##### 



Brookfield Properties Corporation . . . . . . . 2003 ANNUAL REPORT




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Brookfield Properties Corporation . . . . . . . . . . . . . . . . . . . . . Committed to building shareholder value by investing in premier quality office
properties
and pro-actively managing our assets to surface value and maximize return on
capital Cover: 300 Madison Avenue, New York This page: BCE Place, Toronto




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Selected Financial Highlights All amounts expressed in US dollars unless otherwise noted . . . . . . . . (Millions, except per share information)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Results of operations(1)Commercial property net operating income and gains
    
    $
    697
    
    
    $
    660
    
    
    $
    672
    
    
    $
    611
    
    
    $
    569Funds from operations and gains
    
    
    460
    
    
    
    374
    
    
    
    334
    
    
    
    268
    
    
    
    213Net income
    
    
    279
    
    
    
    236
    
    
    
    202
    
    
    
    140
    
    
    
    125Return on equity
    
    
    23.3
    %
    
    
    20.2
    %
    
    
    18.7
    %
    
    
    16.1
    %
    
    
    14.4
    %Per diluted common share(1)Funds from operations and gains
    
    $
    2.78
    
    
    $
    2.18
    
    
    $
    1.92
    
    
    $
    1.56
    
    
    $
    1.23Funds from operations prior to lease
termination income and gains
    
    
    2.15
    
    
    
    1.87
    
    
    
    1.63
    
    
    
    1.45
    
    
    
    1.12Net income
    
    
    1.63
    
    
    
    1.34
    
    
    
    1.12
    
    
    
    0.76
    
    
    
    0.67Dividends
    
    
    0.50
    
    
    
    0.40
    
    
    
    0.33
    
    
    
    0.25
    
    
    
    0.21Book value
    
    
    12.31
    
    
    
    11.07
    
    
    
    10.27
    
    
    
    10.06
    
    
    
    8.77Closing market price  NYSE(2)
    
    
    28.70
    
    
    
    18.20
    
    
    
    15.45
    
    
    
    16.35
    
    
    
    8.78Financial position(1)Total assets
    
    $
    8,097
    
    
    $
    7,450
    
    
    $
    7,419
    
    
    $
    8,123
    
    
    $
    7,535Capital base
    
    
    2,997
    
    
    
    2,433
    
    
    
    2,353
    
    
    
    2,390
    
    
    
    2,293Fully diluted common shareholders equity
    
    
    1,965
    
    
    
    1,819
    
    
    
    1,691
    
    
    
    1,682
    
    
    
    1,406
 (1) Excludes Brookfield Homes Corporation which was distributed to common shareholders on January 6, 2003 (2) Adjusted for the distribution of Brookfield Homes Corporation (RESULTS)




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p.2 BROOKFIELD PROPERTIES Dear Shareholders, 2003 was a year of major accomplishment for
Brookfield. We developed, leased and put into
service 300 Madison Avenue, our newest office
development at one of New Yorks most important
intersections. We delivered on our commitment to
expand our presence into North Americas most
stable office market, Washington, D.C. We also
surfaced tremendous value for shareholders through
the distribution of our U.S. home building
business. 2003 was also a year of record financial
performance for Brookfield, notwithstanding
less-than-optimal economic and leasing conditions
in most of the markets in which we operate. After
adjusting for the spin-out of Brookfield Homes in
January 2003, we produced meaningfully higher Funds
from Operations (FFO). Our solid financial
performance demonstrates that our pro-active
approach to leasing, prudent investment in premier
properties in high-growth, supply-constrained
markets, and leasing long-term to high credit
quality tenants continues to produce consistently
strong and market-leading results across economic
cycles. We are pleased to report that our strong
financial results, coupled with a favorable
investor appetite for real estate securities during
2003, have also resulted in a prosperous year for
shareholders. Our common shareholders realized a
$10.50 increase in share price to $28.70 for 2003
before factoring in the impact of the Brookfield
Homes spin-out. Taking into account dividends and
the performance of Brookfield Homes stock,
Brookfields investors experienced a total return
of 89% for 2003. Those investors who sold their
Brookfield Homes stock immediately following the
distribution realized a total return for the year
of 71%. 2003 Highlights Include:  
    
    Achieved FFO per share prior to lease
termination income and gains of $2.15, meeting
our 15% growth target for the year, sustaining
this cumulative average growth rate for the
sixth year in a row.
    
    Generated $100 million of gains on asset
sales, achieving total FFO per share of $2.78,
representing a 28% increase over 2002.
    
    Leased 3.5 million square feet of space,
approximately three times the amount
contractually expiring. The result: an average
portfolio lease term of ten years, modest
tenant rollover exposure for upcoming years,
and a 97.3% occupancy rate in our primary
markets of New York, Toronto, Boston and
Calgary. Year-end vacancy in our total
portfolio stands at 5.9%, versus a U.S.
national average of 18.6% and a Canadian
national average of 11.6%. These dynamics
remain among the strongest in the industry.
    
    Generated over $1 billion of capital, $297
million from operations, $265 million from the
sale of partial interests and non-core assets,
$151 from financings, and $465 from the
issuance of preferred shares and additional
credit lines. The capital generated was
utilized to fund acquisitions, pay off more
expensive debt and preferred shares, and for
other value-enhancing initiatives. 2003 Achievements Financial Performance  
    
    Increased FFO per share before
gains by 15% to $2.15
    
    Delivered total FFO per share
including gains of $2.78, a 28%
increase
    
    Realized 60%+ total investor return Pro-Active Leasing  
    
    Leased 3.5 million square feet,
three times the amount
contractually expiring
    
    Additional two million square
feet of leases currently in
negotiation Portfolio Initiatives  
    
    Entered Washington, D.C. market
with the purchase of 1625 Eye
Street for $157.5 million
    
    Completed 300 Madison Avenue
development project




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ANNUAL REPORT 2003 p.3 Gordon Arnell, Chairman;Ric Clark, President and Chief Executive Officer;and John Zuccotti, Co-Chairman  
    
    Acquired 1625 Eye Street in Washington, D.C.,
a premier office property located two blocks
from the White House. This
recently-constructed 386,000 square foot tower
is already 51% leased to outstanding tenants
with an encouraging amount of leasing
activity. Brookfields success in acquiring
this highly coveted asset in one of North
Americas most desirable and competitive
markets is a testament to our solid balance
sheet, financial flexibility, and strong
acquisition team. Our ability to fund
acquisitions through internal resources and to
complete due diligence on an expedited basis
without veering from our disciplined approach
to underwriting investment opportunities gave
us the edge to come out on top in this
transaction.  
    
    Completed 300 Madison Avenue, our brand new,
state-of-the-art, 1.2 million square foot
office property located in Midtown Manhattan,
one block from Grand Central Terminal. Prior
to commencement of development, the entire
building had been leased to CIBC World
Markets. As a result of the sale of a
division, CIBC hired Brookfield to find a
subtenant for a sizable portion of their
premises.  In January 2004, we finalized a sublease with
PricewaterhouseCoopers to occupy 800,000 square
feet in the building for their corporate and U.S.
headquarters. Upon their move-in, the building
will be known as PricewaterhouseCoopers Center.  
    
    Simplified the company through the
distribution to shareholders of our U.S. home
building business on January 6, 2003 into its
own public vehicle. Since its listing on the
New York Stock Exchange, Brookfield Homes
common share price increased 166%, while
Brookfield Properties share price increased
by 58%, supporting our original belief that
both companies would be more valuable
operating independently.  
    
    Repurchased five million common shares of our
stock during the year at an average price of
$21.10, bringing the total number of shares
repurchased since 1999 to 10.9 million. In
total, we have invested $201 million on share
repurchases at an average purchase price of
$18.41. With Brookfields common shares
closing the year at $28.70, our share buy-back
program generated an implied gain of $112
million. Liquidity/Capital Initiatives  
    
    Sold 49% interest in 245 Park
Avenue to NYSTRS for $438 million  
    
    Financed One World Financial
Center, Republic Plaza, Canada
Trust Tower and Petro-Canada
Centre Capital Management  
    
    Gained investment-grade credit
rating from Standard & Poors
    
    Completed $415 million of
preferred share issues at an
average rate of 5.4%
    
    Lowered cost of debt and
capital structure by 40 basis
points to 6.6% Corporate Initiatives  
    
    Secured $150 million
corporate credit facility
    
    Repurchased five million
common shares at an average
price of $21.10
    
    Separated U.S. home building
assets into its own public
vehicle




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p.4 BROOKFIELD PROPERTIES Outlook for 2004 Although we are still awaiting evidence of a
sustained recovery, we are seeing signs of the
beginning of a rebound in the economy. Our markets
are improving slightly with absorption of sublease
space and modestly declining vacancy rates. When
the economy does improve, most believe that the
office market will rebound in a slower fashion than
the overall economy, as past cycles have shown that
office markets lag an economic recovery. In keeping
with this, we are planning our affairs with the
expectation that our markets will continue to
bounce along the bottom in 2004 with a sustained
recovery kicking in during 2005. We see no reason
to veer from the strategies that have worked well
for us in the past and will continue to be
pro-active with our leasing, reaching out to renew
tenants in advance of maturities wherever possible. Investor demand for well-leased, high-quality
office properties remains strong, not only from
foreign investors and pension funds, but also from
private investors using high leverage and betting
on a continuation of the current low interest rate
environment. This presents opportunities and
challenges for our company. Our well-leased
properties are more valuable, providing significant
opportunities for strong capital returns when we
sell partial interests. On the other hand, we are
challenged by limited acquisition opportunities and
strong competition that pushes prices beyond
valuations that meet our investment return
criteria. We look forward to 2004 with optimism as the
economy slowly recovers but are conscious of the
fact that we will not be immune to soft market
conditions forever. As a result, our top priority
remains further reducing our current vacancy
levels. Opportunities Growth opportunities in commercial real estate
are traditionally found through acquisition and
development. However, in a soft economy with stiff
competition for premier properties, we intend to
take advantage of internal opportunities to ensure
that we can continue to deliver double-digit growth
in FFO while we patiently pursue acquisitions and
developments. These include:  
    
    Refining our capital structure.Last year, we
took advantage of the active preferred share
market in Canada, issuing $415 million of
preferred shares at an average rate of 5.4%.
These proceeds were used to fund acquisitions,
retire higher dividend rate preferred shares,
pay down debt and for general corporate
purposes. As a result of this initiative, we
have reduced the current cost of our debt to
6.6%, compared with 7% in 2002. Refining our
debt structure to further reduce this rate by
even ten basis points would result in an
increase of $5 million to our bottom line.  
    
    Share buy-backs.Our preference is to use our
excess cash to fund acquisitions. However,
when our shares are trading at a discount to
underlying net asset value, and therefore at a
cap rate higher than our acquisition
alternatives, acquiring our own shares
represents a better opportunity to create
value for shareholders.
    
    Capital management.We will continue to
withdraw capital from our mature, stable
assets that have growth prospects below our
targets for reinvestment into more strategic
and higher return alternatives. The sale of a
49% interest in 245 Park Avenue in New York
City and redeploying proceeds into Washington,
D.C. assets is a prime example of our active
management of capital during the past year.




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ANNUAL REPORT 2003 p.5  
    
    Leasing initiatives.Unlike past cycles,
vacancy rates in our primary markets are at
comparatively low levels which could lead to a
more rapid recovery and rent spikes as
vacancies dip below the equilibrium point.
Additionally, we have a low current vacancy
rate relative to national averages and our
peers. Further reducing our vacancy level by
100 basis points would enhance our
profitability appreciably.  
    
    Aiding tenants in transition.Assisting
tenants in leasing their excess space benefits
us by providing an opportunity to achieve
higher rents, lock into additional lease term,
lease additional space or earn leasing
commissions. So far this year, we have
facilitated 1.2 million square feet of such
transactions.  
    
    Development opportunities.Although we are
not speculative developers, we are a
full-service real estate company with in-house
development expertise. With eight million
square feet of development capacity in New
York City and Toronto, we are well positioned
to take advantage of the demand for new space
once the economy rebounds.  
    
    Cost-cutting and efficiency initiatives.
Further reducing our corporate overhead costs
while ensuring high-quality tenant services
will remain a focus and should yield
additional savings compared with 2003 levels.  
    
    Capitalizing on Lower Manhattans recovery.
The pace of the redevelopment of Lower
Manhattan is encouraging, with unprecedented
investment in infrastructure improvements
within a compressed time frame. This
commitment of resources ensures that downtown
will become a better place to live and work,
benefiting our sizable holdings within this
market. In Closing 2003 was a great year for Brookfield, despite
the weak economy and sluggish real estate markets.
Thanks to the hard work, creativity and support of
our dedicated staff and members of our Board of
Directors, we have a solid growth strategy and
strong platform that we will continue to build upon
to deliver solid earnings. We would like to
acknowledge outgoing board member David Arthur; we
are most grateful for his contributions over the
past decade. We remain focused in 2004 on achieving our
performance targets and enhancing value for
Brookfields shareholders, tenants and partners. On behalf of the management and Board of
Directors, thank you for your continued support of
Brookfield. -s- Richard B. Clark
Richard B. ClarkPresident and Chief Executive Officer February 5, 2004 2004 Objectives Portfolio Management  
    
    Meaningfully reduce vacancy
and roll over exposure in
2005, 2006 and beyond  
    
    Aid tenants in transition to
enhance overall portfolio value Liquidity/Capital Initiatives  
    
    Continue to lower cost of capital  
    
    Expand ownership position in
primary markets, particularly
New York City and Washington Corporate Initiatives  
    
    Advance development sites to
capitalize on opportunities as
they arise and as markets
rebound  
    
    Centralize functions where
cost-effective to reduce general
and administrative and operating
expenses




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p.6 BROOKFIELD PROPERTIES Premier Portfolio . . . . . . . . Brookfield owns 48 commercial properties and development
sites comprising 46 million square feet in major cities in
the United States and Canada Above: Bankers Hall, Calgary Above right: 53 and 75 State Street, Boston 97.3% Leased in Primary Markets Brookfield Properties Corporation owns, develops and manages premier North
American office properties. Brookfields portfolio of premier assets help
define the skylines of several major U.S. and Canadian financial and energy
center cities, with more than 25 million square feet of space in the central
business districts of New York, Toronto and Boston. Brookfields properties
attract the highest credit quality tenants with an average lease term life of
ten years.Over 3.5 million square feet of office space was leased in 2003, three
times the amount contractually expiring. With a current portfolio occupancy
rate of 97.3% in our primary markets  94.1% in our overall portfolio  and
minimal near-term lease roll-over, Brookfield is poised for continued success.




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ANNUAL REPORT 2003 p.7 Asset Management . . . . . . . . Brookfield has a strong track record of active asset management. We have leased
approximately 19 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: Lease maturities Currently
    
    Leases Maturing In:Available
    
    
    
    TotalCity
    
    (000s sq. ft.)
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Beyond
    
    AreaNew York
    
    
    249
    
    
    
    171
    
    
    
    389
    
    
    
    231
    
    
    
    51
    
    
    
    238
    
    
    
    75
    
    
    
    449
    
    
    
    9,409
    
    
    
    11,262Boston
    
    
    43
    
    
    
    56
    
    
    
    226
    
    
    
    260
    
    
    
    60
    
    
    
    377
    
    
    
    14
    
    
    
    128
    
    
    
    999
    
    
    
    2,163Toronto
    
    
    235
    
    
    
    417
    
    
    
    1,052
    
    
    
    319
    
    
    
    518
    
    
    
    326
    
    
    
    350
    
    
    
    291
    
    
    
    3,376
    
    
    
    6,884Calgary
    
    
    153
    
    
    
    84
    
    
    
    246
    
    
    
    220
    
    
    
    138
    
    
    
    318
    
    
    
    98
    
    
    
    824
    
    
    
    5,373
    
    
    
    7,454Subtotal
    
    
    680
    
    
    
    728
    
    
    
    1,913
    
    
    
    1,030
    
    
    
    767
    
    
    
    1,259
    
    
    
    537
    
    
    
    1,692
    
    
    
    19,157
    
    
    
    27,763% of Total
    
    
    2.1
    %
    
    
    2.4
    %
    
    
    6.0
    %
    
    
    3.2
    %
    
    
    2.4
    %
    
    
    4.0
    %
    
    
    1.7
    %
    
    
    5.3
    %
    
    
    52.8
    %
    
    
    79.9
    %Denver
    
    
    423
    
    
    
    85
    
    
    
    283
    
    
    
    175
    
    
    
    225
    
    
    
    546
    
    
    
    95
    
    
    
    169
    
    
    
    1,016
    
    
    
    3,017Minneapolis
    
    
    645
    
    
    
    168
    
    
    
    50
    
    
    
    208
    
    
    
    78
    
    
    
    78
    
    
    
    93
    
    
    
    15
    
    
    
    1,673
    
    
    
    3,008Other
    
    
    97
    
    
    
    99
    
    
    
    49
    
    
    
    83
    
    
    
    122
    
    
    
    20
    
    
    
    41
    
    
    
    28
    
    
    
    1,312
    
    
    
    1,851Subtotal
    
    
    1,165
    
    
    
    352
    
    
    
    382
    
    
    
    466
    
    
    
    425
    
    
    
    644
    
    
    
    229
    
    
    
    212
    
    
    
    4,001
    
    
    
    7,876% of Total
    
    
    3.8
    %
    
    
    1.0
    %
    
    
    1.2
    %
    
    
    1.5
    %
    
    
    1.4
    %
    
    
    2.0
    %
    
    
    0.7
    %
    
    
    0.7
    %
    
    
    7.8
    %
    
    
    20.1
    %Total
    
    
    1,845
    
    
    
    1,080
    
    
    
    2,295
    
    
    
    1,496
    
    
    
    1,192
    
    
    
    1,903
    
    
    
    766
    
    
    
    1,904
    
    
    
    23,158
    
    
    
    35,639% of Total
    
    
    5.9
    %
    
    
    3.4
    %
    
    
    7.2
    %
    
    
    4.7
    %
    
    
    3.8
    %
    
    
    6.0
    %
    
    
    2.4
    %
    
    
    6.0
    %
    
    
    60.6
    %
    
    
    100.0
    %
 Dennis Friedrich, President and ChiefOperating Officer, U.S. CommercialOperations; Tom Farley, President andChief Operating Officer, CanadianCommercial Operations Average lease term (years) (AVERAGE LEASE TERM (YEARS) BAR CHART)




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p.8 BROOKFIELD PROPERTIES Acquisitions . . . . . . . . Expansion of our premier portfolio into markets
with the same attributes as our primary markets adds
value to the company 1625 Eye Street, N.W., Washington, D.C. 1625 Eye Street, N.W. Washington, D.C. Washington, D.C. has been North Americas most stable office market over the
last decade with the strategic attributes  high barriers to entry, supply
constraints, and a strong local economy  that should continue to give it an
edge throughout market cycles. The purchase of 1625 Eye Street is consistent
with our investment strategy of acquiring high-quality properties in stable,
high-growth markets at prices below replacement cost with upside value to be
created by pro-actively managing and leasing the asset. Located two blocks from the White House, 1625 Eye Street was completed in
April 2003. The companys success in acquiring this highly-coveted asset in the
current competitive environment is a reflection of our ability to take on a
manageable level of leasing risk given our solid balance sheet, financial
flexibility, and strong acquisition team. Brookfield will continue to seek new
opportunities to further penetrate the Washington, D.C. market, and to expand
our presence in our primary markets.




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ANNUAL REPORT 2003 p.9 Primary Market Strategy (PIE CHART) Brookfields Acquisition Team: Jim Hedges, Senior Director, Strategic
Initiatives; Katie Kane, Senior Vice President and 
General Counsel and Fred Kelly, Senior Vice President and 
Chief Investment Officer The Brookfield strategy of owning, pro-actively
managing and developing premier properties in
supply-constrained, barrier to entry, high-growth
markets has created one of North Americas most
distinguished portfolios of office properties. Our
primary markets are the financial, energy and
government center cities of New York, Toronto,
Boston, Calgary and now, Washington, D.C. Primary Market Attributes  
    
    High barriers to entry
    
    Strong local economies
    
    Stable demand drivers
    
    Supply-constrained Strong, Conservative Financial Position  
    
    Asset-specific, non-recourse financing  
    
    Long-term, low-risk leverage Premier Asset Qualities  
    
    Technologically-advanced Class A properties proximate to major transit hubs  
    
    Attractive to highest credit quality tenants  
    
    Long-term leases  
    
    Maximum demand; low vacancy and rollover Prudent Capital Strategy  
    
    Own properties on a long-term basis  
    
    Sell participating interests to recycle capital and generate greater returns  
    
    Actively manage capital to deliver long-term
growth for shareholders throughout economic
cycles




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p.10 BROOKFIELD PROPERTIES Development Brookfield holds eight million square feet
of high-quality, centrally located development rights
in New York and Toronto Brookfields 300 Madison Project Team,clockwise from left:
Eddie Galise, Field Superintendent; Al San Filippo,
Senior Vice President, Development; Sabrina Kanner,
Vice President, Design and Construction; Sue Reichel,
Administrative Coordinator; Rich Gladstone, Director
of Architecture and Construction; Larry Graham,
Executive Vice President, Development 300 Madison Avenue New York The
completion of 300 Madison Avenue  on time, under budget and fully
leased  was a gratifying achievement for Brookfield. After securing a 30-year
lease with CIBC World Markets for the entire building, we assembled the
complicated parcel of land at 300 Madison, then worked with architects Skidmore
Owings & Merrill to design a modern, state-of-the-art office tower that would
meet the needs of a large, sophisticated user. Ground was broken in the summer
of 2001 at one of the busiest intersections in the world, and the building was
substantially completed in the fall of 2003. Following the sale of a division,
CIBC hired Brookfield to find a subtenant to lease their excess space, and we
announced in January that PricewaterhouseCoopers is subleasing 800,000 square
feet in the building as their new headquarters.
The U.S. headquarters of CIBC World Markets will also
be relocated to 300 Madison Avenue, to be named the
PricewaterhouseCoopers Center.




