the vesting period. (f) Revenue recognition Revenue from a commercial property is recognized upon the earlier of attaining a break-even point
in cashflow after debt servicing, or the expiration of a reasonable period of time following
substantial completion, subject to the time limitation determined when the project is approved.
Prior to this, the property is categorized as a rental property under development, and related
revenue is applied to reduce development costs. The company has retained substantially all of the risks and benefits of ownership of its rental
properties and therefore accounts for leases with its tenants as operating leases. The total amount
of contractual rent to be received from operating leases is recognized on a straight-line basis
over the term of the lease; a receivable is recorded for the difference between the rental revenue
recorded and the contractual amount received. Rental revenue includes percentage participating
rents and recoveries of operating expenses, including property, capital and Canadian large
corporation taxes. Percentage participating rents are recognized when tenants specified sales
targets have been met. Operating expense recoveries are recognized in the period that recoverable
costs are chargeable to tenants. Revenue from the sale of land and other properties is recorded when the collection of the sale
proceeds is reasonably assured and all other significant conditions are met. Properties which have
been sold, but for which these criteria have not been satisfied, are classified as commercial
properties or included in residential inventory assets, unless they meet the criteria for treatment
as discontinued operations. (g) Income taxes The company accounts for income taxes under the liability method. Under this method, future income
tax assets and liabilities are calculated based on: (i) the temporary differences between the
carrying values and the tax bases of assets and liabilities, and (ii) unused income tax losses,
measured using substantively enacted income tax rates and laws that are expected to apply in the
future as temporary differences reverse and income tax losses are used. (h) Reporting currency and foreign currency translation The consolidated financial statements have been presented in US dollars as the companys principal
investments and cashflow are influenced primarily by the US dollar. Assets and liabilities
denominated in foreign currencies are translated into US dollars at the rate in effect at the
balance sheet date. Revenues and expenses are translated at the weighted average rate in effect for
the period presented. The companys operations in Canada are self-sustaining in nature and as such,
cumulative gains and losses arising from the consolidation of the assets and liabilities of these
operations are recorded as a separate component of shareholders equity. All amounts expressed in the financial statements are in millions of US dollars unless otherwise
noted. (i) Marketable securities Marketable securities are carried at the lower of amortized cost and their estimated net realizable
value. During periods where the fair value or the quoted market value may be less than cost,
the company reviews the relevant security to determine if it will recover its carrying value within
a reasonable period of time and adjusts it, if necessary. This policy considers the companys
intent to hold an investment through periods when quoted market values may not fully reflect the
underlying value of that investment. The company also considers the degree to which estimation is
incorporated into valuations and any potential impairment relative to the magnitude of the related
portfolio. In determining fair values, quoted market prices are generally used when available and, when not
available, management estimates the amounts which could be recovered over time or through a
transaction with knowledgeable and willing third parties under no compulsion to act. (j) Use of estimates The preparation of financial statements, in conformity with Canadian generally accepted accounting
principles, requires estimates and assumptions that affect the carried amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date 42




---



##### 



of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from estimates. Significant estimates are required in
the determination of future cash flows and probabilities in assessing net recoverable amounts and
net realizable value, the allocation of the purchase price to components of commercial properties
acquired, depreciation and amortization, the companys ability to utilize tax losses, hedge
effectiveness, and fair value for disclosure purposes. (k) Derivative financial instruments The company and its subsidiaries utilize derivative financial instruments primarily to manage
financial risks, including interest rate, commodity and foreign exchange risks. Hedge accounting is
applied when the derivative is designated as a hedge of a specific exposure and there is reasonable
assurance that the hedge will be effective. Realized and unrealized gains and losses on forward
exchange contracts designated as hedges of currency risks are included in the cumulative
translation account when the currency risk being hedged relates to a net investment in a
self-sustaining subsidiary. Otherwise, realized and unrealized gains and losses on derivative
financial instruments designated as hedges of financial risks are included in income as an offset
to the hedged item in the period the underlying asset, liability or anticipated transaction affects
income. Financial instruments that are not designated as hedges are carried at estimated fair values, and
gains and losses arising from changes in fair values are recognized in income as a component of
interest and other income in the period the changes occur. The use of non-hedging derivative
contracts is governed by documented risk management policies and approved limits. (l) Comparative figures Certain comparative figures have been reclassified to conform with the current years presentation. NOTE 2: CHANGES IN ACCOUNTING POLICIES Effective January 1, 2004, the company adopted CICA Handbook section 1100, Generally Accepted
Accounting Principles. The section establishes standards for financial reporting in accordance
with
Canadian GAAP, and provides guidance on sources to consult when selecting accounting policies and
determining appropriate disclosures when a matter is not dealt with explicitly in the primary
sources of Canadian GAAP. In particular, this section requires the company to record income arising
from tenant leases and depreciation on buildings on a straight-line basis. Adoption of this section
resulted in recognition of additional straight-line rental revenue of $22 million and additional
depreciation of $58 million before any tax effects for the year ended December 31, 2004.
Previously, the company recorded rental revenue as it was contractually due and payable, and
recorded depreciation on buildings using the sinking fund method. Effective January 1, 2004, the company adopted CICA Handbook section 3063, Impairment of
Long-Lived Assets. The section provides that an impairment loss be recognized when the carrying
value of an asset exceeds the total undiscounted cash flows expected from its use and eventual
disposition. The impairment recognized is measured as the amount by which the carrying value
exceeds its fair value. The adoption of section 3063 did not have a significant impact on the
companys consolidated financial statements. Previously, the impairment was measured as the excess
of the carrying value over the sum of the total undiscounted cash flows. Effective January 1, 2004, the company adopted CICA Handbook section 3110, Asset Retirement
Obligations. The section addresses the recognition and remeasurement of obligations associated
with the retirement of a tangible long-lived asset. This standard provides that obligations
associated with the retirement of tangible long-lived assets be recorded as liabilities when those
obligations are incurred, with the amount of the liability initially measured at fair value. These
obligations are capitalized to the book value of the related long-lived assets and are depreciated
over the useful life of the related asset. The adoption of section 3110 did not have a significant
impact on the companys consolidated financial statements. Effective January 1, 2004, the company adopted Accounting Guideline 13, Hedging Relationships,
(AcG 13), a new accounting guideline issued by the Accounting Standards Board (AcSB) of the CICA
addressing identification, designation, documentation and effectiveness of hedging relationships
for the purposes of applying hedge accounting. Under AcG 13, hedge designation of derivative
financial instruments is only allowed if, both at the inception of the hedge and throughout the
hedge period, the changes in the fair value or cash flows of the derivative instruments are
expected to substantially offset the fair value or cash flows of the underlying asset, liability or
anticipated transaction. Realized and unrealized gains and losses on derivative financial
instruments designated as hedges of financial risks are included in income in the same period as
when the underlying asset, liability or anticipated transaction affects income. The company has adopted CICA Emerging Issue Committee Abstract 140, Accounting for Operating
Leases Acquired in Either an Asset Acquisition or Business Combination, (EIC 140), issued in
September 2003. EIC 140 requires that when a company acquires real estate in either an asset
acquisition or business combination, a portion of the purchase price should be allocated to the
in-place leases to reflect the intangible amounts of leasing costs, above or below market leases
and tenant relationship values, if any. These intangible costs are amortized over their respective
lease terms. The adoption of EIC 140 did not have a significant impact on the companys
consolidated financial statements. 43




---



##### 



NOTE 3: FUTURE ACCOUNTING POLICY CHANGES In June 2003, the CICA issued Accounting Guideline 15, Consolidation of Variable Interest
Entities (AcG 15), which is effective for the companys 2005 fiscal year and provides guidance
for applying the principles in section 1590, Subsidiaries, to those entities defined as Variable
Interest Entities (VIEs) and more commonly referred to as Special Purpose Entities (SPEs), in which
either the equity at risk is not sufficient to permit that entity to finance its activities without
additional subordinated financial support from other parties, or equity investors lack either
voting control, an obligation to absorb expected losses, or the right to relieve expected residual
returns. AcG 15 requires consolidation of VIEs by the Primary Beneficiary. The Primary Beneficiary
is defined as the party who has exposure to the majority of a VIEs
expected losses and/or expected residual returns. The adoption of AcG 15 will not have a material
impact on the consolidated financial statements. In November 2003, CICA Handbook Section 3860, Financial Instruments  Disclosure and
Presentation, effective for the companys 2005 fiscal year, was amended to require that certain
obligations that may be settled at the issuers option in cash or the equivalent value by a
variable number of the issuers own equity instruments be presented as a liability. The amendments
to Section 3860 are effective for fiscal years beginning on or after November 1, 2004, and the
company intends to apply these provisions retroactively, with restatement of prior years presented.
It is expected that this will require the reclassification to liabilities of certain of the
companys preferred shares and securities that are currently included in equity and the recording
of interest expense determined based on the effective financing rate associated with these
instruments. NOTE 4: COMMERCIAL PROPERTIES A breakdown of commercial properties is as follows: (Millions)
    