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##### 



ANNUAL REPORT 2003 p.11 Building Value Strategy for Developing Assets Brookfield holds interests in approximately eight
million square feet of high-quality, centrally
located development properties at various stages of
planning and construction, acquired over time for
value. We will seek to monetize these properties
through development only when it meets our
risk-adjusted return hurdles, and when significant
pre-leasing targets with one or more lead tenants
have been met. We believe as the economy rebounds,
continued supply constraints should create
opportunities for Brookfield to enhance value
through the development of these assets. Two and Three World
Financial Center, New York Current Development Capacity New York  
    
    West 31st Streetis a site located across
from the new Pennsylvania Station at Ninth
Avenue, currently being zoned for 2.5 million
square feet of office space. Significant
redevelopment is taking place in and around
this area in conjunction with New York Citys
bid for the 2012 Summer Olympics.  
    
    Three World Financial Centeris currently
under redevelopment following Brookfields
purchase of 1.2 million square feet in 2002 at
one-third of replacement cost. Toronto  
    
    Bay-Adelaide Centre Given the significant
infrastructure already in place, Bay-Adelaide
is likely be the first new development project
to proceed in Toronto based on economics. The
project currently envisions one million square
feet of office space and 800,000 square feet
of residential space. Brookfield owns a 50%
interest in this project.  
    
    BCE Place III The third tower of the BCE
Place project is expected to house an 800,000
square foot office tower. Brookfield owns a
65% interest in this project.  
    
    Hudsons Bay Centre This 1.1-million square
foot office and retail development project in
downtown Toronto is currently under
redevelopment. Brookfield owns a 25% interest
in this project. Denver  
    
    425 15th Street A 400,000 square foot
development property located one block from
Brookfields Republic Plaza in the heart of
downtown Denver. Brookfield owns a 100%
interest.




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p.12 BROOKFIELD PROPERTIES Prudent Capital Management A strong and conservative financial position leads to the
creation of long-term, sustainable cashflow streams Above, Brookfields Finance Team: Fred Kelly, Senior
Vice President and Chief Investment Officer; Nga Trinh,
Vice President and Controller; and Craig Laurie, 
Senior Vice President and Chief Financial Officer Above right: Fifth Avenue Place, Calgary Leveraging Our Financial Strength Brookfield is committed to building shareholder value by investing in
premier quality assets and pro-actively managing each of our properties to
increase cashflows and maximize return on capital. We strive to reduce the
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. We are able to leverage our
financial strength and market leadership to enhance returns traditionally
earned in
the real estate business. Long leases, limited turnover in the portfolio
and a tenant profile in which over 50% have an investment grade rating means
lower relative risk, and cash flow stability.




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##### 



ANNUAL REPORT 2003 p.13 Capital Strategy Brookfields long-term strategy of reallocating
capital delivers growth for shareholders throughout
economic cycles by increasing cashflow and return
on capital. Brookfield opportunistically acquires
premier office properties in new or existing
markets, pro-actively manages the assets to surface
value, and then refinances or sells partial
interests to investment partners seeking stable
returns. Debt Management Strategy  
    
    Maintain debt to market capitalization of 50% or less  
    
    Move toward long-term goal of 95% non-recourse debt  
    
    Maintain interest expense coverage of 2.3x or greater  
    
    Match the duration of our commercial debt
portfolio with that of our lease portfolio Winter Garden, World Financial Center, New York Strategies for Raising Liquidity  
    
    Sell partial interests in our mature,
stabilized properties to institutional
financial partners  
    
    Refinance underlevered properties  
    
    Issue long-term fixed rate capital  
    
    Sell non-core assets (PIE CHART)




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##### 



p.14 BROOKFIELD PROPERTIES Lower Manhattan Redevelopment $4.5 billion in transportation infrastructure
improvements are underway Brookfields Lower Manhattan Redevelopment Team:
John Zuccotti, Co-Chairman; and Larry Graham,
Executive Vice President, Development The World Financial Center New York Brookfields premier office properties in Lower Manhattan, comprising eight
million square feet, will be a direct beneficiary of the $4.5 billion in
transportation infrastructure improvements underway in and around the former
World Trade Center site. At no time in history have so many resources been
allocated to infrastructure improvements in such a concentrated area and
compressed timeframe. These investments will not only make Lower Manhattan a
better place to live and work, but also unique within Manhattan as well.




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##### 



ANNUAL REPORT 2003 p.15 Rebounding and Rebuilding New York is engaged in an overlapping,
intensely focused process of remembrance and
rebuilding. What is remarkable is not that there
has been controversy, but that in a city renowned
for the spirit of its contention, there has been
agreement and astonishing progress in such a
relatively short a period of time since September
11, 2001. Nowhere is the current successful effort more
evident than in the process that led to an approved
site design by architect Daniel Libeskind in less
than two years, and in the selection of a
respectful and compelling memorial. The planning for ground zero calls for a
spectacularly improved environment, with a more
efficient and appropriate street pattern connected
to the citys historical grid, the provision of
open space that includes a submerged West Street,
appropriate sites for new development and civic and
cultural institutions, and improved transportation. The objective is not simply to restore what
was, but as part of the rebuilding process, under
the direction of Governor George Pataki and Mayor
Michael Bloomberg, to improve upon and enhance the
region. A temporary commuter station was opened in
November to restore PATH service to the area from
New Jersey. The interim station is a placeholder
for a new interconnected down-town transportation
gateway designed by Santiago Calatrava, projected
to open in 2006. A study is advancing to evaluate different
proposals for a new rail service linking downtown
directly to JFK International Airport. It would
also serve commuters from Queens and Long Island
who currently have no direct link to downtown,
providing access to an important and growing labor
pool. A decision as to the best alternative will be
made in April, and according to the Governor and
Mayor, that alternative will be funded and built. Downtown is rebounding. Heartening and visible
signs of recovery are evident in the growing and
strengthened residential market, an improving
commercial sector, a restored transportation
network, new parks and better streets. The pillars
of downtown  those corporations that have called
Lower Manhattan home for decades  have played
major leadership roles in returning to and
reinvigorating their Lower Manhattan base,
reaffirming Lower Manhattan as the financial
capital of the nation and the world. Lower Manhattan Achievements  
    
    JFK Airport/Long Island access options announced, February 2004
    
    Memorial plan selected, January 2004
    
    Calatrava design for Transit Center unveiled
with east-west underground connections,
January 2004
    
    PATH train service returned to WTC, November 2003
    
    New Vesey Street pedestrian bridge over West Street opened, November 2003
    
    Refined Libeskind site planned unveiled
that includes restoration of Greenwich and
Fulton Streets, cultural and performing
arts centers, parks and open spaces,
September 2003 2004/2005 Milestones  
    
    Reconstruction of Liberty Park begins, Spring 2004
    
    Ground-breaking for Freedom Tower, Summer 2004
    
    New Con Edison substation at 7 WTC in service, Summer 2004
    
    Reconstruction and resurfacing of Lower Manhattan streets, Fall 2004
    
    Fast ferry service to LaGuardia Airport, Fall 2004
    
    Construction begins on Fulton Street Transit Center, 2004
    
    Reopening of WFC ferry terminal, 2005
    
    Fast ferry service to JFK Airport, 2005




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##### 



p.16 BROOKFIELD PROPERTIES 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
    
    
    
    99.3
    
    
    
    1,520
    
    
    
    108
    
    
    
    1,628
    
    
    
    100.0
    
    
    
    1,628Two
    
    
    1
    
    
    
    100.0
    
    
    
    2,455
    
    
    
    36
    
    
    
    2,491
    
    
    
    100.0
    
    
    
    2,491Four
    
    
    1
    
    
    
    100.0
    
    
    
    1,711
    
    
    
    89
    
    
    
    1,800
    
    
    
    51.0
    
    
    
    917Retail
    
    
    
    
    
    
    62.6
    
    
    
    
    
    
    
    295
    
    
    
    295
    
    
    
    100.0
    
    
    
    295One Liberty Plaza
    
    
    1
    
    
    
    94.2
    
    
    
    2,194
    
    
    
    20
    
    
    
    2,214
    
    
    
    100.0
    
    
    
    2,214300 Madison Avenue
    
    
    1
    
    
    
    100.0
    
    
    
    1,085
    
    
    
    56
    
    
    
    1,141
    
    
    
    100.0
    
    
    
    1,141245 Park Avenue
    
    
    1
    
    
    
    97.2
    
    
    
    1,631
    
    
    
    62
    
    
    
    1,693
    
    
    
    51.0
    
    
    
    863DevelopmentsThree World Financial Center
    
    
    1
    
    
    
    
    
    
    
    1,200
    
    
    
    
    
    
    
    1,200
    
    
    
    51.0
    
    
    
    1,200Penn Station
    
    
    1
    
    
    
    
    
    
    
    2,500
    
    
    
    
    
    
    
    2,500
    
    
    
    100.0
    
    
    
    2,5008
    
    
    
    97.7
    
    
    
    14,296
    
    
    
    666
    
    
    
    14,962
    
    
    
    
    
    
    
    13,249Boston53 State Street
    
    
    1
    
    
    
    98.1
    
    
    
    1,091
    
    
    
    70
    
    
    
    1,161
    
    
    
    51.0
    
    
    
    59275 State Street
    
    
    1
    
    
    
    97.0
    
    
    
    742
    
    
    
    260
    
    
    
    1,002
    
    
    
    51.0
    
    
    
    5112
    
    
    
    97.7
    
    
    
    1,833
    
    
    
    330
    
    
    
    2,163
    
    
    
    
    
    
    
    1,103TorontoBCE PlaceCanada Trust Tower
    
    
    1
    
    
    
    100.0
    
    
    
    1,127
    
    
    
    17
    
    
    
    1,144
    
    
    
    50.0
    
    
    
    572Bay Wellington Tower
    
    
    1
    
    
    
    94.0
    
    
    
    1,297
    
    
    
    42
    
    
    
    1,339
    
    
    
    100.0
    
    
    
    1,339Retail, parking and office
    
    
    2
    
    
    
    99.6
    
    
    
    137
    
    
    
    809
    
    
    
    946
    
    
    
    75.0
    
    
    
    705Exchange Tower Block
    
    
    2
    
    
    
    96.5
    
    
    
    1,136
    
    
    
    257
    
    
    
    1,393
    
    
    
    58.0
    
    
    
    812HSBC Building
    
    
    1
    
    
    
    99.7
    
    
    
    188
    
    
    
    37
    
    
    
    225
    
    
    
    100.0
    
    
    
    225Queens Quay Terminal
    
    
    1
    
    
    
    92.2
    
    
    
    428
    
    
    
    74
    
    
    
    502
    
    
    
    100.0
    
    
    
    502Atrium on Bay
    
    
    1
    
    
    
    93.6
    
    
    
    914
    
    
    
    137
    
    
    
    1,051
    
    
    
    50.0
    
    
    
    526Other
    
    
    2
    
    
    
    99.3
    
    
    
    284
    
    
    
    
    
    
    
    284
    
    
    
    59.0
    
    
    
    169DevelopmentsBay-Adelaide Centre
    
    
    1
    
    
    
    
    
    
    
    1,000
    
    
    
    800
    
    
    
    1,800
    
    
    
    50.0
    
    
    
    900Hudsons Bay Centre
    
    
    1
    
    
    
    
    
    
    
    535
    
    
    
    557
    
    
    
    1,092
    
    
    
    25.0
    
    
    
    273BCE Place III
    
    
    1
    
    
    
    
    
    
    
    800
    
    
    
    
    
    
    
    800
    
    
    
    65.0
    
    
    
    52014
    
    
    
    96.1
    
    
    
    7,846
    
    
    
    2,730
    
    
    
    10,576
    
    
    
    
    
    
    
    6,543CalgaryBankers Hall
    
    
    3
    
    
    
    97.5
    
    
    
    1,947
    
    
    
    750
    
    
    
    2,697
    
    
    
    50.0
    
    
    
    1,349Fifth Avenue Place
    
    
    2
    
    
    
    99.0
    
    
    
    1,428
    
    
    
    253
    
    
    
    1,681
    
    
    
    50.0
    
    
    
    841Petro-Canada Centre
    
    
    2
    
    
    
    98.7
    
    
    
    1,707
    
    
    
    245
    
    
    
    1,952
    
    
    
    50.0
    
    
    
    976Gulf Canada Square
    
    
    1
    
    
    
    94.5
    
    
    
    1,047
    
    
    
    77
    
    
    
    1,124
    
    
    
    20.0
    
    
    
    2258
    
    
    
    97.6
    
    
    
    6,129
    
    
    
    1,325
    
    
    
    7,454
    
    
    
    
    
    
    
    3,391DenverRepublic PlazaOffice
    
    
    1
    
    
    
    79.0
    
    
    
    1,247
    
    
    
    
    
    
    
    1,247
    
    
    
    100.0
    
    
    
    1,247Development and other
    
    
    1
    
    
    
    
    
    
    
    400
    
    
    
    548
    
    
    
    948
    
    
    
    100.0
    
    
    
    948Trade Center
    
    
    2
    
    
    
    84.2
    
    
    
    767
    
    
    
    43
    
    
    
    810
    
    
    
    100.0
    
    
    
    810Colorado State Bank Building
    
    
    1
    
    
    
    92.8
    
    
    
    412
    
    
    
    
    
    
    
    412
    
    
    
    50.0
    
    
    
    2065
    
    
    
    82.9
    
    
    
    2,826
    
    
    
    591
    
    
    
    3,417
    
    
    
    
    
    
    
    3,211Minneapolis33 South Sixth Street
    
    
    2
    
    
    
    62.4
    
    
    
    1,082
    
    
    
    695
    
    
    
    1,777
    
    
    
    100.0
    
    
    
    1,777Dain Plaza
    
    
    2
    
    
    
    90.6
    
    
    
    593
    
    
    
    638
    
    
    
    1,231
    
    
    
    100.0
    
    
    
    1,2314
    
    
    
    74.1
    
    
    
    1,675
    
    
    
    1,333
    
    
    
    3,008
    
    
    
    
    
    
    
    3,008OtherRoyal Centre, Vancouver
    
    
    1
    
    
    
    85.7
    
    
    
    493
    
    
    
    360
    
    
    
    853
    
    
    
    100.0
    
    
    
    853Other
    
    
    6
    
    
    
    97.3
    
    
    
    2,980
    
    
    
    518
    
    
    
    3,498
    
    
    
    100.0
    
    
    
    3,4987
    
    
    
    90.5
    
    
    
    3,473
    
    
    
    878
    
    
    
    4,351
    
    
    
    
    
    
    
    4,351Total portfolio
    
    
    48
    
    
    
    94.1
    
    
    
    38,078
    
    
    
    7,853
    
    
    
    45,931
    
    
    
    
    
    
    
    34,856Less: other shareholders interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,071
    )Brookfields net effective ownership interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,785




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##### 



ANNUAL REPORT 2003 p.17 Managements Discussion and Analysis INTRODUCTION 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, 2003, the book value of Brookfields assets was $8.1 billion,
90% of which was invested in premier office properties. The company generated
$460 million of funds from operations and gains or $2.78 per share in 2003. The following discussion and analysis is intended to provide readers with an
assessment of our performance over the past three years as well as our
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 37 of this report. Much of the discussion of operating
performance is based on funds from operations for reasons discussed on page 30.
The company also provides a full reconciliation to net income and an assessment
of our 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 SEDARs Web site at www.sedar.com. All figures are expressed in US dollars unless otherwise noted. Brookfields
financial results, both including and excluding Brookfield Homes Corporation
(Brookfield Homes), are as follows: (Millions, except per share amounts)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Continuing operations(1)Funds from continuing operationsPrior to lease termination income and gains
    
    $
    361
    
    
    $
    322
    
    
    $
    286
    
    
    $
    250
    
    
    $
    195Including lease termination income and gains
    
    
    460
    
    
    
    374
    
    
    
    334
    
    
    
    268
    
    
    
    213Funds from operations per share  dilutedPrior to lease termination income and gains
    
    $
    2.15
    
    
    $
    1.87
    
    
    $
    1.63
    
    
    $
    1.45
    
    
    $
    1.12Including lease termination income and gains
    
    
    2.78
    
    
    
    2.18
    
    
    
    1.92
    
    
    
    1.56
    
    
    
    1.23Net incomePrior to lease termination income and gains
    
    $
    209
    
    
    $
    194
    
    
    $
    166
    
    
    $
    128
    
    
    $
    113Including lease termination income and gains
    
    
    279
    
    
    
    236
    
    
    
    202
    
    
    
    140
    
    
    
    125Earnings per share  diluted
    
    
    1.63
    
    
    
    1.34
    
    
    
    1.12
    
    
    
    0.76
    
    
    
    0.67Dividends per share(2)
    
    
    0.50
    
    
    
    0.40
    
    
    
    0.33
    
    
    
    0.25
    
    
    
    0.21Balance sheet dataCommercial property assets
    
    $
    6,297
    
    
    $
    5,661
    
    
    $
    5,802
    
    
    $
    6,368
    
    
    $
    5,930Total assets
    
    
    8,097
    
    
    
    7,450
    
    
    
    7,419
    
    
    
    8,123
    
    
    
    7,535Capital base
    
    
    2,997
    
    
    
    2,433
    
    
    
    2,353
    
    
    
    2,390
    
    
    
    2,293Consolidated(3)Funds from operations and gains
    
    
    
    
    
    $
    447
    
    
    $
    399
    
    
    $
    318
    
    
    $
    259Funds from operations per share  diluted
    
    
    
    
    
    
    2.63
    
    
    
    2.32
    
    
    
    1.88
    
    
    
    1.52Earnings per share  diluted
    
    
    
    
    
    
    1.61
    
    
    
    1.36
    
    
    
    0.95
    
    
    
    0.85Total assets
    
    
    
    
    
    $
    8,329
    
    
    $
    8,291
    
    
    $
    8,885
    
    
    $
    8,291
  (1)
    
    Excludes the assets, liabilities and
results of operations of Brookfield Homes(2)
    
    Excludes the distribution of Brookfield
Homes(3)
    
    Includes the assets, liabilities and
results of operations of Brookfield Homes 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. COMMERCIAL PROPERTIES 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 48 properties and development sites,
predominantly office buildings, comprising 46 million square feet of rentable
area and development capacity in which Brookfield has an ownership interest in
35 million square feet.




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##### 



p.18 BROOKFIELD PROPERTIES OTHER OPERATIONS 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
in excess of 140 million square feet of space across North America, including
its own assets. This scale provides Brookfield with the platform to deliver
superior service offerings 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. ASSET PROFILE Assets totaled $8.1 billion at December 31, 2003. The book value of assets
increased during the year with the acquisition of 1625 Eye Street, N.W. in
Washington, D.C., the completion of construction of the 300 Madison Avenue
development in Midtown Manhattan, and the impact of the higher Canadian dollar on Canadian assets, which in total more than
offset the sale of a 49% interest in 245 Park Avenue in New York. The book
value of the companys assets, segmented by areas of operation, are as follows: Pro FormaBook Value (Millions)
    
    2003
    
    2002*
    
    2002
    
    2003
    
    2002Operating assetsCommercial properties
    
    $
    6,297
    
    
    $
    5,661
    
    
    $
    5,661
    
    
    
    90
    %
    
    
    86
    %Development properties
    
    
    684
    
    
    
    944
    
    
    
    944
    
    
    
    10
    %
    
    
    14
    %6,981
    
    
    
    6,605
    
    
    
    6,605
    
    
    
    100
    %
    
    
    100
    %Other assetsReceivables and other
    
    
    717
    
    
    
    769
    
    
    
    769Cash and marketable securities
    
    
    399
    
    
    
    76
    
    
    
    76Assets of Brookfield Homes
    
    
    
    
    
    
    
    
    
    
    879$
    8,097
    
    
    $
    7,450
    
    
    $
    8,329
  *
    
    Excludes Brookfield Homes which was distributed to common shareholders on
January 6, 2003 COMMERCIAL PROPERTIES The commercial property portfolio is focused in six North American cities, with
New York, Boston, Toronto and Calgary comprising 85% of the portfolio on a net
asset value basis, as follows: Brookfield
    
    2003
    
    2002Leasable Area
    
    Owned Interest
    
    Book Value
    
    Book ValueRegion
    
    (000s Sq. Ft.)
    
    (000s Sq. Ft.)
    
    (Millions)
    
    (Millions)New York, New York
    
    
    11,262
    
    
    
    9,549
    
    
    $
    3,531
    
    
    $
    3,295Boston, Massachusetts
    
    
    2,163
    
    
    
    1,103
    
    
    
    333
    
    
    
    332Toronto, Ontario
    
    
    6,884
    
    
    
    4,850
    
    
    
    928
    
    
    
    778Calgary, Alberta
    
    
    7,454
    
    
    
    3,391
    
    
    
    450
    
    
    
    380Denver, Colorado
    
    
    3,017
    
    
    
    2,811
    
    
    
    372
    
    
    
    354Minneapolis, Minnesota
    
    
    3,008
    
    
    
    3,008
    
    
    
    400
    
    
    
    393Other
    
    
    1,851
    
    
    
    1,851
    
    
    
    283
    
    
    
    129Total*
    
    
    35,639
    
    
    
    26,563
    
    
    $
    6,297
    
    
    $
    5,661
  *
    
    Excludes developments The consolidated carrying value of Brookfields interest in 35.6 million square
feet of rentable area is approximately $235 per square foot, significantly less
than the estimated replacement cost of these assets. Brookfields core
properties average 1.4 million square feet in size. In December 2003, the company completed the purchase of 1625 Eye Street, N.W.
in Washington, D.C for $157.5 million. Located two blocks from the White House,
construction of this 386,000 square-foot, 12-story office building with a
five-level underground parking garage was completed in April 2003. At year-end,
upon its completion, the 300 Madison Avenue development with a book value of
$558 million was reclassified from development property to income-producing
commercial property.