    2004
    
    
    2003Commercial properties
    
    $
    7,272
    
    
    $
    6,748Less: Accumulated depreciation
    
    
    (579
    )
    
    
    (451
    )Total
    
    $
    6,693
    
    
    $
    6,297
 (a) Commercial properties, carried at a net book value of approximately $2,400 million (2003 
$2,380 million), are situated on land held under leases or other agreements largely expiring after
the year 2069. Minimum rental payments on land leases are approximately $22 million annually for
the next five years and $973 million in total on an undiscounted basis. (b) Construction costs of $15 million (2003  $7 million), interest costs of nil (2003  nil) and
general and administrative expenses of nil (2003  nil) were capitalized to the commercial property
portfolio for properties undergoing redevelopment in 2004. (c) The following amounts represent the
companys proportionate interest in incorporated and unincorporated joint ventures and
partnerships, reflected in the companys commercial and development properties: (Millions)
    
    2004
    
    
    2003Assets
    
    $
    2,173
    
    
    $
    2,164Liabilities
    
    
    1,254
    
    
    
    1,267Operating revenues
    
    
    363
    
    
    
    296Operating expenses
    
    
    141
    
    
    
    120Net income
    
    
    110
    
    
    
    87Cashflow provided from operating activities
    
    
    146
    
    
    
    132Cashflow provided from financing activities
    
    
    
    
    
    
    21Cashflow provided from (used in) investing activities
    
    
    25
    
    
    
    (16
    )
 NOTE 5: DEVELOPMENT PROPERTIES Development properties include commercial developments, primarily for office development and
residential land under and held for
development. A breakdown of development properties is as follows: (Millions)
    
    2004
    
    
    2003Commercial developments
    
    $
    399
    
    
    $
    349Residential developments
    
    
    317
    
    
    
    335Total
    
    $
    716
    
    
    $
    684
 Commercial developments include commercial land, and rights and options which represent
developable land and construction costs. Residential development land includes fully entitled lots
and land in processing. The company capitalizes interest and administrative and development costs
to both commercial and residential development properties. During 2004, the company capitalized construction and
related costs of $26 million (2003  $123 million) and $14 million (2003  $44 million) of interest
to its commercial development sites. 44




---



##### 



The company, through its subsidiaries, is contingently liable for obligations of its
associates in its residential development land joint ventures. In each case, all of the assets of
the joint venture are available first for the purpose of satisfying these obligations with the
balance shared among the participants in accordance with predetermined joint-venture arrangements. NOTE 6: RECEIVABLES AND OTHER The components of receivables and other assets are as follows: (Millions)
    
    2004
    
    
    2003Receivables and real estate mortgages
    
    $
    435
    
    
    $
    499Prepaid expenses and other assets
    
    
    246
    
    
    
    212Non-core real estate assets held for sale
    
    
    4
    
    
    
    6Total
    
    $
    685
    
    
    $
    717
 NOTE 7: MARKETABLE SECURITIES Marketable securities are comprised of a portfolio of fixed-rate corporate bonds with a fair
value approximately equal to its book value and an average yield of 2.6%. The portfolio matures
over the period of 2005 to 2007. NOTE 8: COMMERCIAL PROPERTY DEBT Predominantly all of the commercial property mortgages are secured by individual properties
without recourse to the company. Approximately 90% of the companys commercial property debt is due
after 2006. Weighted AverageInterest Rate at
    
    
    Principal Repayment
    
    
    2010&
    
    
    2004
    
    
    2003(Millions)
    
    Dec. 31, 2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Beyond
    
    
    Total
    
    
    TotalCommercial property debt
    
    
    6.5
    %
    
    $
    277
    
    
    $
    175
    
    
    $
    632
    
    
    $
    278
    
    
    $
    193
    
    
    $
    2,995
    
    
    $
    4,550
    
    
    $
    4,537
 Commercial property debt includes $945 million (2003  $1,104 million) repayable in Canadian
dollars of C$1,134 million (2003 -C$1,435 million). The weighted average interest rate at December
31, 2004 was 6.5% (2003  6.6%). The companys bank credit facility is in the form of a three-year revolving facility totaling $150
million, of which $20 million was drawn at December 31, 2004. This facility has a floating interest
rate of approximately 3.7%. NOTE 9: ACCOUNTS PAYABLE AND OTHER LIABILITIES The components of the companys accounts payable and other liabilities are as follows: (Millions)
    
    2004
    
    
    2003Accounts payable
    
    $
    289
    
    
    $
    241AdvancesRetractable preferred shares
    
    
    167
    
    
    
    154Other
    
    
    135
    
    
    
    150Total
    
    $
    591
    
    
    $
    545
 The Class AAA Series E retractable preferred shares have a cumulative dividend rate of 70% of
bank prime. The company also has a revolving five-year term facility with a shareholder which bears
interest based on the prime rate. This revolving facility is convertible at either partys option
into a fixed-rate financing at 9.75% repayable in 2015. This facility was undrawn at December 31,
2004. Other advances are comprised mainly of debt attributable to the land development business of
$135 million (2003  $150 million) and are primarily recourse in nature to subsidiaries of the
company. The weighted average interest rate on these advances as at December 31, 2004 was 4.2%
(2003  4.4%). Advances totaling $107 million are due by the end of 2005, and the remaining
balances are due prior to 2009. NOTE 10: INCOME TAXES Future income tax assets (liabilities) consist of the following: (Millions)
    
    2004
    
    
    2003Future income tax assets related to non-capital and capital losses
    
    $
    472
    
    
    $
    469Future income tax liabilities related to differences in tax and book
basis, net
    
    
    (568
    )
    
    
    (487
    )Total
    
    $
    (96
    )
    
    $
    (18
    )
 45




---



##### 



The future income tax assets (liabilities) relate primarily to non-capital losses available to
reduce taxable income which may arise in the future. The company and its Canadian subsidiaries have
future income tax assets of $277 million (2003  $235 million) that relate to non-capital losses
which expire over the next ten years, and $45 million (2003  $40 million) that relate to capital
losses which have no expiry. The companys U.S. subsidiaries have future income tax assets of $150
million (2003  $194 million) that relate to net operating losses which expire over the next 16
years. The amount of non-capital losses and deductible temporary differences, for which no future
income tax assets have been recognized, is approximately $400 million (2003  $436 million) which
also expire over the next 10 years. Future income tax expense consists of the following: (Millions)
    
    2004
    
    
    2003Income tax expense at the Canadian federal and provincial
income tax rate of 35% (2003 - 35%)
    
    $
    133
    
    
    $
    141Increase (decrease) in income tax expense due to the following:Higher income taxes in other jurisdictions
    
    
    6
    
    
    
    7Minority shareholders interests in income tax expense
    
    
    (4
    )
    
    
    (2
    )Changes in Canadian tax rates
    
    
    
    
    
    
    (23
    )Tax assets previously not recognized
    
    
    (25
    )
    
    
    (28
    )Non-taxable portion of capital gains
    
    
    (1
    )
    
    
    (1
    )Other
    
    
    7
    
    
    
    8Total
    
    $
    116
    
    
    $
    102
 NOTE 11: MINORITY INTERESTS OF OTHERS IN PROPERTIES Minority interests of others in properties include the amounts of common equity related to
other non-controlling shareholders interests in property ownership entities which are consolidated
in the companys accounts. The balances are as follows: Equity(Millions)
    
    Ownership
    
    2004
    
    
    2003Participation by other
shareholders in properties
through:Common shares of BPO Properties
    
    
    11.0
    %
    
    $
    42
    
    
    $
    72Limited partnership units
of Brookfield Financial
Properties
    
    
    0.6
    %
    
    
    11
    
    
    
    9Total
    
    
    
    
    
    $
    53
    
    
    $
    81
 NOTE 12: PREFERRED SHARES  SUBSIDIARIES AND CORPORATE Subsidiaries and corporate preferred shares outstanding total $1,174 million (2003  $1,001 million) as follows: (a) Subsidiaries The companys subsidiaries have the following preferred shares outstanding: Shared
    
    
    Preferred
    
    Cumulative(Millions except share information)
    
    Outstanding
    
    
    Shares Series
    
    Dividend Rate
    
    2004
    
    
    2003BPO Properties
    
    
    1,805,489
    
    
    Series G
    
    70% of bank prime
    
    $
    38
    
    
    $
    353,816,527
    
    
    Series J
    
    70% of bank prime
    
    
    80
    
    
    
    74300
    
    
    Series K
    
    30-day BA + 0.4%
    
    
    124
    
    
    