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##### 



ANNUAL REPORT 2003 p .19 During 2003, Brookfield continued to dispose of partial interests in mature
properties and dispose of non-core assets, generating gross proceeds of $467
million and $221 million of net capital. The following table details the assets
sold during 2003 and proceeds from these sales: (Millions)
    
    
    
    
    
    Percentage
    
    Gross
    
    Net Proceeds toAssets
    
    Sale Date
    
    Sold
    
    Proceeds
    
    Brookfield*245 Park Avenue
    
    
    October 2003
    
    
    
    49
    %
    
    $
    438
    
    
    $
    195Other non-core properties
    
    
    Various
    
    
    
    100
    %
    
    
    29
    
    
    
    26$
    467
    
    
    $
    221
  *
    
    Net of non-recourse commercial property debt The disposition of partial interests reflects Brookfields strategy to acquire
undervalued assets in its core markets, enhance the value through re-leasing
and financing initiatives, and sell partial interests in stable, long-term
leased properties to institutional investors seeking consistent yields. Capital generated through the sale of
these interests is targeted for reinvestment in office properties, share
repurchases or repayment of debt. RESULTS OF OPERATIONS Total commercial property operations contributed $697 million of net operating
income and gains in 2003, a 6% increase over 2002 net operating income of $660
million. The increase is due to internal growth generated by contractual
increases embedded in long-term leases, the impact of the lease-up of vacant
space and the gain realized on the sale of a 49% interest in 245 Park Avenue,
offset partially by the reduction in net operating income forgone on the sale
of the companys partial interests and non-core properties. Net operating income contributed by the same commercial properties totaled $571
million in 2003, an increase of 3.5% over $552 million in 2002 and an increase
of 8.8% over $525 million in 2001. Total net operating income during 2003
included $26 million contributed by properties, or partial interests, disposed
of during 2003. These sold properties and partial interests, as well as
dispositions in 2002 and 2001, contributed net operating income of $48 million
in 2002 and $92 million in 2001. Year ended December 31 (Millions)
    
    2003
    
    2002
    
    2001Operating income from current properties
    
    $
    571
    
    
    $
    552
    
    
    $
    525Operating income from properties sold
    
    
    26
    
    
    
    48
    
    
    
    92Net operating income prior to lease termination income and gains
    
    $
    597
    
    
    $
    600
    
    
    $
    617
 COMPONENTS OF NET OPERATING INCOME 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, and acquisitions, net of dispositions. The growth in net operating
income over the past three years is as follows: Year ended December 31 (Millions)
    
    2003
    
    2002
    
    2001Net operating income prior to lease termination income and gains, prior year
    
    $
    600
    
    
    $
    617
    
    
    $
    592(a) Contractual increases on in-place leases
    
    
    16
    
    
    
    17
    
    
    
    13(b) Rental increases achieved on in-place rents when re-leased
    
    
    10
    
    
    
    8
    
    
    
    17(c) Lease-up of vacancies
    
    
    3
    
    
    
    5
    
    
    
    15(d) Acquisitions, net of dispositions
    
    
    (32
    )
    
    
    (47
    )
    
    
    (20
    )597
    
    
    
    600
    
    
    
    617(e) Lease termination income and gains
    
    
    100
    
    
    
    60
    
    
    
    55Net operating income, end of year
    
    $
    697
    
    
    $
    660
    
    
    $
    672
 The components of total net operating income including gains are as follows: Year ended December 31 (Millions)
    
    2003
    
    2002
    
    2001Rental revenue
    
    $
    976
    
    
    $
    943
    
    
    $
    1,007Property operating costs
    
    
    379
    
    
    
    343
    
    
    
    390Net operating income prior to lease termination income and gains
    
    
    597
    
    
    
    600
    
    
    
    617Lease termination income and gains
    
    
    100
    
    
    
    60
    
    
    
    55Net operating income
    
    $
    697
    
    
    $
    660
    
    
    $
    672




---



##### 



p.20 BROOKFIELD PROPERTIES  (a)
    
    Contractual increases on in-place leases During 2003, net operating income increased $16 million due to contractual
increases, compared with $17 million in 2002 and $13 million in 2001.
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 in realizing these
increases. It is the companys policy to record revenues in accordance with the
actual payments received under the terms of its leases, which typically
increase over time due to the contractual increases in rental payments over the
term of the lease. However, accounting standards and industry practices are
expected to mandate straight-line rent recognition for 2004 which would have
the impact of realizing those contractual steps on a straight-line basis over
the term of the lease. For further discussion of future accounting policy
changes, refer to Note 1 on page 43.  (b)
    
    Rental increases achieved on in-place rents when re-leased During 2003, higher rental rates on the re-leasing of space in the portfolio
contributed $10 million of increased net operating income over 2002. At
December 31, 2003, average in-place net rents throughout the portfolio
increased to $22 per square foot compared with $21 per square foot at December
31, 2002 and 2001. Despite challenging leasing environments in Brookfields
major markets, the company was able to marginally increase its in-place net
rental rate, largely a 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 in 2002 and 2003 at equivalent rental rates.
The 2003 average market rents declined by $1 per square foot as the combined
pressure from sublease space and decreased tenant demand continued, primarily
in Denver, New York and Boston. However, given the low expiry rate of leases in
the next two years, relatively flat rental rates will not have a substantial
immediate impact on net operating income in the short term. The following table
shows the average in-place rents and estimated current market rents for similar
space in each of the companys markets: Avg. In-placeNet Rent
    
    Avg. MarketGross
    
    Average
    
    Dec.
    
    Net RentLeasable Area
    
    Lease Term
    
    31, 2003
    
    Dec. 31, 2003(000s Sq. Ft.)
    
    (Years)
    
    ($ per Sq. Ft.)
    
    ($ per Sq. Ft.)New York, New YorkMidtown
    
    
    2,834
    
    
    
    18
    
    
    $
    40
    
    
    $
    50Downtown
    
    
    8,428
    
    
    
    10
    
    
    
    32
    
    
    
    25Boston, Massachusetts
    
    
    2,163
    
    
    
    6
    
    
    
    30
    
    
    
    35Toronto, Ontario
    
    
    6,884
    
    
    
    7
    
    
    
    18
    
    
    
    21Calgary, Alberta
    
    
    7,454
    
    
    
    9
    
    
    
    11
    
    
    
    15Denver, Colorado
    
    
    3,017
    
    
    
    4
    
    
    
    14
    
    
    
    16Minneapolis, Minnesota
    
    
    3,008
    
    
    
    8
    
    
    
    9
    
    
    
    13Other
    
    
    1,851
    
    
    
    10
    
    
    
    8
    
    
    
    18Total*
    
    
    35,639
    
    
    
    10
    
    
    $
    22
    
    
    $
    24
  *
    
    Excludes developments  (c)
    
    Lease-up of vacancies A total of approximately 6.5 million square feet of vacant space was leased in
2003 and 2002, contributing $3 million to net operating income during 2003.
Contributions from vacancy lease-ups was greater in previous years due to
vacancies leased in properties acquired in 2000. Brookfields total portfolio
occupancy rate at December 31, 2003 declined from 95.5% to 94.1%, primarily due
to vacancy increases in Denver and Minneapolis. A summary of current and
historical occupancy levels for the past three years is as follows: Dec. 31, 2003
    
    Dec. 31, 2002
    
    Dec. 31, 2001Total
    
    %
    
    Total
    
    %
    
    Total
    
    %(Thousands of square feet)
    
    Square Feet
    
    Leased
    
    Square Feet
    
    Leased
    
    Square Feet
    
    LeasedNew York, New York
    
    
    11,262
    
    
    
    97.7
    %
    
    
    10,113
    
    
    
    97.6
    %
    
    
    10,113
    
    
    
    99.6
    %Boston, Massachusetts
    
    
    2,163
    
    
    
    97.7
    %
    
    
    2,163
    
    
    
    97.4
    %
    
    
    2,163
    
    
    
    98.7
    %Toronto, Ontario
    
    
    6,884
    
    
    
    96.1
    %
    
    
    6,883
    
    
    
    96.3
    %
    
    
    6,866
    
    
    
    96.7
    %Calgary, Alberta
    
    
    7,454
    
    
    
    97.6
    %
    
    
    7,570
    
    
    
    97.1
    %
    
    
    6,330
    
    
    
    95.8
    %Denver, Colorado
    
    
    3,017
    
    
    
    82.9
    %
    
    
    3,017
    
    
    
    90.1
    %
    
    
    3,014
    
    
    
    95.5
    %Minneapolis, Minnesota
    
    
    3,008
    
    
    
    74.1
    %
    
    
    3,008
    
    
    
    84.5
    %
    
    
    3,008
    
    
    
    94.5
    %Other
    
    
    1,851
    
    
    
    90.5
    %
    
    
    1,515
    
    
    
    97.1
    %
    
    
    3,171
    
    
    
    93.5
    %Total*
    
    
    35,639
    
    
    
    94.1
    %
    
    
    34,269
    
    
    
    95.5
    %
    
    
    34,665
    
    
    
    97.3
    %
  *
    
    Excludes developments




---



##### 



ANNUAL REPORT 2003 p.21  (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 sale of properties reduced
net operating income by $32 million in 2003, $47 million in 2002 and $20
million in 2001. 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 and 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, and
PricewaterhouseCoopers with a full CIBC covenant and will begin contributing to
rental revenue in 2004. In 2002, Brookfield sold partial interests in two of
its core properties, Exchange Tower in Toronto and Bankers Hall in Calgary.  (e)
    
    Lease termination income and gains Property gains during 2003 of $100 million relate to the sale of a 49% interest
in 245 Park Avenue as described above. During 2002, Brookfield generated $60
million of gains on the sale of partial interests in office properties referred
to above for proceeds of $293 million. There were no significant lease
termination payments during either 2003 or 2002. While these events are
opportunistic and difficult to predict, the dynamic tenant base, which is
typical of our buildings, should enable Brookfield to generate 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 400,000 square feet of space in the portfolio include
Merrill Lynch, CIBC, RBC Financial Group, Petro-Canada, Imperial Oil and
JPMorgan Chase. 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
    
    
    
    12.2
    %
    
    
    A+CIBC/CIBC World Markets
    
    New York/Toronto/Calgary
    
    
    2027
    
    
    
    1,983
    
    
    
    5.6
    %
    
    
    A+RBC Financial Group
    
    Five major markets
    
    
    2019
    
    
    
    976
    
    
    
    2.7
    %
    
    
    AA-Petro-Canada
    
    Calgary
    
    
    2013
    
    
    
    851
    
    
    
    2.4
    %
    
    
    BBBJPMorgan Chase
    
    New York
    
    
    2022
    
    
    
    802
    
    
    
    2.3
    %
    
    
    A+Lehman Brothers
    
    New York
    
    
    2019
    
    
    
    717
    
    
    
    2.0
    %
    
    
    A+Imperial Oil
    
    Calgary
    
    
    2011
    
    
    
    565
    
    
    
    1.6
    %
    
    
    AAATarget Corporation (Dayton Hudson Corp.)
    
    Minneapolis
    
    
    2013
    
    
    
    465
    
    
    
    1.3
    %
    
    
    A+Canadian Pacific Railway Co.
    
    Calgary
    
    
    2013
    
    
    
    447
    
    
    
    1.3
    %
    
    
    A-Talisman Energy
    
    Calgary
    
    
    2015
    
    
    
    446
    
    
    
    1.3
    %
    
    
    BBB+Conoco Canada Resources
    
    Calgary
    
    
    2010
    
    
    
    444
    
    
    
    1.2
    %
    
    
    A-Goldman Sachs
    
    New York
    
    
    2012
    
    
    
    362
    
    
    
    1.0
    %
    
    
    A+Bell West/Bell Canada
    
    Calgary/Toronto
    
    
    2009
    
    
    
    323
    
    
    
    0.9
    %
    
    
    ATeachers Insurance Annuity Assoc.
    
    Denver
    
    
    2008
    
    
    
    323
    
    
    
    0.9
    %
    
    
    AAADow Jones & Company
    
    New York
    
    
    2012
    
    
    
    323
    
    
    
    0.9
    %
    
    
    A+TD Canada Trust
    
    Toronto/Calgary
    
    
    2005
    
    
    
    278
    
    
    
    0.8
    %
    
    
    A+Anadarko Canada Corporation
    
    Calgary
    
    
    2011
    
    
    
    269
    
    
    
    0.8
    %
    
    
    Baa1Canadian Natural Resources
    
    Calgary
    
    
    2011
    
    
    
    257
    
    
    
    0.7
    %
    
    
    BBB+Bank of Nova Scotia
    
    New York
    
    
    2014
    
    
    
    230
    
    
    
    0.6
    %
    
    
    A+EnCana Corporation
    
    Calgary
    
    
    2013
    
    
    
    229
    
    
    
    0.6
    %
    
    
    A-Sovereign Bank/Fleet National Bank
    
    Boston
    
    
    2008
    
    
    
    213
    
    
    
    0.6
    %
    
    
    A+Zurich Insurance
    
    New York
    
    
    2017
    
    
    
    208
    
    
    
    0.6
    %
    
    
    A+Other investment grade
    
    Various
    
    Various
    
    
    3,949
    
    
    
    11.1
    %
    
    
    BBB- or higher19,023
    
    
    
    53.4
    %UnratedCleary, Gottlieb, Steen & Hamilton
    
    New York
    
    
    2011
    
    
    
    402
    
    
    
    1.1
    %
    
    
    Goodwin Procter
    
    Boston
    
    
    2015
    
    
    
    359
    
    
    
    0.9
    %
    
    
    Wellington Management
    
    Boston
    
    
    2011
    
    
    
    330
    
    
    
    0.9
    %
    
    
    National Assoc. of Securities Dealers
    
    New York/Denver
    
    
    2021
    
    
    
    277
    
    
    
    0.8
    %
    
    
    Major League Baseball
    
    New York
    
    
    2012
    
    
    
    109
    
    
    
    0.4
    %
    
    
    20,500
    
    
    
    57.5
    %
  (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)




---



##### 



p.22 BROOKFIELD PROPERTIES 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 to 20-year
terms. As a result, approximately 5% of Brookfields leases mature annually.
Following is the breakdown of lease maturities by market with associated
in-place rental rates: Total Portfolio
    
    New York/Boston
    
    Toronto/Calgary
    
    Denver/Minneapolis/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
    
    
    1,845
    
    
    
    5.9
    %
    
    
    
    
    
    
    292
    
    
    
    2.2
    %
    
    
    
    
    
    
    388
    
    
    
    2.7
    %
    
    
    
    
    
    
    1,165
    
    
    
    14.8
    %2004
    
    
    1,080
    
    
    
    3.4
    %
    
    $
    15
    
    
    
    227
    
    
    
    1.7
    %
    
    $
    30
    
    
    
    501
    
    
    
    3.5
    %
    
    $
    12
    
    
    
    352
    
    
    
    4.5
    %
    
    $
    92005
    
    
    2,295
    
    
    
    7.2
    %
    
    
    24
    
    
    
    615
    
    
    
    4.6
    %
    
    
    41
    
    
    
    1,298
    
    
    
    9.1
    %
    
    
    20
    
    
    
    382
    
    
    
    4.9
    %
    
    
    142006
    
    
    1,496
    
    
    
    4.7
    %
    
    
    16
    
    
    
    491
    
    
    
    3.7
    %
    
    
    25
    
    
    
    539
    
    
    
    3.8
    %
    
    
    13
    
    
    
    466
    
    
    
    5.9
    %
    
    
    112007
    
    
    1,192
    
    
    
    3.8
    %
    
    
    17
    
    
    
    111
    
    
    
    0.8
    %
    
    
    35
    
    
    
    656
    
    
    
    4.6
    %
    
    
    15
    
    
    
    425
    
    
    
    5.4
    %
    
    
    152008
    
    
    1,903
    
    
    
    6.0
    %
    
    
    21
    
    
    
    615
    
    
    
    4.6
    %
    
    
    32
    
    
    
    644
    
    
    
    4.5
    %
    
    
    18
    
    
    
    644
    
    
    
    8.2
    %
    
    
    142009
    
    
    766
    
    
    
    2.4
    %
    
    
    19
    
    
    
    89
    
    
    
    0.7
    %
    
    
    37
    
    
    
    448
    
    
    
    3.1
    %
    
    
    20
    
    
    
    229
    
    
    
    2.9
    %
    
    
    122010
    
    
    1,904
    
    
    
    6.0
    %
    
    
    23
    
    
    
    577
    
    
    
    4.3
    %
    
    
    42
    
    
    
    1,115
    
    
    
    7.8
    %
    
    
    14
    
    
    
    212
    
    
    
    2.7
    %
    
    
    202011 & beyond
    
    
    23,158
    
    
    
    60.6
    %
    
    
    22
    
    
    
    10,408
    
    
    
    77.4
    %
    
    
    34
    
    
    
    8,749
    
    
    
    60.9
    %
    
    
    14
    
    
    
    4,001
    
    
    
    50.7
    %
    
    
    1135,639
    
    
    
    100.0
    %
    
    $
    22
    
    
    
    13,425
    
    
    
    100.0
    %
    
    $
    34
    
    
    
    14,338
    
    
    
    100.0
    %
    
    $
    16
    
    
    
    7,876
    
    
    
    100.0
    %
    
    $
    11Weighted average
market net rent
    
    
    
    
    
    
    
    
    
    $
    24
    
    
    
    
    
    
    
    
    
    
    $
    32
    
    
    
    
    
    
    
    
    
    
    $
    18
    
    
    
    
    
    
    
    
    
    
    $
    16
 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 are capitalized in the year incurred, amortized over
the term of the lease and recovered through rental payments. Expenditures for
tenant improvements in 2003 totaled $26 million, compared with the $49 million
expended in 2002 and $50 million in 2001 due to fewer lease expiries or leases
being renegotiated in advance of their contractual maturity. 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 $15 per square foot. Tenant installation costs are summarized
as follows: (Millions)
    
    2003
    
    2002
    
    2001Commercial property tenant improvementsLeasing commissions
    
    $
    8
    
    
    $
    9
    
    
    $
    15Tenant improvements  first generation space
    
    
    
    
    
    
    2
    
    
    
    Tenant improvements  second generation space
    
    
    18
    
    
    
    38
    
    
    
    35Total
    
    $
    26
    
    
    $
    49
    
    
    $
    50
 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 $16 million in
2003, consistent with 2002. These expenditures exclude repairs and maintenance
costs which are recovered through contractual tenant cost recovery payments. It
is expected that annualized non-revenue enhancing capital expenditures will
remain approximately $6 to $10 million annually. Revenue-enhancing capital expenditures represent improvements to an asset,
reconfiguration of space to increase rentable area or increase current rental
rates, non-revenue enhancing expenditures, and those required to maintain the
service life of an asset, are summarized as follows: (Millions)
    
    2003
    
    2002
    
    2001Capital expendituresRevenue enhancing
    
    $
    9
    
    
    $
    10
    
    
    $
    8Non-revenue enhancing
    
    
    7
    
    
    
    6
    
    
    
    6Total
    
    $
    16
    
    
    $
    16
    
    
    $
    14




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##### 



ANNUAL REPORT 2003 p.23 DEVELOPMENT PROPERTIES Development properties consist of both commercial property development sites,
density rights and related infrastructure, as well as residential land and
infrastructure in the companys land development business and to be sold to
builders for residential resale. The total book value of this development land
and infrastructure was $684 million at December 31, 2003, a reduction of $260
million from $944 million in 2002. The majority of the decrease is due to the
reclassification of the companys 300 Madison project as a commercial property
in the fourth quarter of 2003 upon its substantial completion. The aggregate
book value of Brookfields residential land under development is $335 million.
The details of the development property portfolio are as follows: Buildable(Millions)
    
    Sq. Ft.
    
    2003
    
    2002
    
    ChangeCommercial developments and infrastructureThree World Financial Center
    
    
    1,200,000
    
    
    $
    212
    
    
    $
    170
    
    
    $
    42Bay-Adelaide Centre
    
    
    1,800,000
    
    
    
    90
    
    
    
    72
    
    
    
    18Hudsons Bay Centre
    
    
    1,092,000
    
    
    
    26
    
    
    
    20
    
    
    
    6300 Madison Avenue
    
    
    
    
    
    
    
    
    
    
    437
    
    
    
    (437
    )OtherPenn Station
    
    
    2,500,000BCE Place III
    
    
    800,000Republic Plaza
    
    
    400,0003,700,000
    
    
    
    21
    
    
    
    21
    
    
    
    7,792,000
    *
    
    
    349
    
    
    
    720
    
    
    
    (371
    )Residential development land and infrastructureUnder development
    
    
    
    
    
    
    210
    
    
    
    112
    
    
    
    98Held for development
    
    
    
    
    
    
    125
    
    
    
    112
    
    
    
    13Total
    
    
    
    
    
    $
    684
    
    
    $
    944
    
    
    $
    (260
    )
  *
    
    Excludes rights which Brookfield holds on Site 26 at the World Financial
Center in New York Although Brookfield is not a speculative developer, the company is a
full-service real estate company with in-house development expertise. With
approximately 8 million square feet of high-quality, centrally-located
development properties in New York and Toronto, 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 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 occupied by American Express. Three World Financial
Center was acquired with all repairs completed to damage sustained as a result
of the collapse of the World Trade Center. However, substantial construction
remains to be completed prior to occupancy and will not proceed until a lead
tenant is secured. As such, this property has been classified as a property
under development, and all direct costs of the tower, including interest costs
and property taxes, will be capitalized to the asset. During 2001, Brookfield commenced construction of the 1.2 million square foot,
35-story 300 Madison Avenue office tower in Midtown Manhattan following the
leasing of the entire project to CIBC World Markets for a 30-year term. Ground
breaking on the site, which is located between 41st and 42nd Streets at Madison
Avenue, took place in the spring of 2001, with substantial completion at the
end of 2003. During 2003, an additional $121 million of costs were incurred in
connection with the construction of the project which was funded through a loan
secured by the project, thereby minimizing Brookfields equity investment. At
December 31, 2003, the company reclassified the total cost of $558 million from
development properties to commercial properties upon substantial completion of the project. Subsequent to the
year-end, the company announced that PricewaterhouseCoopers is subleasing
800,000 square feet of space from CIBC World Markets, which will continue to
occupy the remainder space of the building. CIBC has an option to acquire a 49%
interest in this project for cost for two years following the substantial
completion of the project. 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, for an initial investment of $40 million.
Brookfield subsequently acquired two small buildings adjacent to the site
fronting Bay Street to further enhance the value of the project. In addition to Three World Financial Center in New York and the Bay-Adelaide
Centre in Toronto, Brookfield has additional commercial development sites which
provide internal growth opportunities.




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##### 



p.24 BROOKFIELD PROPERTIES The status of each development project is as follows: Location
    
    Ownership
    
    Sq. Ft.
    
    StatusNew YorkThree World Financial Center
    
    200 Vesey Street at West Street
    
    
    100
    %
    
    
    1,200,000
    
    
     Under redevelopmentPenn Station
    
    West 31st Street at 9th Avenue
    
    
    100
    %
    
    
    2,500,000
    
    
     Being zoned for potentially 2.5 million square feet of officeTorontoBay-Adelaide Centre
    
    Bay and Adelaide Streets
    
    
    50
    %
    
    
    1,000,000
    
    
     Office tower planning800,000
    
    
     Sale or joint venture for residential projectBCE Place III
    
    Third tower of current
    
    
    65
    %
    
    
    800,000
    
    
     PlanningBCE Place projectHudsons Bay Centre
    
    Yonge and Bloor Streets
    
    
    25
    %
    
    
    1,092,000
    
    
     Office and retail projects under redevelopmentDenverRepublic Plaza
    
    Downtown Denver
    
    
    100
    %
    
    
    400,000
    
    
     Planning7,792,000
    *
  *
    
    Excludes rights which Brookfield holds on Site 26 at the World Financial
Center in New York Brookfields land development operations are focused in four markets: Calgary,
Alberta; Toronto, Ontario; Edmonton, Alberta; and Denver, Colorado. The book
value of these investments at December 31, 2003 was $335 million, compared with
$224 million at the end of 2002. RECEIVABLES AND OTHER Receivables and other assets decreased to $717 million at December 31, 2003,
from $769 million at December 31, 2002 and $847 million at December 31, 2001 as
a result of decreases in the companys future income tax assets as tax losses
are utilized to shelter taxable income, and the repayment of a subordinated
note from Brookfield Homes which had a balance of $98 million at December 31,
2002. The components of receivables and other assets are as follows: (Millions)
    
    2003
    
    2002
    
    2001Real estate mortgages and receivables
    
    $
    499
    
    
    $
    465
    
    
    $
    506Prepaid expenses and other assets
    
    
    212
    
    
    
    210
    
    
    
    210Non-core real estate assets held for sale
    
    
    6
    
    
    
    51
    
    
    
    41Future income tax assets
    
    
    
    
    
    
    43
    
    
    
    90Total
    
    $
    717
    
    
    $
    769
    
    
    $
    847
 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 shorter term marketable
securities, which provide a source of liquidity to fund investment initiatives.
As at December 31, 2003, cash balances totaled $132 million and marketable
securities totaled $267 million. 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 is generally not materially impacted by
the movement in the Canadian to US dollar exchange rate.




---



##### 



ANNUAL REPORT 2003 p.25 LIABILITIES AND SHAREHOLDERS INTERESTS Brookfields asset base of $8.1 billion is financed with a combination of debt,
preferred shares and common equity as follows: Pro forma(Millions)
    
    2003
    
    2002*
    
    2002
    
    2001Commercial property debt
    
    $
    4,537
    
    
    $
    4,588
    
    
    $
    4,588
    
    
    $
    4,606Accounts payable and other liabilities
    
    
    563
    
    
    
    429
    
    
    
    429
    
    
    
    460Liabilities of Brookfield Homes Corporation
    
    
    
    
    
    
    
    
    
    
    556
    
    
    
    583Shareholders interestsInterest of others in properties
    
    
    81
    
    
    
    84
    
    
    
    84
    
    
    
    113Preferred shares  corporate and subsidiaries
    
    
    1,001
    
    
    
    579
    
    
    
    579
    
    
    
    585Common shares
    
    
    1,915
    
    
    
    1,770
    
    
    
    2,093
    
    
    
    1,944$
    8,097
    
    
    $
    7,450
    
    
    $
    8,329
    
    
    $
    8,291
  *
    
    Excludes Brookfield Homes which was distributed to common shareholders on
January 6, 2003 COMMERCIAL PROPERTY DEBT Commercial property debt totaled $4.5 billion at December 31, 2003, compared
with $4.6 billion at December 31, 2002 and 2001. During 2003, the sale of
participating interest and other non-core properties, as well as the impact of
contractual principal amortizations reduced debt by $329 million, offset by $51
million of additional financing on remaining assets. The commercial property
debt at December 31, 2003 had an average interest rate of 6.6% 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. Commercial property debt maturities for
the next five years and thereafter are as follows: Weighted Average(Millions)
    
    Scheduled
    
    
    
    
    
    
    
    
    
    Interest Rate atYear
    
    Amortizations
    
    Maturities
    
    Total
    
    Dec. 31, 20032004
    
    $
    124
    
    
    $
    141
    
    
    $
    265
    
    
    
    6.9
    %2005
    
    
    130
    
    
    
    302
    
    
    
    432
    
    
    
    7.3
    %2006
    
    
    139
    
    
    
    16
    
    
    
    155
    
    
    
    7.4
    %2007
    
    
    137
    
    
    
    474
    
    
    
    611
    
    
    
    5.1
    %2008
    
    
    152
    
    
    
    99
    

    
    
    251
    
    
    
    6.8
    %2009 and thereafter
    
    
    
    
    
    
    2,823
    
    
    
    2,823
    
    
    
    6.6
    %$
    682
    
    
    $
    3,855
    
    
    $
    4,537
    
    
    
    6.6
    %
 The only significant maturities in the next five years are the refinancing of
the recourse floating-rate mortgages placed on One World Financial Center and
Republic Plaza during 2003 in order to facilitate flexibility in tenant
discussions on these projects and to minimize borrowing costs. It is expected
that both projects 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 as at December 31, 2003. This facilitys
floating rate has a weighted average interest rate of 2.5% and was fully drawn
as at December 31, 2003. 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, 2003 and
at the date of this report were as follows: DBRS
    
    S&PCorporate rating
    
    BBB(high)
    
    BBBPreferred shares
    
    Pfd-3(high)
    
    P3(high)




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##### 



p.26 BROOKFIELD PROPERTIES The largest property debt, in order of maturity, are as follows: Interest
    
    
    
    
    
    BrookfieldRate
    
    Maturity
    
    Proportionate ShareCommercial Property
    
    Location
    
    %
    
    Date
    
    (Millions)
    
    DetailsRepublic Plaza
    
    Denver
    
    
    3.22
    
    
    
    2005
    
    
    $
    156
    
    
    Non-recourse, floating rateOne World Financial Center
    
    New York
    
    
    3.15
    
    
    
    2007
    
    
    
    300
    
    
    Recourse, floating rateCanada Trust Tower
    
    Toronto
    
    
    6.55
    
    
    
    2007
    
    
    
    103
    
    
    Non-recourse, fixed rateTrade Center Denver
    
    Denver
    
    
    7.00
    
    
    
    2007
    
    
    
    52
    
    
    Non-recourse, fixed ratePetro-Canada Centre
    
    Calgary
    
    
    6.43
    
    
    
    2008
    
    
    
    105
    
    
    Non-recourse, fixed rate245 Park Avenue
    
    New York
    
    
    6.65
    
    
    
    2011
    
    
    
    252
    
    
    Non-recourse, fixed rateOne Liberty Plaza
    
    New York
    
    
    6.75
    
    
    
    2011
    
    
    
    418
    
    
    Non-recourse, fixed rateFifth Avenue Place
    
    Calgary
    
    
    7.59
    
    
    
    2011
    
    
    
    61
    
    
    Non-recourse, fixed rateExchange Tower
    
    Toronto
    
    
    6.83
    
    
    
    2012
    
    
    
    53
    
    
    Non-recourse, fixed rateTwo World Financial Center
    
    New York
    
    
    6.91
    
    
    
    2013
    
    
    
    751
    
    
    Non-recourse, fixed rateFour World Financial Center
    
    New York
    
    
    6.95
    
    
    
    2013
    
    
    
    402
    
    
    Non-recourse, fixed rateBay Wellington Tower
    
    Toronto
    
    
    6.49
    
    
    
    2013
    
    
    
    279
    
    
    Non-recourse, fixed rateBankers Hall
    
    Calgary
    
    
    7.20
    
    
    
    2013
    
    
    
    142
    
    
    Non-recourse, fixed rateRoyal Centre
    
    Vancouver
    
    
    7.50
    
    
    
    2022
    
    
    
    42
    
    
    Non-recourse, fixed rate53 State Street
    
    Boston
    
    
    6.91
    
    
    
    2023
    
    
    
    76
    
    
    Non-recourse, fixed rate33 South Sixth Street
    
    Minneapolis
    
    
    6.83
    
    
    
    2027
    
    
    
    101
    
    
    Non-recourse, fixed rateDain Plaza
    
    Minneapolis
    
    
    7.37
    
    
    
    2027
    
    
    
    85
    
    
    Non-recourse, fixed rate75 State Street
    
    Boston
    
    
    7.00
    
    
    
    2028
    
    
    
    89
    
    
    Non-recourse, fixed rate300 Madison Avenue
    
    New York
    
    
    7.26
    
    
    
    2032
    
    
    
    515
    
    
    Non-recourse, fixed rateCorporate credit facility
    
    
    
    
    
    
    
    
    
    
    
    
    131
    
    
    Recourse, floating rateDevelopment debt
    
    
    
    
    
    
    
    
    
    
    
    
    150
    
    
    Recourse, floating rateOther
    
    
    
    
    
    
    
    
    
    
    
    
    274
    
    
    Various termsTotal commercial property debt
    
    
    
    
    6.56
    %
    
    
    
    
    
    $
    4,537
 During 2003, Brookfield refinanced $737 million of commercial property debt
following the successful completion of value-enhancement programs. These
refinancings included the following: Previous
    
    Refinanced
    
    Previous
    
    RefinancedProperty (Millions)
    
    Mortgage
    
    Mortgage
    
    Interest Rate
    
    Interest RateOne World Financial Center
    
    $
    402
    
    
    $
    300
    
    
    
    7.51
    %
    
    
    3.15
    %Republic Plaza
    
    
    178
    
    
    
    140
    
    
    
    9.00
    %
    
    
    3.22
    %Petro Canada Centre
    
    
    77
    
    
    
    105
    
    
    
    6.66
    %
    
    
    6.43
    %Canada Trust Tower
    
    
    80
    
    
    
    103
    
    
    
    7.07
    %
    
    
    6.55
    %$
    737
    
    
    $
    648
    
    
    
    7.73
    %
    
    
    4.24
    %
 ACCOUNTS PAYABLE AND OTHER LIABILITIES Accounts payable and other liabilities totaled $563 million, compared with $429
million in 2002. Advances represent credit facilities which are primarily
recourse in nature to subsidiaries of the company and totaled $269 million in
2003, compared with $183 million in 2002. Shareholder advances, included in these balances, bear interest at floating
rates and can be drawn under a five-year termable revolving facility. This
facility is convertible at either partys option into fixed-rate financing at
9.75% repayable in 2015. Total debt attributable to the land development business at December 31, 2003
was $150 million, compared with $85 million in 2002. This financing carried an
average interest rate of 4.4% 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.




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##### 



ANNUAL REPORT 2003 p.27 A breakdown of accounts payable and other liabilities are as follows: (Millions)
    
    2003
    
    2002
    
    2001Accounts payable
    
    $
    276
    
    
    $
    246
    
    
    $
    219AdvancesRevolving five-year term facilities
    
    
    119
    
    
    
    98
    
    
    
    115Other
    
    
    150
    
    
    
    85
    
    
    
    126Future income tax liabilities
    
    
    18
    
    
    
    
    
    
    
    Total
    
    $
    563
    
    
    $
    429
    
    
    $
    460
 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
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 assets. The following table
details the components of interests of other shareholders: (Millions)
    
    2003
    
    2002
    
    2001BPO Properties
    
    $
    72
    
    
    $
    64
    
    
    $
    52Brookfield Financial Properties
    
    
    9
    
    
    
    20
    
    
    
    61Total
    
    $
    81
    
    
    $
    84
    
    
    $
    113
 During 2003, Brookfield Financial Properties completed a redemption of certain
of its outstanding Partnership Units for cash consideration of $10 million. In
2002, redemptions totaled $56 million. And as a result, 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. The preferred shares are retractable until April 25, 2005 for either
cash or, at the option of the holder, 474,466 common shares of Brookfield and
94,893 common shares of Brookfield Homes Corporation, subject to certain
adjustments. PREFERRED SHARES  CORPORATE AND SUBSIDIARIES The company has $1.0 billion of preferred equity outstanding as at December 31,
2003  $586 million issued by Brookfield and $415 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 interest expense. The details of these interests
are as follows: (Millions)
    
    2003
    
    2002
    
    2001Preferred shares issued by subsidiariesBPO Properties
    
    $
    294
    
    
    $
    241
    
    
    $
    240100% owned subsidiaries
    
    
    121
    
    
    
    100
    
    
    
    99415
    
    
    
    341
    
    
    
    339Preferred shares issued by Brookfield
    
    
    586
    
    
    
    238
    
    
    
    246Total
    
    $
    1,001
    
    
    $
    579
    
    
    $
    585
 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.




---



##### 



p.28 BROOKFIELD PROPERTIES The company has the following preferred shares outstanding: Shares
    
    Cumulative(Millions except share information)
    
    Outstanding
    
    Dividend Rate
    
    2003
    
    2002
    
    2001Class 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 A
    
    
    
    
    
    
    9.00
    %
    
    
    
    
    
    
    
    
    
    
    50Class AAA Series B
    
    
    
    
    
    
    9.00
    %
    
    
    
    
    
    
    
    
    
    
    50Class AAA Series C and D
    
    
    
    
    
    
    8.00
    %
    
    
    
    
    
    
    67
    
    
    
    101Class AAA Series F
    
    
    8,000,000
    
    
    
    6.00
    %
    
    
    126
    
    
    
    126
    
    
    
    Class AAA Series G
    
    
    4,400,000
    
    
    
    5.25
    %
    
    
    110
    
    
    
    
    
    
    
    Class AAA Series H
    
    
    8,000,000
    
    
    
    5.75
    %
    
    
    151
    
    
    
    
    
    
    
    Class AAA Series I
    
    
    8,000,000
    
    
    
    5.20
    %
    
    
    154
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    $
    586
    
    
    $
    238
    
    
    $
    246
 COMMON SHARES The company has 156.2 million issued and outstanding common shares. On a fully
diluted basis, the company has 159.6 million common shares outstanding,
calculated as follows: 2003
    
    2002
    
    2001Common shares outstanding
    
    
    156,246,701
    
    
    
    160,364,416
    
    
    
    161,678,406Unexercised options and warrants
    
    
    3,306,240
    
    
    
    3,568,791
    
    
    
    3,404,886Common shares outstanding  fully diluted
    
    
    159,552,941
    
    
    
    163,933,207
    
    
    
    165,083,292Common shares repurchased
    
    
    5,006,700
    
    
    
    1,385,900
    
    
    
    2,402,700
 The fully diluted book value per common share at December 31, 2003 was $12.31
per share compared with $13.07 at December 31, 2002 and $12.02 at December 31,
2001. The decrease in 2003 was due to the Brookfield Homes distribution. The
book value of Brookfields common equity was $1.9 billion at December 31, 2003,
compared with a market equity capitalization of $5.5 billion, calculated as
total common shares outstanding multiplied by $28.70, the closing price per
common share on the New York Stock Exchange on December 31, 2003, plus
preferred shares outstanding. In September 2003, Brookfield renewed its normal course issuer bid which
permits the company to acquire up to 5% of the common shares of Brookfield.
During 2003, 5,006,700 of the common shares were acquired at an average price
of $21.10. Between January 1, 2004 and February 5, 2004, Brookfield acquired a
further 160,100 shares at an average price of $28.19 per share. During 2002, 57,997 common shares were issued on the exercise of warrants.
During 2001, 2,622,100 common shares were issued as a result of the conversion
of the June 2008, 6% convertible debentures, and a further 2,500,000 common
shares were issued on the exercise of warrants to purchase common shares. 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. In addition, the
exercise price of the outstanding warrants was adjusted downward by C$1.56 in
accordance with their terms. 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




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##### 



ANNUAL REPORT 2003 p.29 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 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)
    
    2002
    
    2001AssetsResidential housing inventory
    
    $
    734
    
    
    $
    749Development properties
    
    
    40
    
    
    
    18Receivables and other
    
    
    105
    
    
    
    105$
    879
    
    
    $
    872LiabilitiesResidential construction financing
    
    $
    345
    
    
    $
    318Accounts payable and other liabilities
    
    
    113
    
    
    
    50Subordinated debt
    
    
    98
    
    
    
    215Common shares
    
    
    323
    
    
    
    289$
    879
    
    
    $
    872
 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. LIQUIDITY AND CAPITAL RESOURCES 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. Brookfields funds from operations, defined as income from commercial
properties prior to non-cash taxes and depreciation, represents 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. In addition, Brookfields tax status as a corporation and
substantial tax loss pools allow it to reinvest and retain cash generated by
operations without incurring cash taxes. During 2003, Brookfield generated in excess of $1 billion in additional capital
through the sale of participating interests in select properties and non-core
assets, corporate and property-specific financing initiatives including the
issuance of $415 million in preferred share capital and the addition of $50
million to the corporate credit facility. In the short term, cash generated
from these initiatives was utilized to fund acquisitions, repay corporate debt,
redeem higher rate preferred shares and repurchase common shares. Commercial property debt assumed by Brookfield 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 where 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 the
property, and as a result, enhances equity returns. As
at December 31, 2003, Brookfield had approximately $562 million (2002  $283
million, 2001  $382 million) of unsecured indebtedness outstanding to related
parties, comprised of $443 million (2002 
$185 million, 2001  $267 million)
outstanding to Brascan Financial and its subsidiaries, and $119 million (2002 
$98 million, 2001  $115 million) outstanding to Brascan Corporation
(Brascan) and its affiliates, other than Brascan Financial and its
subsidiaries. Cost of capital Brookfield continually strives to reduce the 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.




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##### 



p.30 BROOKFIELD PROPERTIES Brookfields weighted average cost of capital, utilizing a 20% return on
equity, is 9.3%. 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. CORPORATE GUARANTEES AND CONTINGENT OBLIGATIONS Brookfield conducts its operations through entities that are fully or
proportionately consolidated in our financial statements other than
equity-accounted investments. Equity-accounted investments include our 40%
investment in Brookfield LePage Facilities Management. 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 the notes to the financial statements. UTILIZATION OF CASH RESOURCES The following table illustrates the utilization of free cashflow generated by
our operations and financing initiatives as well as the reallocation of capital
and the repurchase of common equity and other shareholder interests: (Millions)
    
    2003
    
    2002
    
    2001
    
    TotalCashflow from operations
    
    $
    334
    
    
    $
    250
    
    
    $
    318
    
    
    $
    902FinancingBorrowings, net of repayments
    
    
    7
    
    
    
    (134
    )
    
    
    (239
    )
    
    
    (366
    )Net issuance (repurchase) of preferred shares
    
    
    334
    
    
    
    (3
    )
    
    
    
    
    
    
    331Net repurchase of common shares
    
    
    (98
    )
    
    
    (25
    )
    
    
    (77
    )
    
    
    (200
    )Shareholder distributions
    
    
    (114
    )
    
    
    (113
    )
    
    
    (60
    )
    
    
    (287
    )129
    
    
    
    (275
    )
    
    
    (376
    )
    
    
    (522
    )InvestingMarketable securities
    
    
    (267
    )
    
    
    
    
    
    
    
    
    
    
    (267
    )Dispositions of real estate, net
    
    
    50
    
    
    
    114
    
    
    
    137
    
    
    
    301Development and redevelopment
    
    
    (174
    )
    
    
    (206
    )
    
    
    (101
    )
    
    
    (481
    )Capital expenditures
    
    
    (16
    )
    
    
    (16
    )
    
    
    (14
    )
    
    
    (46
    )(407
    )
    
    
    (108
    )
    
    
    22
    
    
    
    (493
    )Discontinued operations
    
    
    
    
    
    
    14
    
    
    
    30
    
    
    
    44Increase (decrease) in cash
    
    $
    56
    
    
    $
    (119
    )
    
    $
    (6
    )
    
    $
    (69
    )
 FUNDS FROM OPERATIONS Funds from operations (FFO) is defined as net income, prior to non-cash items
and depreciation and amortization of capital assets. While Brookfield believes
that funds from operations is the most relevant measure to analyze real estate
based on the fact that commercial properties generally appreciate rather than
depreciate, the company believes that both funds from operations and net income
are relevant measures. The company computes funds from operations in accordance
with the definitions provided by the National Association of Real Estate
Investment Trusts (NAREIT) in the United States and the Canadian Institute of
Public and Private Real Estate Companies (CIPPREC) in Canada. Funds from
operations 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 net income determined in accordance with GAAP. Funds from operations as defined by NAREIT and CIPPREC include the contribution
from discontinued operations. However, for purposes of comparability and
consistency with current and future financial statement presentations, the
following discussion excludes amounts related to Brookfield Homes, which has
been presented as a discontinued operation in the companys consolidated
financial results. 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 continuing operations and gains of 23% to $460
million in 2003, compared with $374 million in 2002. Excluding lease
termination income and gains, funds from continuing operations increased 15% to
$2.15 per share, compared with $1.87 in 2002. Net income from continuing
operations increased by 13% to $267 million or $1.56 per share on a diluted
basis.