    1152,847,711
    
    
    Series M
    
    70% of bank prime
    
    
    59
    
    
    
    55800,000
    
    
    Series N
    
    30-day BA + 0.4%
    
    
    17
    
    
    
    15$
    318
    
    
    $
    294100%-owned subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    121Total
    
    
    
    
    
    
    
    
    
    
    
    $
    320
    
    
    $
    415
 The redemption terms of the preferred shares issued by BPO Properties are as follows: (i) Series G preferred shares are entitled to cumulative dividends at an annual rate equal to 70%
of the average bank prime rate. The company may, at its option, redeem the shares at a price of
C$25 per share plus arrears on any accrued and unpaid dividends. (ii) Series J and M preferred shares are entitled to cumulative dividends at an annual rate equal
to 70% of the average bank prime rate for the previous quarter. The company may, at its option,
redeem the shares at a price of C$25 per share plus arrears on any accrued and unpaid dividends. (iii) Series K preferred shares are entitled to cumulative dividends at the 30 day bankers
acceptance rate plus 0.4%. The company may, at its option, redeem the shares at a price of
C$500,000 per share plus an amount equal to all accrued and unpaid dividends. 46




---



##### 



(iv) Series N preferred shares are entitled to cumulative dividends at the 30 day bankers
acceptance rate plus 0.4%. The company may, at its option, redeem the shares at C$25 per share plus
arrears on any accrued and unpaid dividends. (b) Corporate The company has the following preferred shares authorized and outstanding: (Millions, except share information)
    
    
    
    
    
    
    CumulativeAuthorized
    
    Outstanding
    
    
    Preferred Shares Series
    
    
    Dividend Rate
    
    
    2004
    
    
    20036,312,000
    
    
    6,312,000
    
    
    Class A redeemable voting
    
    
    7.50
    %
    
    $
    11
    
    
    $
    112,000,000
    
    
    2,000,000
    
    
    Class AA Series E
    
    70% of bank prime
    
    
    
    34
    
    
    
    348,000,000
    
    
    8,000,000
    
    
    Class AAA Series F
    
    
    6.00
    %
    
    
    126
    
    
    
    1266,000,000
    
    
    4,400,000
    
    
    Class AAA Series G
    
    
    5.25
    %
    
    
    110
    
    
    
    1108,000,000
    
    
    8,000,000
    
    
    Class AAA Series H
    
    
    5.75
    %
    
    
    151
    
    
    
    1518,000,000
    
    
    8,000,000
    
    
    Class AAA Series I
    
    
    5.20
    %
    
    
    154
    
    
    
    1548,000,000
    
    
    8,000,000
    
    
    Class AAA Series J
    
    
    5.00
    %
    
    
    146
    
    
    
    6,000,000
    
    
    6,000,000
    
    
    Class AAA Series K
    
    
    5.20
    %
    
    
    122
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    854
    
    
    $
    586
 Cumulative preferred dividends are payable quarterly, as and when declared by the Board of
Directors, on the last day of March, June, September and December. The holders of Class A preferred shares are entitled to receive notice of and to attend all
shareholders meetings and for all purposes are entitled to one vote for each Class A preferred
share held, except in respect to the election of directors, where cumulative voting will apply in
the same manner as for the common shares. Upon giving at least 30 days notice prior to the date
set for redemption, the company may redeem all, or from time to time any part, of the outstanding
Class A preferred shares on payment to the holders thereof, for each share to be redeemed of an

amount equal to C$2.50 per share, together with all accrued and unpaid cumulative dividends
thereon. The company may redeem outstanding Class AA preferred shares, at a redemption price for each of the
Class AA preferred shares so redeemed as may have been fixed for that purpose in respect of each
series prior to the sale and allotment of any Class AA preferred shares of that series, plus an
amount equal to unpaid cumulative dividends. During 2004, the company issued 8,000,000 Class AAA, Series J preferred shares and 6,000,000 Class
AAA, Series K preferred shares for total proceeds of C$350 million. During 2003, the company issued 4,400,000 Class AAA, Series G preferred shares, 8,000,000 Class
AAA, Series H preferred shares, and 8,000,000 Class AAA, Series I preferred shares for total
proceeds of $415 million. In June 2003, 4,000,000 Class AAA, Series C and D preferred shares were
redeemed for $74 million. The redemption terms of the Class AAA Preferred Shares are as follows: Redemption Date(1)
    
    Redemption Price(2)
    
    Companys Option(3)
    
    Holders Option(4)Series F
    
    September 30, 2009
    
    C   $25.75
    
    September 30, 2009
    
    March 31, 2013Series G
    
    June 30, 2011
    
    US  $26.00
    
    June 30, 2011
    
    September 30, 2015Series H
    
    December 31, 2011
    
    C   $26.00
    
    December 31, 2011
    
    December 31, 2015Series I
    
    December 31, 2008
    
    C   $25.75
    
    December 31, 2008
    
    December 31, 2010Series J
    
    June 30, 2010
    
    C   $26.00
    
    June 30, 2010
    
    December 31, 2014Series K
    
    December 31, 2012
    
    C   $26.00
    
    December 31, 2010
    
    December 31, 2016
   (1)
    
    Subject to applicable law and rights of the corporation, the company may, on or after the dates specified above, redeem Class
AAA preferred shares for cash as follows: the Series F at a price of C$25.75, if redeemed during the 12 months commencing
September 30, 2009 and decreasing by C$0.25 each 12-month period thereafter to a price per share of C$25.00 if redeemed
on or after September 30, 2012; the Series G at a price of US$26.00, if redeemed during the 12 months commencing June
30, 2011 and decreasing by US$0.33 each 12-month period thereafter to a price per share of US$25.00 if redeemed on or
after June 30, 2014; the Series H at a price of C$26.00, if redeemed during the 12 months commencing December 31, 2011
and decreasing by C$0.33 each 12-month period thereafter to a price per share of C$25.00 if redeemed on or after
December 31, 2014; the Series I at a price of C$25.75, if redeemed during the 12 months commencing December 31, 2008
and decreasing by C$0.25 each 12-month period thereafter to a price per share of C$25.00 if redeemed on or after
December 31, 2010; the Series J at a price of C$26.00 if redeemed during the 12 months commencing June 30, 2010 and
decreasing by C$0.25 each 12-month period thereafter to a price per share of C$25.00 if redeemed on or after June 30, 47




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##### 



2014; the Series K at a price of C$26,00 if redeemed during the 12-months commencing December 31, 2012 and decreasing
by C$0.33 each 12-month period thereafter to a price per share of $C25.00 if redeemed on or after December 31, 2015.(2)
    
    Subject to applicable law and rights of the corporation, the company may purchase Class AAA preferred shares for cancellation
at the lowest price or prices at which, in the opinion of the Board of Directors of the company, such shares are
obtainable.(3)
    
    Subject to the approval of the Toronto Stock Exchange the company may, on or after the dates specified above, convert the
Class AAA, Series F, G, H, I, J and K into common shares of the company. The Class AAA, Series F, G, H, I, J and K
preferred shares may be converted into that number of common shares determined by dividing the then-applicable
redemption price by the greater of C$2.00 (Series G  US$2.00) or 95% of the weighted average trading price of common
shares at such time.(4)
    
    Subject to the companys right to redeem or find substitute purchasers, the holder may, on or after the dates specified
above, convert Class AAA, Series F, G, H, I, J and K preferred shares into that number of common shares determined by
dividing the then-applicable redemption price by the greater of C$2.00 (Series G  US$2.00) or 95% of the weighted average
trading price of common shares at such time. NOTE 13: COMMON SHARES The authorized common share capital consists of an unlimited number of common voting shares.
The issued and outstanding common share capital consists of: (Millions)
    
    2004
    
    
    2003Common shares
    
    $
    1,080
    
    
    $
    1,084Retained earnings, and cumulative translation adjustment
    
    
    947
    
    
    
    831Total
    
    $
    2,027
    
    
    $
    1,915
 Retained earnings and cumulative translation adjustment include a foreign currency cumulative
translation adjustment of $80 million (2003  $34 million) and $6 million (2003  $8 million) from
preferred share issue costs. The amount paid in excess of the book value of common shares purchased
for cancellation was $29 million (2003  $13 million). (a) Common shares During the years 2004 and 2003, common shares issued
and outstanding changed as follows: 2004
    
    
    2003Common shares outstanding, beginning of year
    
    
    156,246,701
    
    
    
    160,364,416Addition of shares as a result of exercise of options
    
    
    755,052
    
    
    
    888,985Deduction of shares as a result of repurchases made
    
    
    (1,409,900
    )
    
    
    (5,006,700
    )Common shares outstanding, end of year
    
    
    155,591,853
    
    
    