---



##### 



ANNUAL REPORT 2003 p.31 A summary of the components of Brookfields funds from operations and net
income are as follows: (Millions)
    
    2003
    
    2002
    
    2001Total revenue and gains
    
    $
    1,363
    
    
    $
    1,372
    
    
    $
    1,428Net operating incomeCommercial property operations
    
    $
    697
    
    
    $
    660
    
    
    $
    672Development and residential operations
    
    
    31
    
    
    
    22
    
    
    
    20Interest and other income
    
    
    62
    
    
    
    48
    
    
    
    42790
    
    
    
    730
    
    
    
    734Unallocated costs
    
    
    330
    
    
    
    356
    
    
    
    400Funds from continuing operations and gains
    
    
    460
    
    
    
    374
    
    
    
    334Depreciation and amortization
    
    
    79
    
    
    
    80
    
    
    
    76Taxes and other non-cash items
    
    
    102
    
    
    
    58
    
    
    
    56Net income before discontinued operations
    
    
    279
    
    
    
    236
    
    
    
    202Net income from discontinued operations
    
    
    
    
    
    
    44
    
    
    
    39Net income
    
    $
    279
    
    
    $
    280
    
    
    $
    241Funds from
operations per share  dilutedContinuing
operations  prior to lease termination income and gains
    
    $
    2.15
    
    
    $
    1.87
    
    
    $
    1.63Lease termination income and gains
    
    
    0.63
    
    
    
    0.31
    
    
    
    0.29Discontinued operations
    
    
    
    
    
    
    0.45
    
    
    
    0.40$
    2.78
    
    
    $
    2.63
    
    
    $
    2.32Net income
per share  dilutedContinuing
operations  prior to lease termination income and gains
    
    $
    1.19
    
    
    $
    1.09
    
    
    $
    0.90Lease termination income and gains
    
    
    0.44
    
    
    
    0.25
    
    
    
    0.22Discontinued operations
    
    
    
    
    
    
    0.27
    
    
    
    0.24$
    1.63
    
    
    $
    1.61
    
    
    $
    1.36
 After providing for preferred share dividends, Brookfields FFO per diluted
share, prior to and including income from lease terminations and gains, is as
follows: 2003
    
    2002
    
    2001Excluding
    
    
    
    
    
    Excluding
    
    
    
    
    
    Excluding(Millions, except per share amounts)
    
    Total
    
    Gains
    
    Total
    
    Gains
    
    Total
    
    GainsFunds from continuing operations
    
    $
    460
    
    
    $
    361
    
    
    $
    374
    
    
    $
    322
    
    
    $
    334
    
    
    $
    286Preferred share dividends
    
    
    (20
    )
    
    
    (20
    )
    
    
    (19
    )
    
    
    (19
    )
    
    
    (19
    )
    
    
    (19
    )$
    440
    
    
    $
    341
    
    
    $
    355
    
    
    $
    303
    
    
    $
    315
    
    
    $
    267Weighted average shares outstanding
    
    
    158.6
    
    
    
    158.6
    
    
    
    162.3
    
    
    
    162.3
    
    
    
    163.5
    
    
    
    163.5FFO per share
    
    $
    2.78
    
    
    $
    2.15
    
    
    $
    2.18
    
    
    $
    1.87
    
    
    $
    1.92
    
    
    $
    1.63
 Property gains during 2003 related to the sale of a 49% interest in 245 Park
Avenue totaled $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. The 2001 gains and lease termination
income totaled $55 million or $0.29 per share, of which $54 million related to
the sale of 50% in Fifth Avenue Place in Calgary and 49% interest in 53 and 75
State Street in Boston, and $1 million in lease termination income.




---



##### 



p.32 BROOKFIELD PROPERTIES NET INCOME Brookfields net income per share from continuing operations increased 22% in
2003, to $1.63 per diluted share including gains and 9% to $1.19 per diluted
share excluding gains, calculated as follows: 2003
    
    2002
    
    2001Excluding
    
    
    
    
    
    Excluding
    
    
    
    
    
    Excluding(Millions, except per share amounts)
    
    Total
    
    Gains
    
    Total
    
    Gains
    
    Total
    
    GainsNet income from continuing operations
    
    $
    279
    
    
    $
    209
    
    
    $
    236
    
    
    $
    194
    
    
    $
    202
    
    
    $
    166Preferred share dividends
    
    
    (20
    )
    
    
    (20
    )
    
    
    (19
    )
    
    
    (19
    )
    
    
    (19
    )
    
    
    (19
    )Net income for common shares
    
    $
    259
    
    
    $
    189
    
    
    $
    217
    
    
    $
    175
    
    
    $
    183
    
    
    $
    147Weighted average shares outstanding
    
    
    158.6
    
    
    
    158.6
    
    
    
    162.3
    
    
    
    162.3
    
    
    
    163.5
    
    
    
    163.5Net income
per share  diluted
    
    $
    1.63
    
    
    $
    1.19
    
    
    $
    1.34
    
    
    $
    1.09
    
    
    $
    1.12
    
    
    $
    0.90
 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. If the impact of taxes was eliminated, net
income from continuing operations would increase to $2.27 per share on a
diluted basis in 2003, $1.70 per share on a diluted basis in 2002 and $1.46 per
share on a diluted basis in 2001. COMMERCIAL PROPERTY OPERATIONS During 2003, commercial property operations contributed $697 million of
operating income, compared with $660 million in 2002 and $672 million in 2001.
The components of the contribution from the commercial property operations are
as follows: (Millions)
    
    2003
    
    2002
    
    2001Commercial property operationsOperating income from current properties
    
    $
    571
    
    
    $
    552
    
    
    $
    525Operating income from properties sold
    
    
    26
    
    
    
    48
    
    
    
    92Lease termination income and gains
    
    
    100
    
    
    
    60
    
    
    
    55Total commercial property operations
    
    $
    697
    
    
    $
    660
    
    
    $
    672
 The financial results for the companys commercial property operations are
discussed in greater detail on page 19 of this report. DEVELOPMENT AND RESIDENTIAL OPERATIONS Earnings from Brookfields development operations are derived solely from the
residential land development operations. Brookfields residential land
development operations are focused on four markets: Calgary, Alberta; Edmonton,
Alberta; Toronto, Ontario; and Denver, Colorado. Development income increased
to $31 million in 2003, compared with $22 million in 2002, as low interest
rates continued to make home ownership very affordable, therefore increasing
demand. Lot and home sales for 2003, including lots sold to third-party
homebuilders, totaled 2,957, compared with 3,060 in 2002 and 2,278 in 2001.
With continued low interest rates and strong demand, contributions from these
operations could meet or exceed 2003s results in 2004. INTEREST AND OTHER INCOME 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 increased to $62
million in 2003 compared with $48 million in 2002 due to gains realized on the
sale of non-core assets and higher loan balances as a result of the impact of
vendor financing on the sale of selected properties.




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##### 



ANNUAL REPORT 2003 p.33 UNALLOCATED COSTS Unallocated costs were $330 million for the year ended December 31, 2003,
compared with $356 million in 2002. The amounts are comprised of interest
expense, administrative and development expenses and other shareholders
interests, as follows: Interest expense Interest expense declined 7% to $265 million in 2003, compared with $284
million in 2002. This decrease is largely a result of the reduction of debt
through amortization and the sale of participating interests in the core
commercial property portfolio, offset partially by the placement of higher
levels of investment-grade debt on properties and property development and
acquisitions. Administrative and development expenses Administrative costs for 2003 increased to $44 million from $42 million in
2002. The company will be working to reduce its administrative costs in 2004. Other shareholders
interests  expenses Other shareholders interests in the income from properties, consolidated in
the companys accounts, consist of earnings attributable to properties
represented by the interests not owned by Brookfield in BPO Properties and
Brookfield Financial Properties, as well as dividends on preferred shares of
these and other wholly-owned subsidiaries held by other shareholders. The following table outlines the dividends and earnings paid or attributable to
other shareholders of subsidiaries of Brookfield: (Millions)
    
    Type
    
    2003
    
    2002
    
    2001BPO Properties
    
    Redeemable preferred shares*
    
    $
    9
    
    
    $
    7
    
    
    $
    11BPO Properties
    
    Common shares
    
    
    1
    
    
    
    
    
    
    
    100%-owned subsidiaries
    
    Redeemable preferred shares*
    
    
    4
    
    
    
    4
    
    
    
    5Dividends
 preferred shares of subsidiaries
    
    
    
    
    14
    
    
    
    11
    
    
    
    16BPO Properties
    
    Participating interests
    
    
    5
    
    
    
    12
    
    
    
    7Brookfield Financial Properties
    
    Participating interests
    
    
    2
    
    
    
    7
    
    
    
    5Other shareholders interests in subsidiary earnings
    
    
    
    
    7
    
    
    
    19
    
    
    
    12Total
    
    
    
    $
    21
    
    
    $
    30
    
    
    $
    28
 * Non-participating Dividends paid on preferred shares increased to $14 million in 2003 from $11
million in 2002 due to the strengthening of the Canadian dollar compared to the
US dollar, as well as dividends paid on the common shares of BPO Properties,
which commenced in September 2003. Other shareholders interests decreased to $7 million in 2003 from $19 million
in 2002 which included gains realized on sales of participating interests in
assets held by BPO Properties, specifically Exchange Tower in Toronto and
Bankers Hall in Calgary. Other shareholders interests attributable to
Brookfield Financial Properties declined over 2002 levels due to an increase in
ownership interest by Brookfield during 2003 to 99.4%. 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, Denver and Minneapolis in the U.S., and Toronto and Calgary in Canada.
Approximately 72% of the companys net operating income or 68% of the companys
funds from operations are derived from the U.S. The companys residential land
development operations are focused on four markets: Calgary, Edmonton and
Toronto in Canada and Denver 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 on page 58 of the consolidated
financial statements.




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##### 



p.34 BROOKFIELD PROPERTIES QUARTERLY RESULTS The 2003 results by quarter are as follows: (Millions, except per share amounts)
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    TotalTotal revenue and gains
    
    $
    295
    
    
    $
    301
    
    
    $
    320
    
    
    $
    447
    
    
    $
    1,363Net operating incomeCommercial property operationsOperating income from current properties
    
    $
    142
    
    
    $
    143
    
    
    $
    142
    
    
    $
    144
    
    
    $
    571Operating income from properties sold
    
    
    8
    
    
    
    9
    
    
    
    9
    
    
    
    
    
    
    
    26Lease termination income and gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    100Total commercial property operations
    
    
    150
    
    
    
    152
    
    
    
    151
    
    
    
    244
    
    
    
    697Development and residential income
    
    
    7
    
    
    
    7
    
    
    
    7
    
    
    
    10
    
    
    
    31Interest and other
    
    
    15
    
    
    
    14
    
    
    
    16
    
    
    
    17
    
    
    
    62172
    
    
    
    173
    
    
    
    174
    
    
    
    271
    
    
    
    790ExpensesInterest
    
    
    70
    
    
    
    67
    
    
    
    66
    
    
    
    62
    
    
    
    265Administrative and development
    
    
    11
    
    
    
    11
    
    
    
    11
    
    
    
    11
    
    
    
    44Interests of others in properties
    
    
    5
    
    
    
    5
    
    
    
    6
    
    
    
    5
    
    
    
    21Income before non-cash items
    
    
    86
    
    
    
    90
    
    
    
    91
    
    
    
    193
    
    
    
    460Depreciation and amortization
    
    
    18
    
    
    
    20
    
    
    
    20
    
    
    
    21
    
    
    
    79Taxes and other non-cash items
    
    
    18
    
    
    
    17
    
    
    
    21
    
    
    
    46
    
    
    
    102Net income
    
    $
    50
    
    
    $
    53
    
    
    $
    50
    
    
    $
    126
    
    
    $
    279Funds
from operations per share  dilutedPrior to lease termination income and gains
    
    $
    0.51
    
    
    $
    0.53
    
    
    $
    0.55
    
    
    $
    0.56
    
    
    $
    2.15Lease termination income and gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.63
    
    
    
    0.63$
    0.51
    
    
    $
    0.53
    
    
    $
    0.55
    
    
    $
    1.19
    
    
    $
    2.78Net
income per share  dilutedPrior to lease termination income and gains
    
    $
    0.29
    
    
    $
    0.30
    
    
    $
    0.29
    
    
    $
    0.31
    
    
    $
    1.19Lease termination income and gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.44
    
    
    
    0.44$
    0.29
    
    
    $
    0.30
    
    
    $
    0.29
    
    
    $
    0.75
    
    
    $
    1.63
 Operating income from current properties in the fourth quarter of 2003 remained
consistent with previous quarters. The gain realized in the fourth quarter of
2003 relates to the sale of a 49% interest in 245 Park Avenue in New York,
while the gains realized in the first and third quarters of 2002 related to the
sale of 50% interests in the Exchange Tower in Toronto and Bankers Hall in
Calgary, respectively. Development and residential income increased in the fourth quarter of 2003
compared with previous quarters in 2003 and 2002 due to the continued strength
of the North American housing markets. Interest and other income increased in
each quarter in 2003 compared with 2002 as a result of interest earned on the
subordinated note receivable extended to Brookfield Homes at the time of
distribution on January 6, 2003, as well as the reinvestment of the proceeds of
the companys preferred share issuances in the last three quarters of 2003. Interest expense decreased in both the fourth quarter of 2003 and the fourth
quarter of 2002 with the sale of partial interests in the companys properties.
Administrative and development expenses remain consistent with prior quarters,
while interest of others in properties decreased in each quarter in 2003
compared with 2002 due to the increase in ownership in the companys New York
and Boston assets to 99.4% and in the companys significant Canadian operating
subsidiary to 89%. Taxes and other non-cash items as well as net income
increased in the fourth quarter of 2003 due to the gain on the sale of 49%
interest in 245 Park Avenue.




---



##### 



ANNUAL REPORT 2003 p.35 The 2002 results by quarter are as follows: (Millions, except per share amounts)
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    
    TotalTotal revenue and gains
    
    $
    345
    
    
    $
    322
    
    
    $
    315
    
    
    $
    390
    
    
    $
    1,372Net operating incomeCommercial property operationsOperating income from current properties
    
    $
    134
    
    
    $
    139
    
    
    $
    135
    
    
    $
    144
    
    
    $
    552Operating income from properties sold
    
    
    16
    
    
    
    13
    
    
    
    11
    
    
    
    8
    
    
    
    48Lease termination income and gains
    
    
    40
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    60Total commercial property operations
    
    
    190
    
    
    
    152
    
    
    
    166
    
    
    
    152
    
    
    
    660Development and residential income
    
    
    6
    
    
    
    7
    
    
    
    7
    
    
    
    2
    
    
    
    22Interest and other
    
    
    10
    
    
    
    12
    
    
    
    15
    
    
    
    11
    
    
    
    48206
    
    
    
    171
    
    
    
    188
    
    
    
    165
    
    
    
    730ExpensesInterest
    
    
    73
    
    
    
    72
    
    
    
    71
    
    
    
    68
    
    
    
    284Administrative and development
    
    
    11
    
    
    
    12
    
    
    
    10
    
    
    
    9
    
    
    
    42Interests of others in properties
    
    
    10
    
    
    
    5
    
    
    
    8
    
    
    
    7
    
    
    
    30Income before non-cash items
    
    
    112
    
    
    
    82
    
    
    
    99
    
    
    
    81
    
    
    
    374Depreciation and amortization
    
    
    19
    
    
    
    19
    
    
    
    20
    
    
    
    22
    
    
    
    80Taxes and other non-cash items
    
    
    21
    
    
    
    12
    
    
    
    16
    
    
    
    9
    
    
    
    58Net income from continuing operations
    
    
    72
    
    
    
    51
    
    
    
    63
    
    
    
    50
    
    
    
    236Net income from discontinued operations
    
    
    8
    
    
    
    9
    
    
    
    11
    
    
    
    16
    
    
    
    44Net income
    
    $
    80
    
    
    $
    60
    
    
    $
    74
    
    
    $
    66
    
    
    $
    280Funds
from operations per share  dilutedPrior to lease termination income and gains
    
    $
    0.45
    
    
    $
    0.47
    
    
    $
    0.48
    
    
    $
    0.47
    
    
    $
    1.87Lease termination income and gains
    
    
    0.21
    
    
    
    
    
    
    
    0.10
    
    
    
    
    
    
    
    0.31Discontinued operations
    
    
    0.08
    
    
    
    0.10
    
    
    
    0.11
    
    
    
    0.16
    
    
    
    0.45$
    0.74
    
    
    $
    0.57
    
    
    $
    0.69
    
    
    $
    0.63
    
    
    $
    2.63Net
income per share  dilutedPrior to lease termination income and gains
    
    $
    0.25
    
    
    $
    0.28
    
    
    $
    0.27
    
    
    $
    0.29
    
    
    $
    1.09Lease termination income and gains
    
    
    0.17
    
    
    
    
    
    
    
    0.08
    
    
    
    
    
    
    
    0.25Discontinued operations
    
    
    0.05
    
    
    
    0.05
    
    
    
    0.07
    
    
    
    0.10
    
    
    
    0.27$
    0.47
    
    
    $
    0.33
    
    
    $
    0.42
    
    
    $
    0.39
    
    
    $
    1.61
 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 SEDARs Web site at
www.sedar.com. 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.




---



##### 



p.36 BROOKFIELD PROPERTIES 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 of
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 in times of illiquidity. 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,
2004 may not provide the same level of increases in rental rates on renewal as
compared to 2003. The company is, however, substantially protected against
these short-term market conditions, since most of our leases are long-term in
nature with an average term of 10 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 $500 million of damage and business interruption
costs. The company continues to seek additional coverage equal to the full
replacement cost of our 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. FORWARD-LOOKING STATEMENTS The companys annual report 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 matter, 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 statement, whether as a result of new
information, future events or otherwise. OUTLOOK The company believes that signs of tenants making longer-term decisions will
contribute to a stronger leasing market going forward as the economy improves.
The company remains focused on delivering on performance targets and creating
shareholder value. With a strong balance sheet, 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




---



##### 



ANNUAL REPORT 2003 p.37 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 5, 2004
 Auditors Report To the Shareholders, We have audited the consolidated balance sheets of Brookfield Properties
Corporation as at December 31, 2003, 2002 and 2001 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,
2003, 2002 and 2001 and the results of its operations and its cashflows for the
years then ended in accordance with Canadian generally accepted accounting
principles.  Toronto, Canada
February 5, 2004
    

-s- Deloitte & Touche LLPChartered Accountants




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##### 



p.38 BROOKFIELD PROPERTIES Consolidated Balance Sheet December 31 (US Millions)
    
    note
    
    2003
    
    2002
    
    2001AssetsCommercial properties
    
    
    2
    
    
    $
    6,297
    
    
    $
    5,661
    
    
    $
    5,802Development properties
    
    
    3
    
    
    
    684
    
    
    
    944
    
    
    
    575Receivables and other
    
    
    4
    
    
    
    717
    
    
    
    769
    
    
    
    847Marketable securities
    
    
    5
    
    
    
    267
    
    
    
    
    
    
    
    Cash and cash equivalents
    
    
    1
    
    
    
    132
    
    
    
    76
    
    
    
    195Assets of Brookfield Homes Corporation
    
    
    6
    
    
    
    
    
    
    
    879
    
    
    
    872$
    8,097
    
    
    $
    8,329
    
    
    $
    8,291LiabilitiesCommercial property debt
    
    
    8
    
    
    $
    4,537
    
    
    $
    4,588
    
    
    $
    4,606Accounts payable and other liabilities
    
    
    9
    
    
    
    563
    
    
    
    429
    
    
    
    460Liabilities of Brookfield Homes Corporation
    
    
    6
    
    
    
    
    
    
    
    556
    
    
    
    583Shareholders interestsInterests of others in properties
    
    
    10
    
    
    
    81
    
    
    
    84
    
    
    
    113Preferred
shares  subsidiaries and corporate
    
    
    11
    
    
    
    1,001
    
    
    
    579
    
    
    
    585Common shares
    
    
    12
    
    
    
    1,915
    
    
    
    2,093
    
    
    
    1,944$
    8,097
    
    
    $
    8,329
    
    
    $
    8,291
 See accompanying notes to the consolidated financial statements On behalf of the Board, Gordon E. Arnell
    
    Richard B. ClarkGordon E. Arnell
    
    Richard B. ClarkChairman
    
    President and Chief Executive Officer




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##### 



ANNUAL REPORT 2003 p.39 Consolidated Statement of Income December 31 (US Millions, except per share amounts)
    
    note
    
    2003
    
    2002
    
    2001Total revenue and gains
    
    
    
    
    
    $
    1,363
    
    
    $
    1,372
    
    
    $
    1,428Net operating incomeCommercial property operations
    
    
    13Operating income from current properties
    
    
    
    
    
    $
    571
    
    
    $
    552
    
    
    $
    525Operating income from properties sold
    
    
    
    
    
    
    26
    
    
    
    48
    
    
    
    92Lease termination income and gains
    
    
    
    
    
    
    100
    
    
    
    60
    
    
    
    55Total commercial property operations
    
    
    
    
    
    
    697
    
    
    
    660
    
    
    
    672Development and residential operations
    
    
    13
    
    
    
    31
    
    
    
    22
    
    
    
    20Interest and other
    
    
    
    
    
    
    62
    
    
    
    48
    
    
    
    42790
    
    
    
    730
    
    
    
    734ExpensesInterest
    
    
    
    
    
    
    265
    
    
    
    284
    
    
    
    328Administrative and development
    
    
    
    
    
    
    44
    
    
    
    42
    
    
    
    44Interest of others in properties
    
    
    
    
    
    
    21
    
    
    
    30
    
    
    
    28Income before undernoted
    
    
    
    
    
    
    460
    
    
    
    374
    
    
    
    334Depreciation and amortization
    
    
    
    
    
    
    79
    
    
    
    80
    
    
    
    76Taxes and other non-cash items
    
    
    7
    
    
    
    102
    
    
    
    58
    
    
    
    56Net income from continuing operations
    
    
    
    
    
    
    279
    
    
    
    236
    
    
    