    156,246,701
 During 2004, the exercise of options issued under the companys share option plan generated
cash proceeds of $10 million (2003 - $ 8 million). During 2004, common shares of the company were
acquired for cancellation pursuant to the normal course issuer bid at an average price of $30.54
per share (2003  $21.10). (b) Earnings per share Net income per share and weighted average common
shares outstanding are calculated as follows: (Millions, except per share information)
    
    2004
    
    
    2003Net income
    
    $
    242
    
    
    $
    279Preferred share dividends
    
    
    (41
    )
    
    
    (20
    )Net income available to common shareholders
    
    $
    201
    
    
    $
    259Weighted average common shares outstanding  basic
    
    
    155.9
    
    
    
    157.4Effect of unexercised options
    
    
    1.2
    
    
    
    1.2Weighted average common shares outstanding  diluted
    
    
    157.1
    
    
    
    158.6
 On February 9, 2005, the Board of Directors approved a three-for-two stock split. The stock
split will be in the form of a stock dividend. Shareholders will receive one Brookfield common
share for each two common shares held. The stock dividend will be payable on March 31, 2005 to
shareholders of record at the close of business on March 15, 2005. The stock split will not change
the economic value of the common shares issued and outstanding. Effectively, the number of common
shares increases by one-half and the earnings per share decreases by one-third. 48




---



##### 



NOTE 14: STOCK-BASED
COMPENSATION Options issued under the companys Share Option Plan vest proportionately over five years and
expire ten years after the grant date. The exercise price is equal to the market price at the grant
date. During the first quarter of 2004, the company granted 975,000 stock options under the Share Option
Plan with an exercise price of $29.42 per share, which was equal to the market price on the grant
date. The compensation expense was calculated using the Black-Scholes model of valuation, assuming
a 7.5-year term, 16.0% volatility, a weighted average dividend yield of 2% and an interest rate of
4.6%. The resulting fair value of $7 million (2003 - $5 million) is charged to expense over the
vesting period of the options granted. The following table sets out
the number of options to purchase common shares which were issued and outstanding at December 31, 2004 under the companys share option plan: Number
    
    
    Weighted AverageIssue Date
    
    Expiry Date
    
    
    of Shares
    
    
    Exercise Price1998
    
    
    2008
    
    
    
    254,500
    
    
    $
    13.661999
    
    
    2009
    
    
    
    29,300
    
    
    
    9.942000
    
    
    2010
    
    
    
    309,925
    
    
    
    12.082001
    
    
    2011
    
    
    
    492,237
    
    
    
    17.652002
    
    
    2012
    
    
    
    608,587
    
    
    
    18.972003
    
    
    2013
    
    
    
    495,439
    
    
    
    19.962004
    
    
    2014
    
    
    
    938,591
    
    
    
    30.02Total
    
    
    
    
    
    
    3,128,579
    
    
    $
    21.04The change in the number of options during 2004
and 2003 is as follows:
 2004
    
    
    2003Number
    
    
    Weighted Average
    
    
    Number
    
    
    Weighted Averageof Options
    
    
    Exercise Price
    
    
    of Options
    
    
    Exercise PriceOutstanding, beginning of year
    
    
    3,242,240
    
    
    $
    16.03
    
    
    
    3,504,791
    
    
    $
    12.99Granted
    
    
    975,000
    
    
    
    29.42
    
    
    
    1,000,000
    
    
    
    18.38Exercised
    
    
    (755,052
    )
    
    
    (13.21
    )
    
    
    (888,985
    )
    
    
    (8.44
    )Cancelled
    
    
    (333,609
    )
    
    
    (19.70
    )
    
    
    (373,566
    )
    
    
    (17.05
    )Outstanding, at end of year
    
    
    3,128,579
    
    
    $
    21.04
    
    
    
    3,242,240
    
    
    $
    16.03Exercisable at end of year
    
    
    1,580,724
    
    
    $
    17.74
    
    
    
    1,136,968
    
    
    $
    13.42
 A Deferred Share Unit Plan is offered to executive officers and non-employee directors of the
company. Under this plan, each officer and director may choose to receive all or a percentage of
his or her annual incentive bonus or directors fees in the form of deferred share units (DSUs).
The DSUs are vested over a five year period and accumulate additional DSUs at the same rate as
dividends on common shares. Officers and directors are not permitted to convert the DSUs into cash
until retirement or cessation of employment. The value of the vested and non-vested DSUs, when
converted to cash, will be equivalent to the market value of the common shares at the time the
conversion takes place. Employee compensation expense for these plans is charged against income
over the vesting period of the DSUs. Changes in the amount payable by the company in respect of
vested DSUs as a result of dividends and share price movements are recorded as employee
compensation expense in the period of the change. Employee compensation expense related to the stock option and the Deferred Share Unit plans for the
year ended December 31, 2004 was $5 million (2003 - $3 million). NOTE 15: COMMERCIAL
PROPERTY AND RESIDENTIAL DEVELOPMENT OPERATIONS (a) Revenue and
gains
The components of revenue and gains are as follows: (Millions)
    
    2004
    
    
    2003Revenue from commercial property operations
    
    $
    1,074
    
    
    $
    976Lease termination income
    
    
    60
    
    
    
    Total commercial property revenue
    
    
    1,134
    
    
    
    976Revenue from development and residential operations
    
    
    261
    
    
    
    225Revenue from commercial property, development and residential operations
    
    
    1,395
    
    
    
    1,201Interest and other
    
    
    47
    
    
    
    62Commercial property gains
    
    
    
    
    
    
    100Total
    
    $
    1,442
    
    
    $
    1,363
 49




---



##### 



(b) Commercial
property operations
The results of the companys commercial property operations are as follows: (Millions)
    
    2004
    
    
    2003Commercial property operations
    
    $
    1,074
    
    
    $
    976Expenses
    
    
    (391
    )
    
    
    (379
    )Lease termination income and gains
    
    
    60
    
    
    
    100Total
    
    $
    743
    
    
    $
    697
 Due to the events of September 11, 2001 and the impact on the companys properties in Lower
Manhattan, commercial property income includes $7 million (2003 - $11 million) of business
interruption insurance claims as a result of loss of revenue. During 2004, rental revenues
from Merrill Lynch accounted for 14% (2003 - 14%) of total revenue
from commercial properties. (c) Development and
residential operations
Development and residential operations results for the year are as follows: (Millions)
    
    2004
    
    
    2003Revenue
    
    $
    261
    
    
    $
    225Expenses
    
    
    (219
    )
    
    
    (194
    )Total
    
    $
    42
    
    
    $
    31
 NOTE 16: DIFFERENCES FROM UNITED STATES ACCOUNTING PRINCIPLES Canadian generally accepted accounting principles (Canadian GAAP) differ in some respects
from the principles that the company would follow if its consolidated financial statements were
prepared in accordance with accounting principles generally accepted in the United States (US
GAAP). The effects of significant accounting differences on the companys balance sheet and
statements of income, retained earnings and cashflow are quantified and described in the
accompanying notes. Under both Canadian and US GAAP, non-GAAP measures and discussion are generally
not included in the financial statements and notes thereto. (a) Income statement differences The incorporation of the significant differences in accounting principles in the companys income
statements for the years ended December 31, 2004 and 2003 under US GAAP would result in net income
under US GAAP of $259 million (2003  $254 million). The main differences between Canadian GAAP and
US GAAP are summarized in the following table: (Millions, except per share information)
    
    2004
    
    
    2003Net income as reported under Canadian GAAP
    
    $
    242
    
    
    $
    279Adjustments:(i) (Decreased) increased commercial property income
    
    
    (18
    )
    
    
    9(ii) Decreased (increased) commercial property depreciation
    
    
    5
    
    
    
    (60
    )(iii) Increased commercial property lease termination income and gains
    
    
    42
    
    
    
    9(iv) (Increased) decreased deferred income taxes
    
    
    (12
    )
    
    
    17Net income under US GAAP
    
    $
    259
    
    
    $
    254Net income per shareBasic
    
    $
    1.40
    
    
    $
    1.49Diluted
    
    $
    1.39
    
    
    $
    1.48Net income per share  after giving effect to stock dividendBasic
    
    $
    0.93
    
    
    $
    0.99Diluted
    
    $
    0.92
    
    
    $
    0.98
  Other significant differences are outlined in each category between Canadian GAAP and US GAAP
as follows:(i)
    
    (Decreased) Increased commercial property incomePrior to January 1, 2004, rental revenue was recognized under Canadian GAAP over the term
of the lease as it becomes due where increases in rent are intended to offset the estimated
effects of inflation. Effective January 1, 2004, rental revenue is recognized on a
straight-line basis over the term of the lease. Under US GAAP, rental revenue has always
been recognized on a straight-line basis. The net impact on the current year income of the
company had the straight-line method always been used under Canadian GAAP would be a
decrease in commercial property revenue by $18 million (2003 - increase by $9 million). 50




---



##### 



(ii)
    
    Decreased (increased) commercial property depreciationPrior to January 1, 2004, commercial properties were depreciated under Canadian GAAP using
the sinking-fund method.
Effective January 1, 2004, depreciation of rental properties is recorded using the
straight-line method on a prospective basis.
Under US GAAP, commercial properties have been depreciated on a straight-line basis from
inception. As a result of the higher carrying value under Canadian GAAP at January 1, 2004,
straight-line depreciation is higher under Canadian GAAP by $5 million for 2004. For 2003,
straight-line depreciation under US GAAP was $60 million higher
than sinking - fund
depreciation under Canadian GAAP.(iii)
    
    Increased commercial property lease termination income and gainsUnder US GAAP, the book values of commercial property assets differ from Canadian GAAP as a
result of historical rental revenue recognition and commercial property depreciation
methods, as explained in (i) and (ii). Further, termination of a previously existing lease
at One World Financial Center in New York resulted in additional lease termination income
under US GAAP. The net impact of these amounts would be an increase in commercial property
lease termination income and gains of $42 million (2003 - $9 million).(iv)
    
    (Increased) decreased deferred income taxesIncome taxes are accounted for using the liability method under Canadian and US GAAP. For
the year ended December 31, 2004, an increase of deferred income tax expense of $12 million
(2003 - decrease of $17 million) would be recorded under US GAAP due to the tax effect of
the stated differences between Canadian and US GAAP described
above.
Under current Canadian and US GAAP, the impact of changes in income tax rates to the tax
asset or liability account is reflected in the current years statement of income. Under
Canadian GAAP, the impact of the change is reflected when the legislation affecting the tax
rate change is substantively enacted, whereas the impact under US GAAP is reflected when
legislation is enacted. (b) Comprehensive income Under US GAAP, the Financial Accounting Standards Board (FASB) issued SFAS 130 entitled
Reporting Comprehensive Income requiring the reporting of comprehensive income. Comprehensive
income, which incorporates net income, includes all changes in equity during the year, and
accordingly, the change in the companys cumulative translation adjustment is reflected in the
companys calculation of comprehensive income. Differences arise from the application of the current rate method of currency translation under US
GAAP to all periods presented pursuant to the adoption of the US dollar as the companys reporting
currency, and from other differences between Canadian and US GAAP as described above under Income
statement differences. Comprehensive income using Canadian GAAP amounts is as follows: (Millions)
    
    2004
    
    
    2003Net income under Canadian GAAP
    
    $
    242
    
    
    $
    279Foreign currency translation adjustment under Canadian GAAP
    
    
    46
    
    
    
    70Comprehensive income using Canadian GAAP amounts
    
    $
    288
    
    
    $
    349
 Comprehensive income using US GAAP amounts is as follows: (Millions)
    
    2004
    
    
    2003Net income under US GAAP
    
    $
    259
    
    
    $
    254Foreign currency translation adjustment under US GAAP
    
    
    71
    
    
    
    54Comprehensive income using US GAAP amounts
    
    $
    330
    
    
    $
    308
 51




---



##### 



(c) Balance sheet differences There are differences in the treatment of balance sheet items between Canadian GAAP and US GAAP.
The incorporation of the significant differences in accounting principles in the companys
financial statements as at December 31, 2004 and 2003 would result in the following balance sheet
presentation under US GAAP: (Millions)
    
    2004
    
    
    2003AssetsCommercial properties
    
    $
    6,277
    
    
    $
    5,877Development properties
    
    
    716
    
    
    
    684Receivables and other
    
    
    777
    
    
    
    824Deferred income taxes
    
    
    6
    
    
    
    116Marketable securities
    
    
    285
    
    
    
    267Cash and cash equivalents
    
    
    112
    
    
    
    132Total assets under US GAAP
    
    $
    8,173
    
    
    $
    7,900Liabilities and shareholders equityCommercial property debt
    
    $
    4,550
    
    
    $
    4,537Accounts payable and other liabilities
    
    
    558
    
    
    
    545Minority interests of others in properties
    
    
    58
    
    
    
    86Preferred sharesSubsidiaries
    
    
    320
    
    
    
    415Corporate
    
    
    865
    
    
    
    598Common shares
    
    
    1,822
    
    
    
    1,719Total liabilities and shareholders equity under US GAAP
    
    $
    8,173
    
    
    $
    7,900
 Significant differences between Canadian GAAP and US GAAP are as follows: Commercial properties There are two principal differences between Canadian GAAP and US GAAP affecting the carrying value of commercial properties.
The first difference relates to historical differences in the method of depreciation to be applied to depreciable assets as
described in
Note 16(a)(ii). At December 31, 2004, this would result in a cumulative adjustment of $416 million (2003  $420 million). The second
difference relates to the method of accounting for joint ventures and partnerships. Under Canadian GAAP, the accounts of all
incorporated and unincorporated joint ventures and partnerships are proportionately consolidated according to the companys ownership interest. Under US GAAP, the equity method of accounting is applied. In circumstances where a joint venture is an operating
entity and the significant financial and operating policies are, by contractual arrangement, jointly controlled by all parties
having an
equity interest in the entity, US regulations do not require adjustment to equity account the joint ventures. The presentation of the
companys joint ventures does not require adjustment to the equity method. (Millions)
    
    2004
    
    
    2003Commercial properties under Canadian GAAP
    
    $
    6,693
    
    
    $
    6,297Additional accumulated depreciation under US GAAP
    
    
    (416
    )
    
    
    (420
    )Commercial properties under US GAAP
    
    $
    6,277
    
    
    $
    5,877
 Receivables and other The principal difference in the accounting for receivables and other under US GAAP is the inclusion of a straight-line rent
receivable
of $92 million (2003  $107 million) had the company always straight-lined its revenue. (Millions)
    
    2004
    
    
    2003Receivables and other under Canadian GAAP
    
    $
    685
    
    
    $
    717Straight-line rent receivable
    
    
    92
    
    
    
    107Receivables and other under US GAAP
    
    $
    777
    
    
    $
    824
 Deferred income taxes Under US GAAP, the company has a deferred tax asset of $6 million (2003  $116 million). The
offsetting balance created by this adjustment decreases future income tax liability under Canadian
GAAP by $96 million (2003  $18 million), decreases cumulative translation adjustment by $25
million (2003  $5 million) and increases shareholders equity by $127 million (2003  $139
million). 52




---



##### 



The deferred income tax asset under US GAAP is as follows: (Millions)
    
    2004
    
    
    2003Tax assets related to net operating and capital losses
    
    $
    612
    
    
    $
    609Tax liabilities related to differences in tax and book basis
    
    
    (458
    )
    
    
    (333
    )Valuation allowance
    
    
    (148
    )
    
    
    (160
    )Deferred income tax asset under US GAAP
    
    $
    6
    
    
    $
    116
 Accounts payable and other liabilities The principal difference under US GAAP relates to deferred income relating to a lease transaction at One World Financial Center
in New York. The accounts payable and other liabilities under US GAAP is as follows: (Millions)
    
    2004
    
    
    2003Accounts payable and other liabilities under Canadian GAAP
    
    $
    591
    
    
    $
    545Deferred income
    
    
    (33
    )
    
    
    Accounts payable and other liabilities under US GAAP
    
    $
    558
    
    
    $
    545
 Common shareholders equity The cumulative impact of US GAAP adjustments to common
shareholders equity is as follows: (Millions)
    
    2004
    
    
    2003Common shareholders equity under Canadian GAAP
    
    $
    2,027
    
    
    $
    1,915Adjustment to accumulated depreciation under US GAAP
    
    
    (416
    )
    
    
    (420
    )Adjustment to accounts payable and other liabilities under US GAAP
    
    
    33
    
    
    
    Adjustment to deferred income tax asset under US GAAP
    
    
    102
    
    
    
    134Rental revenue adjustments under US GAAP
    
    
    92
    
    
    
    107Foreign currency translation adjustments, net
    
    
    (16
    )
    
    
    (17
    )Common shareholders equity under US GAAP
    
    $
    1,822
    
    
    $
    1,719
 The components of common shareholders equity under US GAAP, after the adjustments in the previous table, are as follows: (Millions)
    
    2004
    
    
    2003Common shares
    
    $
    1,173
    
    
    $
    1,177Additional paid-in capital, net*
    
    
    871
    
    
    
    825Cumulative translation adjustment
    
    
    (29
    )
    
    
    (100
    )Cumulative adjustments to net income and retained earnings
    
    
    (193
    )
    