    202Net income from discontinued operations
    
    
    6
    
    
    
    
    
    
    
    44
    
    
    
    39Net income
    
    
    
    
    
    $
    279
    
    
    $
    280
    
    
    $
    241Net
income per share  basic
    
    
    12Continuing operations
    
    
    
    
    
    $
    1.64
    
    
    $
    1.35
    
    
    $
    1.12Discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.27
    
    
    
    0.25$
    1.64
    
    
    $
    1.62
    
    
    $
    1.37Net
income per share  diluted
    
    
    12Continuing operations
    
    
    
    
    
    $
    1.63
    
    
    $
    1.34
    
    
    $
    1.12Discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.27
    
    
    
    0.24$
    1.63
    
    
    $
    1.61
    
    
    $
    1.36
 See accompanying notes to the consolidated financial statements Consolidated Statement of Retained Earnings December 31 (US Millions)
    
    note
    
    2003
    
    2002
    
    2001Retained
earnings  beginning of year
    
    
    
    
    
    $
    630
    
    
    $
    441
    
    
    $
    274Net income
    
    
    
    
    
    
    279
    
    
    
    280
    
    
    
    241Shareholder distributions
Preferred shares dividends and convertible debenture interest
    
    
    
    
    
    
    (20
    )
    
    
    (19
    )
    
    
    (21
    )Common share dividends
    
    
    
    
    
    
    (79
    )
    
    
    (64
    )
    
    
    (53
    )Amount paid in excess of the book value of common
shares purchased for cancellation
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    Accounting
policy change  stock-based compensation
    
    
    1
    
    
    
    
    
    
    
    (8
    )
    
    
    Retained
earnings  end of year
    
    
    12
    
    
    $
    797
    
    
    $
    630
    
    
    $
    441
 See accompanying notes to the consolidated financial statements




---



##### 



p.40 BROOKFIELD PROPERTIES Consolidated Statement of Cashflow December 31 (US Millions)
    
    note
    
    2003
    
    2002
    
    2001Operating activitiesNet income
    
    
    
    
    
    $
    279
    
    
    $
    280
    
    
    $
    241Depreciation and amortization
    
    
    
    
    
    
    79
    
    
    
    80
    
    
    
    76Taxes and other non-cash items
    
    
    
    
    
    
    102
    
    
    
    87
    
    
    
    82Funds from operations and gains
    
    
    
    
    
    
    460
    
    
    
    447
    
    
    
    399Gains
    
    
    
    
    
    
    (100
    )
    
    
    (60
    )
    
    
    (54
    )Income from discontinued operations, before tax
    
    
    
    
    
    
    
    
    
    
    (73
    )
    
    
    (65
    )Commercial property tenant improvements
    
    
    
    
    
    
    (26
    )
    
    
    (49
    )
    
    
    (50
    )Other
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    88Cashflow from operating activities
    
    
    
    
    
    
    334
    
    
    
    250
    
    
    
    318Financing activities and capital distributionsCommercial property debt arranged
    
    
    
    
    
    
    735
    
    
    
    557
    
    
    
    1,341Commercial property debt repayments
    
    
    
    
    
    
    (727
    )
    
    
    (632
    )
    
    
    (1,050
    )Subordinated note receivable
    
    
    6
    
    
    
    98
    
    
    
    
    
    
    
    Other advances
    
    
    
    
    
    
    (99
    )
    
    
    (59
    )
    
    
    (530
    )Common shares of Brookfield and subsidiaries acquired
    
    
    
    
    
    
    (106
    )
    
    
    (26
    )
    
    
    (102
    )Common shares issued
    
    
    
    
    
    
    8
    
    
    
    1
    
    
    
    25Preferred shares issued, net
    
    
    
    
    
    
    408
    
    
    
    123
    
    
    
    Preferred shares redeemed
    
    
    
    
    
    
    (74
    )
    
    
    (126
    )
    
    
    Cashflow (distributed to) retained from other shareholders
    
    
    
    
    
    
    (15
    )
    
    
    (30
    )
    
    
    14Preferred share dividends and convertible debenture interest
    
    
    
    
    
    
    (20
    )
    
    
    (19
    )
    
    
    (21
    )Common share dividends
    
    
    
    
    
    
    (79
    )
    
    
    (64
    )
    
    
    (53
    )Cashflow provided from (used in) financing activities
and capital distributions
    
    
    
    
    
    
    129
    
    
    
    (275
    )
    
    
    (376
    )Investing activitiesMarketable securities
    
    
    
    
    
    
    (267
    )
    
    
    
    
    
    
    Dispositions of real estate, net
    
    
    17
    
    
    
    50
    
    
    
    114
    
    
    
    137Development and redevelopment investments
    
    
    
    
    
    
    (174
    )
    
    
    (206
    )
    
    
    (101
    )Capital expenditures
    
    
    
    
    
    
    (16
    )
    
    
    (16
    )
    
    
    (14
    )Cashflow (used in) provided from investing activities
    
    
    
    
    
    
    (407
    )
    
    
    (108
    )
    
    
    22Discontinued operations
    
    
    6
    
    
    
    
    
    
    
    14
    
    
    
    30Increase (decrease) in cash resources
    
    
    
    
    
    
    56
    
    
    
    (119
    )
    
    
    (6
    )Opening cash and cash equivalents
    
    
    
    
    
    
    76
    
    
    
    195
    
    
    
    201Closing cash and cash equivalents
    
    
    
    
    
    $
    132
    
    
    $
    76
    
    
    $
    195
 See accompanying notes to the consolidated financial statements




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##### 



ANNUAL REPORT 2003 p.41 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). The companys accounting policies and its financial disclosure are
substantially in accordance with the recommendations of the Canadian Institute
of Public and Private Real Estate Companies (CIPPREC). (b) Principles of consolidation The 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: The company owns a 99.4% (2002  98.5%
and 2001  94.7%) limited partnership equity and general partnership
interest in Brookfield Financial Properties.(ii)
    
    BPO Properties: The company owns 89% (2002 and 2001  87%) on an equity
basis and 54.3% (2002 and 2001  47%) on a voting basis of the common shares
of BPO Properties. (c) Properties  (i)
    
    Commercial propertiesCommercial properties held for investment are carried at the lower of
cost less accumulated depreciation and net recoverable amount. For
operating properties and properties held for long-term investment, a
write-down to estimated net recoverable amount is recognized when a
propertys undiscounted future cashflow is less than its carried value.
Projections of future cash-flow 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.Depreciation on buildings is provided on the sinking-fund basis over the
useful lives of the properties to a maximum of 60 years. The sinking-fund
method provides for a depreciation charge of an annual amount increasing
on a compounded basis of 5% per annum.
Depreciation is determined with reference to each rental propertys
carried value, remaining estimated useful life and residual value. Tenant
improvements and re-leasing costs are deferred and amortized over the
lives of the leases to which they relate.(ii)
    
    Development properties  commercialCommercial 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 the lower of cost,
including pre-development expenditures, and the net recoverable amount.(iii)
    
    Development properties  residentialDevelopment 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.(iv)
    
    Properties held for saleProperties held for sale are recorded at the lower of cost and net
realizable value. (d) Capitalized costs Costs are capitalized on commercial and residential properties which are under
development and other properties held for sale, including all expenditures
incurred in connection with the acquisition, development, construction and
initial predetermined leasing period. These expenditures consist of all direct
costs, interest on debt that is related to these assets and certain
administrative expenses. Ancillary income relating specifically to such
properties during the development period is treated as a reduction of costs. (e) 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.




---



##### 



p.42 BROOKFIELD PROPERTIES 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. Rental revenue includes percentage participating
rents and recoveries of operating expenses, including property, capital and
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 included in development property or
residential inventory assets. (f) 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. See
Note 7 for additional information on the composition of the income tax assets
(liabilities) and expense. (g) 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 US dollars unless otherwise noted. (h) Per share calculations Net income per common share has been calculated after providing for preferred
share dividends using the weighted average number of basic common shares
outstanding of 157.4 million (2002  161.1 million, 2001  159.9 million) and
diluted common shares outstanding of 158.6 million (2002  162.3 million, 2001
- 163.5 million). (i) Cash and cash equivalents Cash and cash equivalents include $90 million (2002  $69 million, 2001  $156
million) which is designated for property-specific taxes and operating costs,
unless otherwise approved by the respective property mortgage holder. (j) Marketable securities Marketable securities are carried at the lower of cost and their estimated net
realizable value with any valuation adjustments charged to income. This policy
considers the companys intent to hold an investment through periods where
quoted market values may not fully reflect the underlying value of that
investment. Accordingly, there are periods where the fair value or the
quoted market value may be less than cost. In these circumstances, the
company reviews the relevant security to determine if it will recover its
carrying value within a reasonable period of time and adjust it, if necessary.
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 where
available and, where 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. (k) 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 cash flows and probabilities in assessing net recoverable
amounts and net realizable value, tax provisions, hedge effectiveness, and fair
value for disclosure purposes. (l) Funds from operations Funds from operations (FFO) is a measurement defined by CIPPREC as net income
before certain items including non-cash tax expenses, depreciation and
amortization. As a result, this amount has been included as a separate line on
the consolidated statement of cashflow. (m) Stock-based compensation Effective January 1, 2002, the company adopted the new accounting standard
issued by the CICA on stock-based compensation and other stock-based payments.
The new standard was applied retroactively without restatement of prior years
results. The company




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##### 



ANNUAL REPORT 2003 p.43 accounts for stock options using the fair value method, under which
compensation expense is measured at the grant date using an option pricing
model and recognized over the vesting period. The cumulative effect on opening
retained earnings was $8 million. (n) 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. 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. 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 in the period the changes occur. The use of
non-hedging derivative contracts is governed by documented risk management
policies and approved limits. (o) Change in accounting policy Effective January 1, 2003, the company adopted a new accounting guideline
related to significant guarantees and indemnification agreements (Note 14). (p) Future accounting policy changes The following future accounting policy changes may have an impact on the
company, although the impact, if any, has not been determined at this time. In
December 2002, the Accounting Standards Board (AcSB) issued handbook section
3063, Impairment of Long-lived Assets, effective prospectively for years
beginning on or after April 1, 2003. This standard provides guidance on
recognizing, measuring and disclosing the impairment of long-lived assets. The
guidance requires 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. It is not expected that
section 3063 would have a material impact on the companys financial
statements. In March 2003, the CICA issued section 3110, Asset Retirement Obligations,
effective for financial statements issued for fiscal years beginning on or
after January 1, 2004. Section 3110 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. It is not expected that section 3110 would have a material
impact on the consolidated financial statements of the company. In June 2003, the CICA issued Accounting Guideline (AcG) 15, Consolidation
of Variable Interest Entities (AcG 15), which is effective for fiscal year
2005 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 impact of AcG 15 on the
companys financial statements, if any, has not been determined at this time. In July 2003, the CICA issued 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. The company will implement the new section prospectively
beginning on January 1, 2004. Due to the prospective nature of this change,
there is no impact on the companys consolidated financial statements as of the
implementation date; however, the standard will require the company to record
income arising from tenant leases and depreciation on buildings on a
straight-line basis. In November 2003, the AcSB approved a revision to CICA section 3860, Financial
Instruments: Disclosure and Presentation, to require certain obligations that
must or could be settled with a variable number of the issuers own equity
instruments to be presented as a liability. It is expected that this will
require the reclassification of certain of the companys preferred shares that
are included in equity to liabilities, effective for the company on January 1,
2005. Effective January 1, 2004, the company will adopt Accounting Guideline 13,
Hedging Relationships, (AcG 13), the new accounting guideline issued by 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.




---



##### 



p.44 BROOKFIELD PROPERTIES Realized and unrealized gains and losses on derivative financial instruments
designated as hedges of financial risks will be included in income in the same
period as when the underlying asset, liability or anticipated transaction
affects income. It is expected that AcG 13 would not have a material impact on
the companys financial statements. NOTE 2: COMMERCIAL PROPERTIES (Millions)
    
    2003
    
    2002
    
    2001Commercial properties
    
    $
    6,748
    
    
    $
    6,029
    
    
    $
    6,117Less: accumulated depreciation
    
    
    (451
    )
    
    
    (368
    )
    
    
    (315
    )Total
    
    $
    6,297
    
    
    $
    5,661
    
    
    $
    5,802
 (a)Commercial properties, carried at a net book value of approximately $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 $996 million in
total on an undiscounted basis. During the year, the company disposed of whole and partial interests in
properties for proceeds totaling $469 million. In addition, the company
reclassified $558 million from development properties to commercial properties
in respect of a commercial property for which the development period was
substantially completed on December 31, 2003. The company also acquired a
property in Washington, D.C., for $157.5 million. (b)Construction costs of $7 million (2002  $9 million, 2001  $17 million),
interest costs of nil (2002 and 2001  nil) and general and administrative
expenses of nil (2002  nil, 2001  $1 million) were capitalized to the
commercial property portfolio for properties undergoing redevelopment in 2003. (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)
    
    2003
    
    2002
    
    2001Assets
    
    $
    2,164
    
    
    $
    1,705
    
    
    $
    1,362Liabilities
    
    
    1,267
    
    
    
    965
    
    
    
    758Operating revenues
    
    
    296
    
    
    
    231
    
    
    
    174Operating expenses
    
    
    120
    
    
    
    91
    
    
    
    61Net income
    
    
    87
    
    
    
    70
    
    
    
    59Cashflow from operating activities
    
    
    132
    
    
    
    81
    
    
    
    76Cashflow from financing activities
    
    
    21
    
    
    
    4
    
    
    
    4Cashflow used in investing activities
    
    
    (16
    )
    
    
    (31
    )
    
    
    (73
    )
 NOTE 3: DEVELOPMENT PROPERTIES Development properties include commercial developments, primarily for office
development and residential land under and held for development. (Millions)
    
    2003
    
    2002
    
    2001Commercial developments
    
    $
    349
    
    
    $
    720
    
    
    $
    344Residential development land
    
    
    335
    
    
    
    224
    
    
    
    231Total
    
    $
    684
    
    
    $
    944
    
    
    $
    575
 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 2003, the company capitalized
construction and related costs of $123 million (2002  $189 million, 2001  $61
million) and $44 million (2002  $28 million, 2001  $17 million) of interest
to its commercial development sites. During 2003, after interest recoveries of
nil (2002  $20 million, 2001  $35 million), the company capitalized to its
residential land operations a net $9 million (2002  recovered net $9 million,
2001  recovered net $11 million) of interest and capitalized a net of nil
(2002 and 2001  nil) of administrative and development costs. In connection
with residential land development operations, these costs are expensed as land
is sold.




---



##### 



ANNUAL REPORT 2003 p.45 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 As
detailed in Note 2, the company reclassified $558 million from development
properties to commercial properties during the year. NOTE 4: RECEIVABLES AND OTHER A description of these assets is as follows: (Millions)
    
    2003
    
    2002
    
    2001Real estate operating receivables and mortgages
    
    $
    499
    
    
    $
    465
    
    
    $
    506Prepaid expenses and other assets
    
    
    212
    
    
    
    210
    
    
    
    210Non-core real estate assets held for sale
    
    
    6
    
    
    
    51
    
    
    
    41Future income tax assets (Note 7)
    
    
    
    
    
    
    43
    
    
    
    90Total
    
    $
    717
    
    
    $
    769
    
    
    $
    847
 NOTE 5: MARKETABLE SECURITIES Marketable securities are comprised of a portfolio of fixed-rate corporate
bonds which are carried at cost with a fair value equal to their book value and
an average yield of 2.4% which mature over the period of 2005 to 2006. NOTE 6: DISCONTINUED OPERATIONS On October 29, 2002, the Board of Directors approved the special distribution
of the companys U.S. residential home building business, Brookfield Homes
Corporation (Brookfield Homes). On January 6, 2003, the distribution date, the companys common shareholders of
record on January 2, 2003 received a special distribution equivalent to
one-fifth of a Brookfield Homes share for each common share of the company that
they owned. The value of the special distribution, based on a book value of
$323 million of equity, was $2.00 per Brookfield common share. The distribution
was in the form of a return of capital, as approved by the companys
shareholders on December 16, 2002, totaling $323 million, and resulted in a
reduction of the common equity of the company of $323 million. Summarized
financial information for Brookfield Homes at the time of the distribution was
as follows: December 31 (Millions)
    
    2002
    
    2001Residential housing inventory
    
    $
    734
    
    
    $
    749Development properties
    
    
    40
    
    
    
    18Other assets
    
    
    105
    
    
    
    105Total assets
    
    
    879
    
    
    
    872Residential construction financing
    
    
    345
    
    
    
    318Accounts payable and other
    
    
    113
    
    
    
    50Subordinated debt
    
    
    98
    
    
    
    215Net assets of discontinued operations
    
    $
    323
    
    
    $
    289Revenue
    
    $
    897
    
    
    $
    852Net income from discontinued operations, before taxes
    
    $
    73
    
    
    $
    65Income taxes
    
    
    29
    
    
    
    26Results of discontinued operations
    
    $
    44
    
    
    $
    39Cashflow used in operating activities
    
    $
    (13
    )
    
    $
    (69
    )Cashflow provided by financing activities
    
    
    27
    
    
    
    99Cashflow used in investing activities
    
    
    
    
    
    
    Cashflow provided by discontinued operations
    
    $
    14
    
    
    $
    30
 The subordinated note receivable from Brookfield Homes Corporation which was
included in real estate operating receivables and mortgages was repaid in 2003
(2002  $98 million, 2001  $215 million). During 2002, after interest recoveries of $39 million (2001  $40 million), the
company recovered from its residential development operations a net of $9
million (2001  $4 million) of interest. In connection with residential
development operations, these costs are expensed as building lots and homes are
sold.




---



##### 



p.46 BROOKFIELD PROPERTIES At December 31, 2002, residential construction financing totaled $345 million
(2001  $318 million). Residential construction financing related to
construction and development loans which were repaid out of the proceeds from
the sale of building lots, single-family and condominium homes. As new homes
were constructed, further loan facilities were arranged on a rolling basis. The
weighted average interest rate on these facilities as at December 31, 2002 was
4.7% (2001  5.1%) and the balances were due prior to 2006. NOTE 7: INCOME TAXES Future income tax assets (liabilities) consist of the following: (Millions)
    
    2003
    
    2002
    
    2001Future income tax assets related to non-capital and capital losses
    
    $
    469
    
    
    $
    385
    
    
    $
    421Future income tax liabilities related to differences in tax and book basis, net
    
    
    (487
    )
    
    
    (342
    )
    
    
    (331
    )Total
    
    $
    (18
    )
    
    $
    43
    
    
    $
    90
 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 $235
million (2002  $154 million, 2001   $153 million) that relate to non-capital
losses which expire over the next seven years, and $40 million (2002  $30
million, 2001   $30 million) that relate to capital losses which have no
expiry. The companys U.S. subsidiaries have future income tax assets of $194
million (2002  $201 million, 2001  $238 million) that relate to net operating
losses which expire over the next 17 years. The amount of non-capital losses
and deductible temporary differences, for which no future income tax assets
have been recognized, is approximately $436 million (2002  $443 million, 2001
- $588 million). Future income tax expense consists of the following: (Millions)
    
    2003
    
    2002
    
    2001Income tax expense at the Canadian federal and provincial income
tax rate of 35.0% (2002  37.5%, 2001  40.6%)
    
    $
    141
    
    
    $
    118
    
    
    $
    114Increase (decrease) in income tax expense due to the following:Higher (lower) income taxes in other jurisdictions
    
    
    7
    
    
    
    4
    
    
    
    (2
    )Other shareholders interests in income tax expense
    
    
    (2
    )
    
    
    (5
    )
    
    
    (5
    )Changes in Canadian tax rates
    
    
    (23
    )
    
    
    
    
    
    
    34Tax assets previously not recognized
    
    
    (28
    )
    
    
    (54
    )
    
    
    (45
    )Non-taxable portion of capital gains
    
    
    (1
    )
    
    
    (13
    )
    
    
    (15
    )Other
    
    
    8
    
    
    
    8
    
    
    
    (25
    )Future income tax expense and other non-cash items
    
    $
    102
    
    
    $
    58
    
    
    $
    56
 NOTE 8: COMMERCIAL PROPERTY DEBT The companys commercial property debt outstanding and principal repayments at
December 31, 2003 are as follows: Weighted Average
    
    Principal RepaymentsInterest Rate at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2009 &
    
    2003
    
    2002
    2001(Millions)
    
    Dec. 31, 2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Beyond
    
    Total
    
    Total
    TotalCommercial
property debt
    
    
    6.6
    %
    
    $
    265
    
    
    $
    432
    
    
    $
    155
    
    
    $
    611
    
    
    $
    251
    
    
    $
    2,823
    
    
    $
    4,537
    
    
    $
    4,588
    
    
    $
    4,606
 Commercial
property debt includes $1,104 million (2002 
$798 million, 2001  $964 million) repayable in Canadian dollars of C$1,435 million (2002  C$1,260
million, 2001  C$1,532 million). The weighted average interest rate at
December 31, 2003 was 6.6% (2002 and 2001  7.0%). The companys bank credit facility is in the form of a three-year revolving
facility totaling $150 million, which is fully drawn at December 31, 2003. This
facility is floating rate and has a weighted average interest rate of 2.5%. During the year, the company disposed of whole and partial interests in
properties for consideration of cash and the assumption of $246 million of
debt.