    
    (183
    )Common shareholders equity under US GAAP
    
    $
    1,822
    
    
    $
    1,719
   *
    Net of retained earnings of $607 million (2003  $526 million) Joint ventures The following amounts represent the companys proportionate interest in incorporated and unincorporated joint
ventures reflected in
the companys balance sheet for US GAAP purposes: (Millions)
    
    2004
    
    
    2003Assets
    
    $
    1,866
    
    
    $
    1,865Liabilities
    
    
    1,254
    
    
    
    1,267Operating revenue
    
    
    306
    
    
    
    258Operating expenses
    
    
    130
    
    
    
    109Net income
    
    
    81
    
    
    
    74Cashflows provided from operating activities
    
    
    116
    
    
    
    116Cashflows provided from investing activities
    
    
    
    
    
    
    21Cashflows provided from (used in) financing activities
    
    
    25
    
    
    
    (16
    )
 (d) Change in
accounting policies In April 2003, FASB issued SFAS 149, Amendment of SFAS 133 on Derivative Instruments and Hedging
Activities (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133. In particular, it clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative, clarifies when a derivative contains a
financing component, amends the definition 53




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##### 



of an underlying, and amends certain other existing pronouncements. The adoption of SFAS 149
by the company has not had a material impact on the results of operations or financial condition. In May 2003, FASB issued SFAS 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for
how an issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances) whereas many of those instruments were
previously classified as equity. Some of the provisions of this statement are consistent with the
current definition of liabilities in FASB Concepts Statement 6, Elements of Financial Statements.
The remaining provisions of this statement are consistent with the proposal to revise that
definition to encompass certain obligations that a reporting entity can or must settle by issuing
its own equity shares, depending on the nature of the relationship established between the holder
and the issuer. The adoption of SFAS 150 by the company has not had a material impact on the
consolidated financial statements. In December 2003, the FASB issued revised Interpretation 46 (FIN 46R), Consolidation of Variable
Interest Entities (VIEs), an Interpretation of Accounting Research Bulletin 51, Consolidated
Financial Statements, and replaces the previous version of FASB Interpretation 46 issued in
January, 2003 (FIN 46). This interpretation is to be applied immediately to VIEs created after
January 31, 2003. A company that holds a variable interest in a VIE it acquired before February 1,
2003 shall apply the provision of this interpretation no later than the first fiscal year or
interim period ending after March 15, 2004 unless those entities are considered to be special
purpose entities in which the application is to be no later than the end of the first reporting
period that ends after December 15, 2003. This interpretation may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first applied or by restating previously
issued financial statements for one or more years with a cumulative-effect adjustment as of the
beginning of the first year restated. The decision whether to consolidate a VIE begins with
establishing that a VIE exists. A VIE exists when either the total equity investment at risk is not
sufficient to permit the entity to finance its activities by itself, or the equity investor lacks
one of three characteristics associated with owning a controlling financial interest. Those
characteristics are the direct or indirect ability to make decisions about the entitys activities
through voting rights or similar rights, the obligation to absorb the expected losses of an entity,
and the right to receive the expected residual returns. The entity with the majority of the
expected losses or expected residual return is considered to be primary beneficiary of the entity
and is required to consolidate such entity. FIN 46R was effective for the company on June 30, 2004.
The adoption of FIN 46R has not had a material impact on the companys financial statements. (e) Future accounting policy changes In December 2004, the FASB issued SFAS 123R, Share-Based Payment (SFAS 123R), which establishes
accounting standards for all transactions in which an entity exchanges its equity instruments for
goods and services. SFAS 123R focuses primarily on accounting for transactions with employees, and
carries forward without change prior guidance for share-based payments for transactions with
non-employees. SFAS 123R eliminates the intrinsic value measurement objective in APB Opinion 25 and generally
requires the company to measure the cost of employee services received in exchange for an award of
equity instruments based on the fair value of the award on the date of the grant. The standard
requires grant date fair value to be estimated using either an option-pricing model which is
consistent with the terms of the award or a market observed price, if such a price exists. Such
cost must be recognized over the period during which an employee is required to provide service in
exchange for the award. The standard also requires the company to estimate the number of
instruments that will ultimately be issued, rather than accounting for forfeitures as they occur.
The company is assessing the requirements of the standard and believes that its adoption will not
have a significant impact. In December 2004, the FASB issued SFAS 153, Exchanges of Non-Monetary Assets (SFAS 153), an
amendment of APB 29. This standard amends Opinion 29 to eliminate the exception for non-monetary
exchanges of similar productive assets and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. The standard specifies that a non-monetary
exchange has commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. This standard is effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is
permitted for non-monetary asset exchanges occurring in fiscal periods beginning after the date
this standard is issued. Retroactive application is not permitted. The company is assessing the
requirements of this standard and believes that its adoption will not have a significant impact. On March 21, 2004, the FASB ratified the consensus reached by the EITF on EITF 03-6. This EITF
requires the calculation of earnings per share to be changed to measure the impact of certain
securities or other instruments or contracts that entitle their holders to participate in
undistributed earnings of the reporting entity, provided such entitlement is non-discretionary and
objectively determinable. EITF 03-6 is effective for the first interim or annual reporting period
that begins after March 31, 2004, and requires retroactive adjustment to earnings per share
presented for prior periods. The company is assessing the impact that EITF 03-6 will have on its
2005 consolidated financial statements, if any. 54




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##### 



NOTE 17: GUARANTEES, CONTINGENCIES AND OTHER (a) In the normal course of operations, the company and its consolidated subsidiaries execute
agreements that provide for indemnification and guarantees to third parties in transactions such as
business dispositions, business acquisitions, sales of assets, sales of services, securitization
agreements and underwriting and agency agreements. In particular, the company provided income
guarantees to the co-owners in connection with the sale of certain properties in prior years. These
guarantees are based on a specified level of contractual occupancy until July 2007 and a specified
rate of return until July 2005. Based on estimated levels of contractual occupancy and rate of
return, the company has provided for potential payments of $2 million at the time of sale. The company has also agreed to indemnify its directors and certain of its officers and employees.
The nature of substantially all of the indemnification undertakings prevent the company from making
a reasonable estimate of the maximum potential amount that could be required to pay third parties
as the agreements do not specify a maximum amount and the amounts are dependent upon the outcome of
future contingent events, the nature and likelihood of which cannot be determined at this time.
Historically, neither the company nor its consolidated subsidiaries have made significant payments
nor do they expect to make any significant payments under such indemnification agreements. Brookfield does not conduct its operations, other than equity-accounted investments, through
entities that are not fully or proportionately consolidated in its consolidated financial
statements, and has not guaranteed or otherwise contractually committed to support any material
financial obligations not reflected in its consolidated financial statements. (b) The company and its operating subsidiaries are contingently liable with respect to litigation
and claims that arise from time to time in the normal course of business. In the opinion of
management, any liability which may arise from such contingencies would not have a material adverse
effect on the consolidated financial statements of the company. (c) On September 11, 2001, Brookfield owned eight million square feet of space in four office
towers surrounding the World Trade Center site - One Liberty Plaza and One, Two and Four World
Financial Center. The physical damage sustained by these properties was mainly cosmetic as a result
of the attack on and subsequent collapse of the World Trade Center and consisted primarily of
replacement of broken windows and some repair to the granite façade on the World Financial Center.
While there was no structural damage to these four office towers, the glass-enclosed Winter Garden
atrium at the center of the World Financial Center suffered more significant damage from falling
debris than other areas of the complex. This component of the World Financial Center was fully
restored and re-opened in September 2002. To date, approximately $230 million has been received for property and business interruption claims
relating to One Liberty Plaza, One World Financial Center, the Winter Garden and common areas of
the World Financial Center. Two and Four World Financial Center are covered by insurance in place
under the triple-net leases with Merrill Lynch. Brookfields insurance claim adjustment process is
on-going due to the complexity of the issues involved. However, Brookfield anticipates recovery of
all material amounts relating to the restoration and business interruption costs of its properties. One Liberty Plaza and Four World Financial Center reopened in October 2001 and One and Two World
Financial Center reopened in the first quarter of 2002. No material lease cancellations in the New
York portfolio occurred as a result of the events of September 11. Brookfield has insurance covering certain acts of terrorism for up to $600 million of damage and
business interruption costs. Brookfield continues to seek additional coverage equal to the full
replacement cost of its assets; however, until this type of coverage becomes commercially available
on an economically reasonable basis, any damage or business interruption costs as a result of
uninsured acts of terrorism could result in a material cost to the company. Brookfield believes it
is in compliance with all of its loan covenants, despite not being able to acquire terrorism
coverage for the full replacement cost of all of the companys properties. NOTE 18: OTHER INFORMATION (a) At December 31, 2004, the company had foreign exchange contracts to sell a notional amount
of C$711 million at a weighted average exchange rate of C$1.00 = US$0.76, maturing in January 2005,
designated as hedges for accounting purposes to manage the companys foreign exchange risk in
respect to its Canadian-denominated net investments. The fair value of these contracts at December
31, 2004 was a loss of $52 million which is reflected in the cumulative translation adjustment
account. The companys self-sustaining subsidiaries also had foreign exchange contracts to sell a
notional amount of US$310 million at a weighted average exchange rate of US$1.00 = C$1.33, maturing
in January 2005, which have not been designated as hedges for financial reporting purposes. The
aggregate fair value of these contracts at December 31, 2004 was a gain of $30 million. (b) As at
December 31, 2004, Brookfield had approximately $216 million (December 31, 2003 - $562
million) of indebtedness outstanding to Brascan Corporation and its affiliates. During the first
quarter of 2004, the company, based on an agreement signed in 1997, purchased the land lease on one
of its Canadian properties for an amount equal to its carrying value of $80 million from Brascan
Corporation. (c) Generally accepted accounting principles require that, where practical, estimates be made with
respect to the fair value of both on and off balance sheet financial instruments. The financial
assets of the company are generally short-term floating rate loans receivable of a trade nature. At
December 31, 2004, the fair value of loans receivable exceeded their book value by $1 million (2003
-$1 million). The fair value of mortgages and loans payable is determined by references to current
market rates for debt with similar 55




---



##### 



terms and risks. As at December 31, 2004, the fair value of advances, commercial property debt
and other loans payable exceeds the book value of these obligations
by $196 million (2003 - $178
million). (d) Supplemental cashflow information Years ended December 31 (Millions)
    
    2004
    
    
    2003Investing activitiesAcquisitions of real estate
    
    $
    (359
    )
    
    $
    (172
    )Mortgages assumed by purchasers
    
    
    152
    
    
    
    $
    (207
    )
    
    $
    (172
    )Dispositions of real estate
    
    $
    99
    
    
    $
    469Mortgages assumed by purchasers
    
    
    (36
    )
    
    
    (247
    )$
    63
    
    
    $
    222
 Cash taxes paid were
$7 million (2003 - $10 million). Cash interest paid totaled $278 million
(2003 - $308 million). (e) The assets and liabilities of certain of the companys subsidiaries are neither available to
pay debts of, nor constitute legal obligations of the parent or other subsidiaries, respectively. NOTE 19: SEGMENTED INFORMATION The company and its subsidiaries operate in the U.S. and Canada within the commercial property
business and the residential land development business. The following summary presents segmented
financial information for the companys principal areas of business by industry and geographic
location: United States

    
    Canada
    
    Total(Millions)
    
    2004
    
    
    2003
    
    
    
    2004
    
    
    2003
    
    
    
    2004
    
    
    2003AssetsCommercial properties
    
    $
    5,093
    
    
    $
    4,842
    
    
    
    $
    1,600
    
    
    $
    1,455
    
    
    
    $
    6,693
    
    
    $
    6,297Development properties
    
    
    326
    
    
    
    373
    
    
    
    
    390
    
    
    
    311
    
    
    
    
    716
    
    
    
    684Receivables and other
    
    
    355
    
    
    
    334
    
    
    
    
    330
    
    
    
    383
    
    
    
    
    685
    
    
    
    717Marketable securities
    
    
    285
    
    
    
    267
    
    
    
    
    
    
    
    
    
    
    
    
    
    285
    
    
    
    267Cash and cash equivalents
    
    
    49
    
    
    
    101
    
    
    
    
    63
    
    
    
    31
    
    
    
    
    112
    
    
    
    132$
    6,108
    
    
    $
    5,917
    
    
    
    $
    2,383
    
    
    $
    2,180
    
    
    
    $
    8,491
    
    
    $
    8,097
 United States
    
    Canada
    
    Total(Millions)
    
    2004
    
    
    2003
    
    
    
    2004
    
    
    2003
    
    
    
    2004
    
    
    2003Commercial property operationsRental revenues
    
    $
    773
    
    
    $
    678
    
    
    
    $
    301
    
    
    $
    298
    
    
    
    $
    1,074
    
    
    $
    976Lease termination income and gains
    
    
    60
    
    
    
    97
    
    
    
    
    
    
    
    
    3
    
    
    
    
    60
    
    
    
    100Expenses
    
    
    262
    
    
    
    244
    
    
    
    
    129
    
    
    
    135
    
    
    
    
    391
    
    
    
    379571
    
    
    
    531
    
    
    
    
    172
    
    
    
    166
    
    
    
    
    743
    
    
    
    697Land and housingRevenues
    
    
    19
    
    
    
    30
    
    
    
    
    242
    
    
    
    195
    
    
    
    
    261
    
    
    
    225Expenses
    
    
    16
    
    
    
    27
    
    
    
    
    203
    
    
    
    167
    
    
    
    
    219
    
    
    
    1943
    
    
    
    3
    
    
    
    
    39
    
    
    
    28
    
    
    
    
    42
    
    
    
    31Other revenues
    
    
    14
    
    
    
    25
    
    
    
    
    33
    
    
    
    37
    
    
    
    
    47
    
    
    
    62Net operating income
    
    
    588
    
    
    
    559
    
    
    
    
    244
    
    
    
    231
    
    
    
    
    832
    
    
    
    790Interest expense
    
    
    215
    
    
    
    212
    
    
    
    
    55
    
    
    
    53
    
    
    
    
    270
    
    
    
    265Administrative and development
    
    
    20
    
    
    
    20
    
    
    
    
    21
    
    
    
    24
    
    
    
    
    41
    
    
    
    44Minority interests of others in properties
    
    
    4
    
    
    
    2
    
    
    
    
    16
    
    
    
    19
    
    
    
    
    20
    
    
    
    21Income before undernoted
    
    
    349
    
    
    
    325
    
    
    
    
    152
    
    
    
    135
    
    
    
    
    501
    
    
    
    460Depreciation and amortization
    
    
    102
    
    
    
    40
    
    
    
    
    41
    
    
    
    39
    
    
    
    
    143
    
    
    
    79Income before unallocated costs
    
    
    247
    
    
    
    285
    
    
    
    
    111
    
    
    
    96
    
    
    
    
    358
    
    
    
    381Taxes and other non-cash items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116
    
    
    
    102Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    242
    
    
    $
    279Acquisitions of real estate, net
    
    $
    124
    
    
    $
    172
    
    
    
    $
    83
    
    
    $
    
    
    
    
    $
    207
    
    
    $
    172Dispositions of real estate, net
    
    
    (31
    )
    
    
    (199
    )
    
    
    
    (32
    )
    
    
    (23
    )
    
    
    
    (63
    )
    
    
    (222
    )Commercial property tenant improvements
    
    
    69
    
    
    
    13
    
    
    
    
    13
    
    
    
    13
    
    
    
    
    82
    
    
    
    26Development and redevelopment investments
    
    
    51
    
    
    
    167
    
    
    
    
    4
    
    
    
    7
    
    
    
    
    55
    
    
    
    174Capital expenditures
    
    
    13
    
    
    
    7
    
    
    
    
    13
    
    
    
    9
    
    
    
    
    26
    
    
    
    16
 56




---



##### 



Selected Financial Information December 31 (US Millions, except per share information)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Financial results (1)Commercial property net operating income
    
    $
    743
    
    
    $
    697
    
    
    $
    660
    
    
    $
    672
    
    
    $
    611Funds from
operations and gains - continuing operations
    
    
    501
    
    
    
    460
    
    
    
    374
    
    
    
    334
    
    
    
    268Net income from continuing operations
    
    
    242
    
    
    
    279
    
    
    
    236
    
    
    
    202
    
    
    
    140Total assets
    
    
    8,491
    
    
    
    8,097
    
    
    
    7,450
    
    
    
    7,419
    
    
    
    8,123Capital base
    
    
    3,254
    
    
    
    2,997
    
    
    
    2,433
    
    
    
    2,353
    
    
    
    2,390Per diluted common share(1)Common shares outstanding
    
    
    155.6
    
    
    
    156.2
    
    
    
    160.4
    
    
    
    161.7
    
    
    
    158.7Fully diluted shares outstanding
    
    
    158.7
    
    
    
    159.6
    
    
    
    163.9
    
    
    
    165.1
    
    
    
    167.4Funds from operations and gains
    
    $
    2.93
    
    
    $
    2.78
    
    
    $
    2.18
    
    
    $
    1.92
    
    
    $
    1.56Funds from operations excluding straight line rent,
lease termination income and gains
    
    
    2.41
    
    
    
    2.15
    
    
    
    1.87
    
    
    
    1.63
    
    
    
    1.45Net income
    
    
    1.28
    
    
    
    1.63
    
    
    
    1.34
    
    
    
    1.12
    
    
    
    0.76Dividends paid
    
    
    0.62
    
    
    
    2.50

(2)
    
    
    0.40
    
    
    
    0.33
    
    
    
    0.25Shareholders equity - book value
    
    
    13.19
    
    
    
    12.31
    
    
    
    11.07
    
    
    
    10.27
    
    
    
    10.06Common share price at year end
    
    
    37.40
    
    
    
    28.70
    
    
    
    18.20
    
    
    
    15.45
    
    
    
    16.35Operating
data - Commercial propertiesNumber of properties
    
    
    46
    
    
    
    48
    
    
    
    50
    
    
    
    50
    
    
    
    60Rentable area (millions of sq. ft.)
    