---



##### 



ANNUAL REPORT 2003 p.47 NOTE 9: ACCOUNTS PAYABLE AND OTHER LIABILITIES Accounts payable and other liabilities consist of the following: (Millions)
    
    2003
    
    2002
    
    2001Accounts payable
    
    $
    276
    
    
    $
    246
    
    
    $
    219AdvancesRevolving five-year term facilities
    
    
    119
    
    
    
    98
    
    
    
    115Other
    
    
    150
    
    
    
    85
    
    
    
    126Future income tax liabilities
    
    
    18
    
    
    
    
    
    
    
    Total
    
    $
    563
    
    
    $
    429
    
    
    $
    460
 Advances represent credit facilities which are primarily recourse in nature to
subsidiaries of the company. The revolving five-year term facility is borrowed from a shareholder and 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.
Interest expense includes $3 million (2002   $2 million, 2001  $4 million)
relating to these advances. Other advances are comprised mainly of debt attributable to the land
development business of $150 million (2002  $85 million, 2001  $126 million).
The weighted average interest rate on these advances as at December 31, 2003
was 4.4% (2002  4.8 %, 2001   4.2%). Advances totaling $124 million are due
by the end of 2004, and the remaining balances are due prior to 2007. NOTE 10: INTERESTS OF OTHERS IN PROPERTIES Interests of others in properties include the amounts of common equity related
to other shareholders interests in property ownership entities which are
consolidated in the companys accounts. The balances are as follows: Equity(Millions)
    
    Ownership
    
    2003
    
    2002
    
    2001Participation by other shareholders in properties through:Common shares of BPO Properties
    
    
    11.0
    %
    
    $
    72
    
    
    $
    64
    
    
    $
    52Limited partnership units of Brookfield Financial Properties
    
    
    0.6
    %
    
    
    9
    
    
    
    20
    
    
    
    61Total
    
    
    
    
    
    $
    81
    
    
    $
    84
    
    
    $
    113
 NOTE 11: PREFERRED SHARES  SUBSIDIARIES AND CORPORATE Subsidiaries and corporate preferred shares outstanding total $1,001 million
(2002  $579 million, 2001  $585 million) as follows: (a)Subsidiaries of the company have issued the following preferred shares: (Millions)
    
    2003
    
    2002
    
    2001Preferred shares of subsidiaries owned by other shareholdersBPO Properties
    
    $
    294
    
    
    $
    241
    
    
    $
    240100%-owned subsidiaries
    
    
    121
    
    
    
    100
    
    
    
    99Total subsidiary preferred shares
    
    $
    415
    
    
    $
    341
    
    
    $
    339
  (b)
    
    The company has the following preferred shares authorized and outstanding: (Millions, except share information)
    
    Cumulative Dividend Rate
    
    2003
    
    2002
    
    2001Authorized
    
    Outstanding6,312,000
    
    
    6,312,000
    
    
    Class A redeemable voting
    
    
    7.50
    %
    
    $
    11
    
    
    $
    11
    
    
    $
    112,000,000
    
    
    2,000,000
    
    
    Class AA Series E
    
    70%of bank prime
    
    
    34
    
    
    
    34
    
    
    
    343,000,000
    
    
    
    
    
    Class AAA Series A
    
    
    9.00
    %
    
    
    
    
    
    
    
    
    
    
    503,000,000
    
    
    
    
    
    Class AAA Series B
    
    
    9.00
    %
    
    
    
    
    
    
    
    
    
    
    506,000,000
    
    
    
    
    
    Class AAA Series C and D
    
    
    8.00
    %
    
    
    
    
    
    
    67
    
    
    
    1018,000,000
    
    
    8,000,000
    
    
    Class AAA Series F
    
    
    6.00
    %
    
    
    126
    
    
    
    126
    
    
    
    6,000,000
    
    
    4,400,000
    
    
    Class AAA Series G
    
    
    5.25
    %
    
    
    110
    
    
    
    
    
    
    
    8,000,000
    
    
    8,000,000
    
    
    Class AAA Series H
    
    
    5.75
    %
    
    
    151
    
    
    
    
    
    
    
    8,000,000
    
    
    8,000,000
    
    
    Class AAA Series I
    
    
    5.20
    %
    
    
    154
    
    
    
    
    
    
    
    Total corporate preferred shares
    
    
    
    
    
    
    
    
    
    
    
    $
    586
    
    
    $
    238
    
    
    $
    246




---



##### 



p .48 BROOKFIELD PROPERTIES 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 of 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. 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. The 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, 2010
  (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.(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
(Series G  New York
Stock Exchange) the company may, on or after the dates specified above, convert
the Class AAA, Series F, G, H and I into common shares of the company. The
Class AAA, Series F, G, H and I 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 and I 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 12: 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)
    
    2003
    
    2002
    
    2001Common shares
    
    $
    1,084
    
    
    $
    1,448
    
    
    $
    1,459Retained earnings, contributed surplus, and cumulative
translation adjustment
    
    
    831
    
    
    
    645
    
    
    
    485Total
    
    $
    1,915
    
    
    $
    2,093
    
    
    $
    1,944




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##### 



ANNUAL REPORT 2003 p.49 On October 29, 2002, the Board of Directors approved the special distribution
of the companys U.S. residential home building business, Brookfield Homes. The
distribution was in the form of a return of capital, representing the shares of
Brookfield Homes, and was approved by the companys shareholders on December
16, 2002. This special distribution totaled $323 million and was completed on
January 6, 2003 to shareholders of record on January 2, 2003, as discussed in
Note 6. Retained earnings, contributed surplus and cumulative translation adjustment
include a foreign currency cumulative translation adjustment of $34 million
(2002  $(36) million, 2001  $(27) million) and contributed surplus of nil
(2002  $51 million, 2001   $71 million). During the year, contributed surplus
decreased by $58 million (2002  $14 million, 2001  $21 million) from the
repurchase of the companys common shares, $8 million (2002  $3 million, 2001
- nil) from preferred share issue costs, nil (2002  $3 million) from
transaction costs related to the distribution of Brookfield Homes, nil (2002 -
nil) pursuant to the exercise of options under the market growth feature and
increased by $2 million from stock compensation expense.The amount paid in
excess of the book value of common shares purchased for cancellation was $13
million (2002 and 2001  nil). (a) Common shares During the years 2003, 2002 and 2001, common shares issued and outstanding
changed as follows: 2003
    
    2002
    
    2001Common shares outstanding, beginning of year
    
    
    160,364,416
    
    
    
    161,678,406
    
    
    
    158,746,008Add shares issued on:Exercise of options
    
    
    888,985
    
    
    
    13,913
    
    
    
    195,329Exercise of warrants
    
    
    
    
    
    
    57,997
    
    
    
    2,500,000Conversion of debentures
    
    
    
    
    
    
    
    
    
    
    2,622,100In exchange for shares of BPO Properties
    
    
    
    
    
    
    
    
    
    
    17,669Deduction of shares as a result of repurchases made
    
    
    (5,006,700
    )
    
    
    (1,385,900
    )
    
    
    (2,402,700
    )Common shares outstanding, end of year
    
    
    156,246,701
    
    
    
    160,364,416
    
    
    
    161,678,406
 During 2003, the exercise of options issued under the companys share option
plan generated cash proceeds of $9.4 million (2002  $0.2 million, 2001  $1.4
million). In 2001, 17,669 common shares of the company were issued in
conjunction with deficient tenders. Warrants to acquire common shares of the
company that were exercised during 2002 generated proceeds of $0.5 million
(2001  $24.2 million). During 2003, common shares of the company were acquired
for cancellation pursuant to the normal course issuer bid at an average price
of $21.10 per share (2002  $18.49, 2001  $ 17.30). (b) Earnings per share The components of basic and diluted earnings per share are summarized in the
following table: (Millions, except per share information)
    
    2003
    
    2002
    
    2001Net income
    
    $
    279
    
    
    $
    280
    
    
    $
    241Preferred dividends
    
    
    (20
    )
    
    
    (19
    )
    
    
    (19
    )Total
    
    $
    259
    
    
    $
    261
    
    
    $
    222Weighted average shares outstanding  basic
    
    
    157.4
    
    
    
    161.1
    
    
    
    159.9Dilutive effect of the conversion of warrants and options
    
    
    1.2
    
    
    
    1.2
    
    
    
    3.6Weighted average shares outstanding  diluted
    
    
    158.6
    
    
    
    162.3
    
    
    
    163.5
 (c) Stock-based compensation The company has a management share option plan in which options vest
proportionately over five years and expire 10 years after the grant date. The
exercise price is equal to the market price at the time they are granted.
Compensation expense was calculated using the Black-Scholes model of valuation,
assuming a 10-year term, 22.8% volatility and an interest rate of 5.1%. 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 the exercise price of all outstanding stock options
being reduced by $1.00 effective February 4, 2003.




---



##### 



p.50 BROOKFIELD PROPERTIES The following table sets out the number of common shares which the company may
issue under the management share option plan: Issue
    
    Expiry
    
    Number
    
    Weighted AverageDate
    
    Date
    
    of Shares
    
    Exercise Price1997
    
    
    2008
    
    
    
    5,000
    
    
    $
    7.631998
    
    
    2009
    
    
    
    440,000
    
    
    
    11.971999
    
    
    2009
    
    
    
    29,300
    
    
    
    9.282000
    
    
    2010
    
    
    
    650,946
    
    
    
    10.652001
    
    
    2011
    
    
    
    694,257
    
    
    
    16.862002
    
    
    2012
    
    
    
    841,496
    
    
    
    18.642003
    
    
    2013
    
    
    
    581,241
    
    
    
    20.753,242,240
    
    
    $
    16.03
 The change in the number of options during the year is as follows: Weighted AverageNumber of
    
    ExerciseOptions
    
    PriceOutstanding, beginning of year
    
    
    3,504,791
    
    
    $
    12.99Granted
    
    
    1,000,000
    
    
    
    18.38Exercised
    
    
    (888,985
    )
    
    
    (8.44
    )Cancelled
    
    
    (373,566
    )
    
    
    (17.05
    )Outstanding, at end of year
    
    
    3,242,240
    
    
    $
    16.03Exercisable at end of year
    
    
    1,136,968
    
    
    $
    13.42
 A Restricted 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 these plans for the year ended
December 31, 2003 was $3 million (2002 and 2001  $2 million). NOTE
13: COMMERCIAL PROPERTY AND RESIDENTIAL DEVELOPMENT OPERATIONS(a) Commercial property operations The results of the companys commercial property operations are as follows: (Millions)
    
    2003
    
    2002
    
    2001Commercial property operations
    
    $
    976
    
    
    $
    943
    
    
    $
    1,007Expenses
    
    
    (379
    )
    
    
    (343
    )
    
    
    (390
    )Lease termination income and gains
    
    
    100
    
    
    
    60
    
    
    
    55Total
    
    $
    697
    
    
    $
    660
    
    
    $
    672
 Due to the events of September 11, 2001 and the impact on the companys
properties in Lower Manhattan, commercial property income includes $11 million
(2002 and 2001  $49 million) of business interruption insurance claims as a
result of loss of revenue.




---



##### 



ANNUAL REPORT 2003 p.51 (b) Development and residential operations Development and residential operations results for the year are as follows: (Millions)
    
    2003
    
    2002
    
    2001Revenue
    
    $
    225
    
    
    $
    321
    
    
    $
    324Expenses
    
    
    (194
    )
    
    
    (299
    )
    
    
    (304
    )Total
    
    $
    31
    
    
    $
    22
    
    
    $
    20
 NOTE 14: GUARANTEES 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. OTHER INFORMATION NOTE 15: 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. (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, 2003, 2002 and
2001 under US GAAP would result in net income under US GAAP of $254 million
(2002  $251 million, 2001  $173 million). The main differences between
Canadian GAAP and US GAAP are summarized in the following table: Years ended December 31 (Millions, except per share information)
    
    2003
    
    2002
    
    2001Net income as reported under Canadian GAAP
    
    $
    279
    
    
    $
    280
    
    
    $
    241Adjustments:(i) Increased commercial property income
    
    
    9
    
    
    
    14
    
    
    
    14(ii) Increased commercial property depreciation
    
    
    (60
    )
    
    
    (64
    )
    
    
    (69
    )(iii) Increased commercial property gains
    
    
    9
    
    
    
    
    
    
    
    16(iv) (Increased) decreased deferred income taxes
    
    
    17
    
    
    
    19
    
    
    
    (25
    )(v) Subordinated convertible debenture interest
    
    
    
    
    
    
    
    
    
    
    (2
    )(vi) Stock option expense
    
    
    
    
    
    
    
    
    
    
    (4
    )(vii) Decreased other shareholders interests
    
    
    
    
    
    
    2
    
    
    
    2Net income under US GAAP*
    
    $
    254
    
    
    $
    251
    
    
    $
    173Net income per shareBasic
    
    $
    1.49
    
    
    $
    1.44
    
    
    $
    0.96Diluted
    
    $
    1.48
    
    
    $
    1.43
    
    
    $
    0.95
 * There are no extraordinary items included in these results Other significant differences are outlined in each category between Canadian
GAAP and US GAAP as follows:  (i)
    
    Increased commercial property incomeUnder current Canadian GAAP, rental revenue is recognized over the term
of the lease as it becomes due where increases in rent are intended to
offset the estimated effects of inflation. Under US GAAP, rental revenue
is recognized on a straight-line basis over the term of the lease. The
net impact of using the straight-line method on the income of the company
would be to increase the commercial property revenue by $9 million (2002
  $14 million, 2001  $14 million).




---



##### 



p .52 BROOKFIELD PROPERTIES  (ii)
    
    Increased commercial property depreciationUnder current Canadian GAAP, commercial properties have been depreciated
using the sinking-fund method. Under US GAAP, commercial properties are
depreciated on a straight-line basis. In recalculating depreciation on a
straight-line basis, the additional depreciation expense would be $60
million (2002  $64 million, 2001  $69 million).(iii)
    
    Increased commercial property gainsUnder US GAAP, the book values of commercial property assets differ from
Canadian GAAP as a result of rental revenue recognition and commercial
property depreciation methods, as explained in (i) and (ii). The net
impact of these amounts would be an increase in commercial property gains
of $9 million (2002  nil, 2001  $16 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, 2003, a reduction of
deferred income tax expense of $17 million (2002 
$19 million, 2001  $31 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. In 2000, legislation implementing
a decrease in certain Canadian income tax rates was proposed but not
enacted. This legislation was enacted in 2001. Accordingly, in 2001 an
additional tax expense of $56 million is recorded under US GAAP.(v)
    
    Subordinated convertible debenture interestUnder current Canadian GAAP, the companys subordinated convertible
debentures, which were redeemed in 2001, were recorded as a component of
the companys capital base and the related interest paid recorded as a
distribution from retained earnings, as a result of the companys option
of repaying these debentures by delivering its common shares to the
holders and meeting interest obligations by issuing common shares. The
corresponding interest charge in 2001 was recorded as a charge to income
under US GAAP compared with a distribution from retained earnings of $2
million under Canadian GAAP. There was no effect on basic or diluted net
income per share.(vi)
    
    Stock option expenseUnder Canadian GAAP, a new accounting standard on stock-based
compensation was issued in 2001 and was adopted by the company effective
January 1, 2002 which substantially harmonized Canadian GAAP with US
GAAP. The new standard was applied retroactively without restatement;
therefore, no expense adjustment from Canadian to US GAAP was required
for 2002 and 2003.Under US GAAP, the company adopted the recommendations of the Statement
of Financial Accounting Standards No. 123 (SFAS 123) entitled
Accounting for Stock-Based Compensation which establishes financial
accounting and reporting standards for stock-based employee compensation
plans.Under SFAS 123, the company accounts for stock options or similar equity
instruments under a fair value methodology. Under this method, options
are valued using an acceptable valuation method and the charge on an
annual basis is reflected in the income statement. In 2001, using the
Black-Scholes model of valuation, assuming a 10-year term, 18% volatility
and an interest rate of 5.5%, the cost of stock compensation would be $4
million. This amount has been recorded as an expense under US GAAP.(vii)
    
    Decreased other shareholders interestsUnder US GAAP, other shareholders interests are adjusted for the
differences from Canadian GAAP. The total adjustment results in a
decrease in other shareholders interests of nil (2002 and 2001  $2
million), which relate to a recovery of nil (2002  $3 million, 2001  $4
million) from increased commercial property depreciation, offset by nil
(2002 and 2001  $1 million) relating to the other shareholders
interests in straight-line rental income, and nil (2002  nil, 2001   $1
million) from increased commercial property gains.




---



##### 



ANNUAL REPORT 2003 p.53 (b) Comprehensive income Under US GAAP, the Financial Accounting Standards Board (FASB) issued SFAS
130 entitled Reporting 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 for fiscal 2003,
2002 and 2001: Years Ended December 31 (Millions)
    
    2003
    
    2002
    
    2001Net income under Canadian GAAP
    
    $
    279
    
    
    $
    280
    
    
    $
    241Foreign currency translation adjustment under Canadian GAAP
    
    
    70
    
    
    
    (9
    )
    
    
    (39
    )Comprehensive income using Canadian GAAP amounts
    
    $
    349
    
    
    $
    271
    
    
    $
    202
 Comprehensive income using US GAAP amounts is $308 million (2002  $257
million, 2001  $134 million). 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. (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,
2003, 2002 and 2001 would result in the following balance sheet presentation
under US GAAP: As at December 31 (Millions)
    
    2003
    
    2002
    
    2001AssetsCommercial properties
    
    $
    5,877
    
    
    $
    5,281
    
    
    $
    5,476Development properties
    
    
    684
    
    
    
    944
    
    
    
    575Receivables and other
    
    
    824
    
    
    
    835
    
    
    
    857Deferred income taxes
    
    
    116
    
    
    
    160
    
    
    
    188Marketable securities
    
    
    267
    
    
    
    
    
    
    
    Cash and cash equivalents
    
    
    132
    
    
    
    76
    
    
    
    195Assets of Brookfield Homes Corporation
    
    
    
    
    
    
    879
    
    
    
    872Total assets under US GAAP
    
    $
    7,900
    
    
    $
    8,175
    
    
    $
    8,163Liabilities and shareholders equityCommercial property debt
    
    $
    4,537
    
    
    $
    4,588
    
    
    $
    4,606Notes and shareholders advances
    
    
    119
    
    
    
    98
    
    
    
    115Accounts payable and other liabilities
    
    
    426
    
    
    
    331
    
    
    
    353Liabilities of Brookfield Homes Corporation
    
    
    
    
    
    
    556
    
    
    
    583Interests of others in properties
    
    
    86
    
    
    
    77
    
    
    
    103Preferred sharesSubsidiaries
    
    
    415
    
    
    
    341
    
    
    
    339Corporate
    
    
    598
    
    
    
    250
    
    
    
    273Common shares
    
    
    1,719
    
    
    
    1,934
    
    
    
    1,791Total liabilities and equity under US GAAP
    
    $
    7,900
    
    
    $
    8,175
    
    
    $
    8,163
 Significant differences between Canadian GAAP and US GAAP are as follows: Commercial properties As at December 31 (Millions)
    
    2003
    
    2002
    
    2001Commercial properties under Canadian GAAP
    
    $
    6,297
    
    
    $
    5,661
    
    
    $
    5,802Additional accumulated depreciation under US GAAP
    
    
    (420
    )
    
    
    (380
    )
    
    
    (326
    )Commercial properties under US GAAP
    
    $
    5,877
    
    
    $
    5,281
    
    
    $
    5,476
 There are two principal differences between Canadian GAAP and US GAAP affecting
the carrying value of commercial properties. The first difference relates to US
GAAP requiring straight-line depreciation to be applied to depreciable assets
rather than the sinking-fund method of depreciation. At December 31, 2003, this
would result in a cumulative adjustment of $420 million (2002  $380 million,
2001  $326 million). The second difference relates to the method of accounting
for joint ventures and partnerships. Under Canadian




---



##### 



p .54 BROOKFIELD PROPERTIES 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. Under Canadian GAAP, commercial properties held for investment purposes are
carried at the lower of cost and net recoverable amount as disclosed in Note
1(c). Under US GAAP, these assets, on an identifiable unit basis, are required
to be reviewed for impairment in accordance with the requirements under SFAS
144 entitled, Accounting for the Impairment or Disposal of Long-Lived Assets.
There is no material impact as a result of this standard as at December 31,
2003, 2002 and 2001. Receivables and other The principal differences in the accounting for receivables and other under US
GAAP are the inclusion of a straight-line rent receivable of $107 million (2002
 $109 million, 2001  $100 million) which would result under US GAAP if the
company straight-lined its revenue and the reclassification of deferred income
taxes. December 31 (Millions)
    
    2003
    
    2002
    
    2001Receivables and other under Canadian GAAP
    
    $
    717
    
    
    $
    769
    
    
    $
    847Straight-line rent receivable
    
    
    107
    
    
    
    109
    
    
    
    100Reclassification of deferred income taxes
    
    
    
    
    
    
    (43
    )
    
    
    (90
    )Receivables and other under US GAAP
    
    $
    824
    
    
    $
    835
    
    
    $
    857
 Deferred income taxes Under US GAAP, the company has a deferred tax asset of $116 million (2002 -
$160 million, 2001  $188 million). The offsetting balance created by this
adjustment decreases accounts payable and other by $18 million (2002  $43
million decrease in receivables and other, 2001  $90 million decrease in
receivables and other), decreases cumulative translation adjustment by $41
million (2002   $9 million, 2001  $5 million) and increases shareholders
equity by $139 million (2002  $122 million, 2001  $103 million). The deferred income tax asset under US GAAP is as follows: December 31 (Millions)
    
    2003
    
    2002
    
    2001Tax assets related to net operating and capital losses
    
    $
    609
    
    
    $
    546
    
    
    $
    587Tax liabilities related to differences in tax and book basis
    
    
    (333
    )
    
    
    (222
    )
    
    
    (179
    )Valuation allowance
    
    
    (160
    )
    
    
    (164
    )
    
    
    (220
    )Deferred income tax asset under US GAAP
    
    $
    116
    
    
    $
    160
    
    
    $
    188
 Common shareholders equity The cumulative impact of US GAAP adjustments to common shareholders equity is
as follows: December 31 (Millions)
    
    2003
    
    2002
    
    2001Common shareholders equity under Canadian GAAP
    
    $
    1,915
    
    
    $
    2,093
    
    
    $
    1,944Adjustment to accumulated depreciation under US GAAP
    
    
    (420
    )
    
    
    (380
    )
    
    
    (326
    )Adjustment to deferred income tax asset under US GAAP
    
    
    134
    
    
    
    117
    
    
    