    
    46
    
    
    
    46
    
    
    
    46
    
    
    
    45
    
    
    
    46Effective interest (millions of sq. ft.)
    
    
    35
    
    
    
    36
    
    
    
    35
    
    
    
    37
    
    
    
    41Average occupancy (%)
    
    
    95.2
    
    
    
    94.1
    
    
    
    95.5
    
    
    
    97.3
    
    
    
    97.0Property managementArea managed (sq. ft.)
    
    
    150
    
    
    
    140
    
    
    
    130
    
    
    
    120
    
    
    
    120
   (1)
    
    Excludes the assets, liabilities and results of operations of Brookfield Homes
Corporation(2)
    
    Includes the distribution of Brookfield Homes Corporation valued at $2.00 per common
share 57




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##### 



Board of Directors Gordon E. ArnellLondon, United Kingdom
Chairman
Brookfield Properties Corporation Chairman of Brookfield since
1989; President and CEO of
Brookfields predecessor, Carena
Developments Ltd., for eleven
years; senior executive roles at
Oxford Development Group Ltd.
and Trizec Corporation Ltd. William T. Cahill(1)Ridgefield, Connecticut
Senior Credit Officer
Citibank Community Development Bank Senior Credit Officer, Citibank
Community Development Group since
2002. Various positions including
Managing Director, OREO 19962002
and Senior Asset Manager
19911996. Vice President and
Senior Asset Manager, Mellon Real
Estate Investment Advisors Inc.,
19831991. Richard B. ClarkNew York, New York
President and CEO
Brookfield Properties Corporation President and CEO of Brookfield
since 2002; President and CEO of
U.S. operations 20002002; senior
positions for Brookfield and its
predecessor companies; Chairman,
Real Estate Round Table Tax Policy
Advisory Committee; Member, NAREIT
and REBNY Board of Governors. Jack L. Cockwell(2)Toronto, Ontario
Group Chairman, Brascan Corporation Group Chairman of Brascan since
2002; President and CEO 19912001;
senior executive of Brascan and
its predecessor companies from
1969. Director, Brascan, Partners
Limited and affiliates and Astral
Media Inc. Chairman, Board of
Trustees, Royal Ontario Museum and
Director, C.D. Howe Institute. J. Bruce FlattToronto, Ontario
President and CEO
Brascan Corporation President and CEO of Brascan since
2002; President and CEO of
Brookfield 20002001; President
and COO 19952000; other senior
management positions from 1992.
Director, Brascan, Partners
Limited and affiliates. Lance Liebman(2)(3)New York, New York
Director, American Law Institute
Columbia University School of Law Professor of Law at Columbia since
1991; Director of the American Law
Institute since 1999; Dean,
Columbia Law School 19911996;
Professor, Harvard Law School
19701991; Assistant to NYC Mayor
Lindsay 19681970; Law Clerk to
U.S. Supreme Court Justice White
19671968; Director, Tarragon
Corporation and Greater New York
Insurance Cos. Paul D. McFarlane(1)(2)Mississauga, Ontario Retired from CIBC in 2002 after
more than 40 years service in
numerous branch, regional and head
office positions, most recently as
Senior Vice President, Special
Loans, Head Office, from 1994
until retirement. Allan S. Olson(1)(3)Edmonton, Alberta
President and CEO
First Industries Corporation President and CEO of First
Industries since 1991. President
and CEO, Churchill Corp. 19891990
and Banister Construction Group
19901991. Various positions at
Stuart Olson Construction
including President and CEO
19651989. Director, Ipsco Steel
and Chairman, Summit REIT. 58




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##### 



Samuel P.S. Pollock, O.C.(3)Toronto, Ontario
President of 96345 Canada Inc. Chairman, Toronto Blue Jays
19952000; Chairman, John Labatt
Ltd. 19911995; President, Carena
Investments 19781991; Vice
President and General Manager,
Montreal Canadiens 19641978.
Officer, Order of Canada and
Member, Order of Quebec. Inducted
to the Hockey Hall of Fame and
the Canadian Sports Hall of Fame.
Named Great Montrealer in 1978. William C. Wheaton, Ph.D.Hamilton, Massachusetts
Professor of EconomicsFounder
and Former Director,Center
for Real EstateMassachusetts
Institute of Technology MIT faculty member since 1972;
founder, MIT Center for Real
Estate, 1984. Founder and
Principal, Torto Wheaton
Research. Co-author,
Urban Economics and the Real
Estate Markets(1996). John E. ZuccottiNew York, New York
Co-Chairman
Brookfield Properties Corporation Chairman, Real Estate Board of New
York since 2004; Senior Counsel,
Weil, Gotshal and Manges since
1998; President and CEO, Olympia &
York Companies U.S.A. 19901996;
Partner, Brown & Wood 19861990
and Tufo & Zuccotti 19781986.
First Deputy Mayor of the City of
New York 19751977. Chairman, New
York City Planning Commission
19731975. in memoriam John McCaig19292005We pay
tribute to John Bud McCaig, a
Brookfield director since 1995.
Bud led a remarkable life as an
entrepreneur, business leader
and philanthropist. One of our
great mentors, Bud was an
inspiration to all of us and he
will be deeply missed. Membership of Board Committees:
(1) Audit Committee; (2) Human Resources Committee; (3) Governance and Nominating Committee 
 Strengthening Corporate Governance Brookfield believes strongly in good corporate
governance. The board of directors of Brookfield
encourages sound corporate governance practices
designed to promote the well-being and ongoing
development of the corporation, having always as its
ultimate objective the best long-term interests of
Brookfield and the enhancement of value for all
shareholders. The charters for the board of directors and each
of the standing committees are in compliance with the
New York Stock Exchange rules on corporate governance
(NYSE Rules), the provisions of the Sarbanes-Oxley
Act of 2002 and Canadian securities laws. Although
Brookfield is a Canadian company, we have chosen to
comply with the NYSE Rules as they apply to U.S.
domestic companies; however, we have elected to rely on an exemption from
the NYSE Rules with respect to certain independence
requirements. While the board believes that it has an
appropriate mix of directors in order to effectively
oversee the business plan and managements
performance, our commitment to shareholders is to
continuously review our policies and practices and
benchmark them against evolving legislation and
acknowledged leaders in this area. Additional details
of our corporate governance program are outlined on
our Web site, Brookfieldproperties.com. We welcome
any comments you may have on our corporate governance
and investor relations programs. 59




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Officers CHAIRMEN Gordon E. ArnellChairman John E. ZuccottiCo-Chairman CORPORATE Richard B. ClarkPresident and Chief Executive Officer Kathleen G. KaneSenior Vice President and General
Counsel and Secretary Frederick T. KellySenior Vice President and
Chief Investment Officer Craig J. LaurieSenior Vice President and
Chief Financial Officer Melissa J. ColeyVice President, Investor Relations P. Keith HydeVice President, Taxation Stephanie A. SchembariVice President, Human Resources Michael P. SullivanVice President, Risk Management T. Nga TrinhVice President and Controller Gordon E. WiddesVice President, Information Technologies PROPERTY OPERATIONS UNITED STATES Dennis H. FriedrichPresident and Chief Operating Officer Lawrence F. GrahamExecutive Vice President, Development Edward F. BeisnerSenior Vice President and Controller Daniel M. KindberghSenior Vice President, Operations Jeremiah B. LarkinSenior Vice President,
Director of Leasing Michael D. BermanSenior Vice President, Leasing David SternbergSenior Vice President, Midwest and
Mountain Region James E. HedgesSenior Director, Strategic Initiatives Brett M. FoxVice President and Associate Counsel CANADA Thomas F. FarleyPresident and Chief Operating Officer Philip H. MostowichExecutive Vice President, Eastern Region Robert K. MacNicolSenior Vice President, Leasing Ian D. ParkerSenior Vice President, Asset Management Scott E. PennockSenior Vice President, Asset Management Rael L. DiamondVice President and Controller N. Dwight JackVice President, Leasing RESIDENTIAL OPERATIONS Alan NorrisPresident and Chief Executive Officer 60