    98Rental revenue adjustments under US GAAP
    
    
    107
    
    
    
    109
    
    
    
    100Stock option expense adjustments under US GAAP
    
    
    
    
    
    
    
    
    
    
    (8
    )Other shareholders interests
    
    
    
    
    
    
    6
    
    
    
    10Foreign currency translation adjustments, net
    
    
    (17
    )
    
    
    (11
    )
    
    
    (27
    )Common shareholders equity under US GAAP
    
    $
    1,719
    
    
    $
    1,934
    
    
    $
    1,791
 The components of common shareholders equity under US GAAP, after the
adjustments in the previous table, are as follows: December 31 (Millions)
    
    2003
    
    2002
    
    2001Common shares
    
    $
    1,177
    
    
    $
    1,541
    
    
    $
    1,551Additional paid-in capital, net*
    
    
    825
    
    
    
    695
    
    
    
    526Cumulative translation adjustment
    
    
    (100
    )
    
    
    (154
    )
    
    
    (160
    )Cumulative adjustments to net income and retained earnings
    
    
    (183
    )
    
    
    (148
    )
    
    
    (126
    )Common shareholders equity under US GAAP
    
    $
    1,719
    
    
    $
    1,934
    
    
    $
    1,791
 * Net of retained earnings of $526 million (2002  $332 million, 2001  $133
million)




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##### 



ANNUAL REPORT 2003 p.55 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: As at December 31 (Millions)
    
    2003
    
    2002
    
    2001Assets
    
    $
    1,865
    
    
    $
    1,441
    
    
    $
    1,115Liabilities
    
    
    1,267
    
    
    
    750
    
    
    
    539Operating revenue
    
    
    258
    
    
    
    191
    
    
    
    133Operating expenses
    
    
    109
    
    
    
    81
    
    
    
    50Net income
    
    
    74
    
    
    
    50
    
    
    
    39Cashflows from operating activities
    
    
    116
    
    
    
    65
    
    
    
    61Cashflows provided from investing activities
    
    
    21
    
    
    
    4
    
    
    
    4Cashflows used in financing activities
    
    
    (16
    )
    
    
    (31
    )
    
    
    (73
    )
 (d) Cashflow statement differences The statement of cashflow prepared under US GAAP differs from Canadian GAAP
because US GAAP requires reclassification of interest on convertible debentures
from a financing item to an operating item. As a result, the summarized
cashflow statement under US GAAP is as follows: Years ended December 31 (Millions)
    
    2003
    
    2002
    
    2001Cashflows provided from (used in) the following activitiesOperating
    
    $
    334
    
    
    $
    250
    
    
    
    316Financing
    
    
    129
    
    
    
    (275
    )
    
    
    (374
    )Investing
    
    
    (407
    )
    
    
    (108
    )
    
    
    22Discontinued operations
    
    
    
    
    
    
    14
    
    
    
    30Net increase (decrease) in cash and cash equivalents
    
    $
    56
    
    
    $
    (119
    )
    
    $
    (6
    )
 (e) Change in accounting policies In April 2002, FASB issued SFAS 145, Rescission of FASB Statements 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections. First, SFAS
145 rescinds SFAS 4, Reporting Gains and Losses from Extinguishment of Debt,
and an amendment of that statement, SFAS 64, Extinguishment of Debt Made to
Satisfy Sinking-Fund Requirements. Because of the rescission of SFAS 4 and
SFAS 64, the gains and losses from the extinguishment of debt are no longer
required to be classified as extraordinary items. Second, SFAS 145 rescinds
SFAS 44, Accounting for Intangible Assets of Motor Carriers. Third, SFAS 145
amends SFAS 13, Accounting for Leases, to require sale-leaseback accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. Lastly, SFAS 145 makes various technical
corrections to existing pronouncements that are not substantive in nature. The
company adopted the new standards as of January 1, 2003. In June 2002, FASB issued SFAS 146, Accounting for Costs Associated with Exit
or Disposal Activities. This statement requires a liability to be recognized
for costs associated with exit or disposal activities when they are incurred
rather than at the date upon which a company commits to an exit plan. In November 2002, FASB issued Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, which elaborates on the disclosure to be made by a
guarantor about its obligations under certain guarantees issued. There is also
a new requirement that a guarantor must recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The interpretation does identify several situations
where the recognition of a liability at inception for a guarantors obligation
is not required. In April 2003, FASB issued SFAS No. 149, Amendment of SFAS No. 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 No. 133, Accounting for Derivative Instruments and Hedging
Activities (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 of an underlying, and amends certain other existing
pronouncements. The adoption of SFAS No. 149 by the company has not had a
material impact on the results of operations or financial condition. In May 2003, FASB issued SFAS No. 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 certain financial instrument that
is within its scope




---



##### 



p.56 BROOKFIELD PROPERTIES as a liability (or an asset in some circumstances). 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 No. 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 No. 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 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 is effective for the
company on January 1, 2004. The company has not yet completed its evaluation of
the impact of FIN 46R on its financial position or results of operations. NOTE 16: CONTINGENCIES AND OTHER (a)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. 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. 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,
2003, the fair value of loans receivable exceeded their book value by $1
million (2002  $4 million, 2001  $1 million). The fair value of mortgages and
loans payable is determined by references to current market rates for debt with
similar terms and risks. As at December 31, 2003, the fair value of mortgages
and loans payable exceeds the book value of these obligations by $178 million
(2002  exceeded the book value by $149 million, 2001  below the book value by
$86 million). The company uses interest rate and foreign exchange forward swaps to manage
risk. Management evaluates and monitors the credit risks of its derivative
financial instruments and endeavors to minimize credit risk through offset
arrangements, collateral, and other credit risk mitigation techniques. The
credit risk of derivative financial instruments is limited to the replacement
value of the instrument, and takes into account any replacement cost and future
credit exposure. The replacement value or cost of interest rate swap contracts
which form part of financing arrangements is calculated by way of discounted
cashflows using market rates adjusted for credit spreads. The company held interest rate swap contracts as at December 31, 2003, with a
total notional amount of $150 million. These interest rate swap contracts were
comprised of contracts with a replacement cost in excess of that recorded in
the companys accounts of $2 million. The interest rate swap transactions
include both fixed and variable rate instruments which mature in five years. (b)As at December 31, 2003, Brookfield has approximately
$562 million (2002  $283 million, 2001  $382 million) of unsecured indebtedness outstanding to
related parties, comprised of $443 million (2002  $185 million, 2001  $267
million) outstanding to Brascan Financial and its subsidiaries, and $119
million (2002  $98 million, 2001  $115 million) outstanding to Brascan and
its affiliates, other than Brascan Financial and its subsidiaries. The company
is currently in compliance with all terms of the agreements governing the
indebtedness.




---



##### 



ANNUAL REPORT 2003 p .57 (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 $202 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 $500
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. (d)Certain comparative figures have been reclassified to conform with the
current years presentation. NOTE 17: OTHER INFORMATION (a) Supplemental cashflow information Years ended December 31 (Millions)
    
    2003
    
    2002
    
    2001Investing activitiesDispositions of real estate, net
    
    $
    222
    
    
    $
    193
    
    
    $
    249Acquisitions of real estate, net
    
    
    (172
    )
    
    
    (79
    )
    
    
    (112
    )$
    50
    
    
    $
    114
    
    
    $
    137
 Cash taxes paid were $10 million (2002  $5 million, 2001  $4 million). Cash
interest paid totaled $308 million (2002  $312 million, 2001  $345 million). (b) Rental revenue During 2003, rental revenues from Merrill Lynch accounted for 14% (2002 and
2001  14%) of consolidated revenue. NOTE 18: SUBSEQUENT EVENT Subsequent to December 31, 2003, the company sold its interest in Gulf Canada
Square in Calgary based on a property valuation of C$222 million.




---



##### 



p .58 BROOKFIELD PROPERTIES NOTE 19: SEGMENTED INFORMATION The company and its subsidiaries operate in the U.S. 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)
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001AssetsCommercial properties
    
    $
    4,842
    
    
    $
    4,430
    
    
    $
    4,392
    
    
    $
    1,455
    
    
    $
    1,231
    
    
    $
    1,410
    
    
    $
    6,297
    
    
    $
    5,661
    
    
    $
    5,802Development properties
    
    
    373
    
    
    
    711
    
    
    
    374
    
    
    
    311
    
    
    
    233
    
    
    
    201
    
    
    
    684
    
    
    
    944
    
    
    
    575Receivables and other
    
    
    334
    
    
    
    301
    
    
    
    428
    
    
    
    383
    
    
    
    468
    
    
    
    419
    
    
    
    717
    
    
    
    769
    
    
    
    847Marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    267
    
    
    
    
    
    
    
    
    
    
    
    267
    
    
    
    
    
    
    
    Cash and cash equivalents
    
    
    101
    
    
    
    72
    
    
    
    195
    
    
    
    31
    
    
    
    4
    
    
    
    
    
    
    
    132
    
    
    
    76
    
    
    
    195Assets of Brookfield Homes
    
    
    
    
    
    
    879
    
    
    
    872
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    879
    
    
    
    872$
    5,650
    
    
    $
    6,393
    
    
    $
    6,261
    
    
    $
    2,447
    
    
    $
    1,936
    
    
    $
    2,030
    
    
    $
    8,097
    
    
    $
    8,329
    
    
    $
    8,291
 United States
    
    Canada
    
    Total(Millions)
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Commercial property operationsRental revenues
    
    $
    678
    
    
    $
    687
    
    
    $
    688
    
    
    $
    298
    
    
    $
    256
    
    
    $
    319
    
    
    $
    976
    
    
    $
    943
    
    
    $
    1,007Lease termination income
and gains
    
    
    97
    
    
    
    
    
    
    
    25
    
    
    
    3
    
    
    
    60
    
    
    
    30
    
    
    
    100
    
    
    
    60
    
    
    
    55Expenses
    
    
    244
    
    
    
    240
    
    
    
    254
    
    
    
    135
    
    
    
    103
    
    
    
    136
    
    
    
    379
    
    
    
    343
    
    
    
    390531
    
    
    
    447
    
    
    
    459
    
    
    
    166
    
    
    
    213
    
    
    
    213
    
    
    
    697
    
    
    
    660
    
    
    
    672Land and housingRevenues
    
    
    30
    
    
    
    157
    
    
    
    181
    
    
    
    195
    
    
    
    164
    
    
    
    143
    
    
    
    225
    
    
    
    321
    
    
    
    324Expenses
    
    
    27
    
    
    
    156
    
    
    
    180
    
    
    
    167
    
    
    
    143
    
    
    
    124
    
    
    
    194
    
    
    
    299
    
    
    
    3043
    
    
    
    1
    
    
    
    1
    
    
    
    28
    
    
    
    21
    
    
    
    19
    
    
    
    31
    
    
    
    22
    
    
    
    20Other revenues
    
    
    25
    
    
    
    9
    
    
    
    17
    
    
    
    37
    
    
    
    39
    
    
    
    25
    
    
    
    62
    
    
    
    48
    
    
    
    42Net operating income
    
    
    559
    
    
    
    457
    
    
    
    477
    
    
    
    231
    
    
    
    273
    
    
    
    257
    
    
    
    790
    
    
    
    730
    
    
    
    734Interest expense
    
    
    212
    
    
    
    235
    
    
    
    250
    
    
    
    53
    
    
    
    49
    
    
    
    78
    
    
    
    265
    
    
    
    284
    
    
    
    328Administrative and development
    
    
    20
    
    
    
    18
    
    
    
    22
    
    
    
    24
    
    
    
    24
    
    
    
    22
    
    
    
    44
    
    
    
    42
    
    
    
    44Interests of others in properties
    
    
    2
    
    
    
    7
    
    
    
    5
    
    
    
    19
    
    
    
    23
    
    
    
    23
    
    
    
    21
    
    
    
    30
    
    
    
    28Income before undernoted
    
    
    325
    
    
    
    197
    
    
    
    200
    
    
    
    135
    
    
    
    177
    
    
    
    134
    
    
    
    460
    
    
    
    374
    
    
    
    334Depreciation and amortization
    
    
    54
    
    
    
    52
    
    
    
    48
    
    
    
    25
    
    
    
    28
    
    
    
    28
    
    
    
    79
    
    
    
    80
    
    
    
    76Income before unallocated costs
    
    
    271
    
    
    
    145
    
    
    
    152
    
    
    
    110
    
    
    
    149
    
    
    
    106
    
    
    
    381
    
    
    
    294
    
    
    
    258Taxes and other non-cash items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    58
    
    
    
    56Net income from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    279
    
    
    
    236
    
    
    
    202Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    39Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    279
    
    
    $
    280
    
    
    $
    241Acquisitions (dispositions)
of real estate, net (Note 17)
    
    $
    (24
    )
    
    $
    2
    
    
    $
    (97
    )
    
    $
    (26
    )
    
    $
    (116
    )
    
    $
    (40
    )
    
    $
    (50
    )
    
    $
    (114
    )
    
    $
    (137
    )Commercial property
tenant improvements
    
    
    13
    
    
    
    36
    
    
    
    24
    
    
    
    13
    
    
    
    13
    
    
    
    26
    
    
    
    26
    
    
    
    49
    
    
    
    50Development and redevelopment
investments
    
    
    167
    
    
    
    195
    
    
    
    75
    
    
    
    7
    
    
    
    11
    
    
    
    26
    
    
    
    174
    
    
    
    206
    
    
    
    101Capital expenditures
    
    
    7
    
    
    
    7
    
    
    
    6
    
    
    
    9
    
    
    
    9
    
    
    
    8
    
    
    
    16
    
    
    
    16
    
    
    
    14




---



##### 



ANNUAL REPORT 2003 p .59 Selected Financial Information December 31 (Millions, except per share information)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Financial results(1)Commercial property net operating income
    
    $
    697
    
    
    $
    660
    
    
    $
    672
    
    
    $
    611
    
    
    $
    569Funds from operations and gains  continuing operations
    
    
    460
    
    
    
    374
    
    
    
    334
    
    
    
    268
    
    
    
    213Net income from continuing operations
    
    
    279
    
    
    
    236
    
    
    
    202
    
    
    
    140
    
    
    
    125Total assets
    
    
    8,097
    
    
    
    7,450
    
    
    
    7,419
    
    
    
    8,123
    
    
    
    7,535Capital base
    
    
    2,997
    
    
    
    2,433
    
    
    
    2,353
    
    
    
    2,390
    
    
    
    2,293Per diluted common share(1)Common
shares outstanding (millions)
    
    
    156.2
    
    
    
    160.4
    
    
    
    161.7
    
    
    
    158.7
    
    
    
    132.7Fully diluted shares outstanding (millions)
    
    
    159.6
    
    
    
    163.9
    
    
    
    165.1
    
    
    
    167.4
    
    
    
    160.3Funds from operations and gains
    
    $
    2.78
    
    
    $
    2.18
    
    
    $
    1.92
    
    
    $
    1.56
    
    
    $
    1.23Funds from operations prior to lease
termination income and gains
    
    
    2.15
    
    
    
    1.87
    
    
    
    1.63
    
    
    
    1.45
    
    
    
    1.12Net income
    
    
    1.63
    
    
    
    1.34
    
    
    
    1.12
    
    
    
    0.76
    
    
    
    0.67Dividends paid(2)
    
    
    0.50
    
    
    
    0.40
    
    
    
    0.33
    
    
    
    0.25
    
    
    
    0.21Shareholders equity  book value
    
    
    12.31
    
    
    
    11.07
    
    
    
    10.27
    
    
    
    10.06
    
    
    
    8.77Common share price at year end
    
    
    28.70
    
    
    
    18.20
    
    
    
    15.45
    
    
    
    16.35
    
    
    
    8.78Operating dataCommercial propertiesNumber of properties
    
    
    48
    
    
    
    50
    
    
    
    50
    
    
    
    60
    
    
    
    46Rentable area (sq. ft.)
    
    
    46
    
    
    
    46
    
    
    
    45
    
    
    
    46
    
    
    
    33Effective interest (sq. ft.)
    
    
    36
    
    
    
    35
    
    
    
    37
    
    
    
    41
    
    
    
    29Average occupancy (%)
    
    
    94.1
    
    
    
    95.5
    
    
    
    97.3
    
    
    
    97.0
    
    
    
    95.7Property managementArea managed (sq. ft.)
    
    
    140
    
    
    
    130
    
    
    
    120
    
    
    
    120
    
    
    
    119
  (1)
    
    Excludes the assets, liabilities and results
of operations of Brookfield Homes Corporation(2)
    
    Excludes distribution of Brookfield Homes
Corporation




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p .60 BROOKFIELD PROPERTIES Board of Directors Gordon E. Arnell New York, New York  Chairman  Brookfield Properties Corporation
  William T. Cahill (1)Ridgefield, ConnecticutDeputy Director, Risk ManagementCitibank Community Development  Richard B. ClarkNew York, New YorkPresident and CEOBrookfield Properties Corporation  Jack L. Cockwell(2)Toronto, OntarioGroup Chairman, Brascan Corporation  J. Bruce FlattToronto, OntarioPresident and CEOBrascan Corporation  Lance Liebman (2)(3)New York, New YorkWilliam S. BeineckeProfessor of Law Columbia
Law School  John R. McCaig, C.M., L.L.D.(2)(3)(4)Calgary, AlbertaChairman, Trimac Corporation  Paul D. McFarlane (1)(2)Mississauga, Ontario




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ANNUAL REPORT 2003 p .61 Strengthening Corporate Governance During 2003 and early 2004, Brookfield
undertook a review of our corporate
governance practices. As a result of this
review, the board of directors modified the
composition of its committees, appointed a
new lead independent director and adopted
new charters for the board of directors and
each of the standing committees. These
charters 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
you 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,
www.brookfieldproperties.com. We welcome any
comments you may have on our corporate
governance and investor relations programs. Allan
S. Olson (1)(3)Edmonton, Alberta
President and CEO
First Industries
Corporation  Sam Pollock,
O.C.(3)Toronto, Ontario  William C. Wheaton, Ph.D*Cambridge, MassachusettsProfessor of EconomicsDirector, Center for Real EstateMassachusetts Institute of Technology Urban Economics and the
Real Estate Markets
 John E. ZuccottiBrooklyn, New YorkCo-ChairmanBrookfield Properties Corporation  Membership of Board Committees: (1) Audit Committee; (2) Human Resources Committee; (3) Governance and
Nominating Committee; (4) Lead Independent Director * Director-elect pending approval at Annual General Meeting




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p .62 BROOKFIELD PROPERTIES 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 Emilee P. SamtaniVice President, Human Resources T. Nga TrinhVice President, 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, 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. MostowichSenior Vice President, Eastern Region Rael L. DiamondVice President, Controller N. Dwight JackVice President, Leasing Robert K. MacNicolVice President, Leasing Antonio MaduriVice President, Asset Management Ian D. ParkerVice President, Asset Management Scott E. PennockVice President, Asset Management RESIDENTIAL OPERATIONS Alan NorrisPresident and Chief Executive Officer




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Corporate Information TRANSFER AGENTHEAD OFFICE
    
    
    
    CIBC Mellon Trust CompanyNew York
    
    Toronto
    
    P.O. Box 7010, Adelaide Street Postal StationOne Liberty Plaza
    
    P.O. Box 770, Suite 330
    
    Toronto, Ontario M5C 2W9165 Broadway, 6th Floor
    
    BCE Place, 181 Bay Street
    
    Tel: 416.643.5500 or 800.387.0825New York, New York 10006
    
    Toronto, Ontario M5J 2T3
    
    Fax: 416.643.5501Tel: 212.417.7000
    
    Tel: 416.369.2300
    
    Web site: www.cibcmellon.comFax: 212.417.7196
    
    Fax: 416.369.2301
    
    E-mail: inquiries@cibcmellon.com
 STOCK EXCHANGE LISTINGS Stock Symbol
    
    Exchange
    
    Record Date
    
    Payment DateCommon shares
    
    BPO
    
    NYSE, TSX
    
    First day of March, June,
September and December
    
    Last day of March, June,
September and DecemberClass A Preferred SharesSeries A
    
    Not listed
    
    
    
    First day of March and
September
    
    15th day of March and
SeptemberSeries B
    
    Not listed
    
    
    
    First day of March and
September
    
    15th day of March and
SeptemberClass AA Preferred SharesSeries E
    
    Not listed
    
    
    
    15th day of March, June,
September and December
    
    Last day of March, June,
September and DecemberClass AAA Preferred SharesSeries F
    
    BPO.PR.F
    
    TSX
    
    15th day of March, June,
September and December
    
    Last day of March, June,
September and DecemberSeries G
    
    BPO.PR.U
    
    TSX
    
    15th day of March, June,
September and December
    
    Last day of March, June,
September and DecemberSeries H
    
    BPO.PR.H
    
    TSX
    
    15th day of March, June,
September and December
    
    Last day of March, June,
September and DecemberSeries I
    
    BPO.PR.I
    
    TSX
    
    15th day of March, June,
September and December
    
    Last day of March, June,
September and December
 SHAREHOLDER INFORMATION www.brookfieldproperties.com Brookfield welcomes inquiries from shareholders, analysts, media
representatives and other interested parties. Investor or media inquiries can
be directed to Melissa Coley, Vice President, Investor Relations and
Communications at (212) 417-7215 or via e-mail at
mcoley@brookfieldproperties.com. Inquiries regarding financial results should
be directed to Craig Laurie, Senior Vice President and Chief Financial Officer
at (212) 417-7040 or via e-mail at claurie@brookfieldproperties.com. Shareholder questions relating to dividends, address changes and share
certificates should be directed to the companys Transfer Agent, CIBC Mellon Trust as listed above. ANNUAL GENERAL MEETING The Annual General Meeting of shareholders will be held in New York City at the
American Express Auditorium, Three World Financial Center, 200 Vesey Street,
26th Floor, at 11:30 a.m. on April 28, 2004. Shareholders may also participate
by webcast through Brookfields Web site at www.brookfieldproperties.com.  (RECYCLE LOGO)
    
    Printed in Canada on recycled paper