10-K 1 dtla2013123110k.htm ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2013 DTLA 2013 12.31 10K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to __________________
Commission File Number: 001-36135
________________________
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
(Exact name of registrant as specified in its charter)
Maryland
 
46-2616226
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
250 Vesey Street, 15th Floor
New York, NY
 
10281
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (212) 417-7000
________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
7.625% Series A Cumulative Redeemable Preferred Stock,
$0.01 par value per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the registrant’s common equity held by non-affiliates as of June 28, 2013 was $0.
As of March 31, 2014, 100% of the registrant’s common stock (all of which is privately owned and is not traded on any public market) was held by Brookfield DTLA Holdings LLC.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Brookfield DTLA Fund Office Trust Investor Inc. 2014 Notice of Annual Meeting of Stockholders and Proxy Statement or Annual Report on Form 10-K/A, to be filed with the U.S. Securities and Exchange Commission (“SEC”) within 120 days after the close of the registrant’s fiscal year (incorporated into Part III).


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2013

TABLE OF CONTENTS

 
 
 
Page
 

 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 





PART I

Item 1.
Business.

Our Company

As used in this Annual Report on Form 10-K, the terms “Brookfield DTLA,” the “Company,” “us,” “we” and “our” refer to Brookfield DTLA Fund Office Trust Investor Inc.

Brookfield DTLA Fund Office Trust Investor Inc. (“Brookfield DTLA” or the “Company”) is a Maryland corporation and was incorporated on April 19, 2013. Brookfield DTLA was formed for the purpose of consummating the transactions contemplated in the Agreement and Plan of Merger dated as of April 24, 2013, as amended (the “Merger Agreement”), and the issuance of shares of 7.625% Series A Cumulative Redeemable Preferred Stock (the “Series A preferred stock”) in connection with the acquisition of MPG Office Trust, Inc. and MPG Office, L.P. (together, “MPG”). Brookfield DTLA is a direct subsidiary of Brookfield DTLA Holdings LLC (“Brookfield DTLA Holdings”), a Delaware limited liability company, and an indirect subsidiary of Brookfield Office Properties Inc. (“BPO”).

Prior to October 15, 2013, 333 South Hope Co. LLC (“333 South Hope”) and EYP Realty LLC (“EYP Realty”) were controlled by BPO through its indirect ownership interest in TRZ Holdings IV LLC (“TRZ”). TRZ owned 100% of the member units of 333 South Hope and EYP Realty, and BPO indirectly owns approximately 84% of the member units of TRZ.

On October 15, 2013, through a series of formation transactions TRZ’s interests in 333 South Hope and EYP Realty were contributed to subsidiaries of Brookfield DTLA in exchange for preferred and common interests in Brookfield DTLA Fund Properties II LLC (“New OP”) and a preferred interest in Brookfield DTLA Fund Properties III LLC (“DTLA OP”). 333 South Hope owned Bank of America Plaza (“BOA Plaza”) and EYP Realty owned Ernst & Young Plaza (“EY Plaza”). Both of these Class A commercial properties are located in the Los Angeles Central Business District (the “LACBD”).

Prior to October 15, 2013, Brookfield DTLA had not conducted any business as a separate company and had no material assets or liabilities. The operations of 333 South Hope and EYP Realty (together, the “Predecessor Entities”) contributed to Brookfield DTLA by TRZ on October 15, 2013 are presented in the consolidated and combined financial statements as if they were owned by Brookfield DTLA for all historical periods presented. See Part II, Item 8. “Financial Statements and Supplementary Data.”

On October 15, 2013, Brookfield DTLA completed the acquisition of MPG (the “merger”) pursuant to the terms of the Merger Agreement. As part of the transaction, MPG was contributed to New OP in exchange for a preferred interest in New OP. In addition to BOA Plaza and EY Plaza, Brookfield DTLA now owns Wells Fargo Center–North Tower (also known as “Wells Fargo Tower”), Wells Fargo Center–South Tower (also known as “KPMG Tower”), Gas Company Tower and 777 Tower, each of which are Class A office properties located in the LACBD that were formerly owned by MPG.

Brookfield DTLA intends to elect to be taxed as a real estate investment trust (“REIT”) pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax year ended December 31, 2013. Brookfield DTLA intends to conduct its operations so as to qualify as a REIT. Accordingly, Brookfield DTLA will not be subject to U.S. federal income tax, provided that it qualifies as a REIT and distributions to its stockholders generally equal or exceed its taxable income.


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Brookfield DTLA receives its income primarily from rental income (including tenant reimbursements) generated from the operations of its office and retail properties and, to a lesser extent, from its parking garages.

Corporate Strategy

Brookfield DTLA’s current strategy is to own and invest in commercial properties primarily in the LACBD that are of a high-quality, determined by its view of the certainty of receiving rental payments generated by the tenants of those assets.

Competition

Brookfield DTLA competes in the leasing of office space with a number of other real estate companies.

Principal factors of competition in our primary business of owning office properties are: the quality of properties, leasing terms (including rent and other charges and allowances for tenant improvements), attractiveness and convenience of location, the quality and breadth of tenant services provided, and reputation as an owner and operator of quality office properties in the LACBD. Additionally, our ability to compete depends upon, among other factors, trends in the national and local economies, investment alternatives, financial condition and operating results of current and prospective tenants, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.

Segment, Geographical and Tenant Concentration Information

Segment Information—

Brookfield DTLA operates in a single reportable segment referred to as its office segment, which includes the operation and management of commercial office properties. Each of Brookfield DTLA’s operating properties is considered a separate operating segment, as each property earns revenues and incurs expenses, individual operating results are reviewed and discrete financial information is available. Management does not distinguish or group Brookfield DTLA’s consolidated operations based on geography, size or type. Brookfield DTLA’s operating properties have similar economic characteristics and provide similar products and services to tenants. As a result, Brookfield DTLA’s operating properties are aggregated into a single reportable segment.

Geographical Information—

All of Brookfield DTLA’s business is conducted in the United States, and it does not derive any revenue from foreign sources.

Tenant Concentration Information—

Brookfield DTLA’s properties are typically leased to high credit-rated tenants for terms ranging from five to ten years, although we also enter into some short-term as well as longer-term leases. As our entire portfolio is located in the LACBD, any specific economic changes within that location could affect our tenant base and by extension our profitability.


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A significant portion of Brookfield DTLA’s rental income and tenant reimbursements revenue is generated by a small number of tenants. During the year ended December 31, 2013, one tenant, The Capital Group Companies, accounted for more than 10% of our consolidated rental income and tenant reimbursements revenue.

During the year ended December 31, 2013, BOA Plaza and EY Plaza each contributed more than 10% of Brookfield DTLA’s consolidated revenue. The revenue generated by these two properties totaled 72% of Brookfield DTLA’s consolidated revenue during the year ended December 31, 2013.

Government and Environmental Regulations

Brookfield DTLA’s office properties are subject to various laws, ordinances and regulations, including regulations relating to common areas. We believe that each of our properties has the necessary permits and approvals to operate its business.

Our properties must comply with Title III of the Americans with Disabilities Act of 1990 (the “ADA”) to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA, and we continue to make capital expenditures to address the requirements of the ADA. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we continue to assess our properties and to make alterations as appropriate in this respect.

Some of our properties contain, or may have contained, or are adjacent to or near other properties that have contained or currently contain, underground storage tanks for the storage of petroleum products or other hazardous or toxic substances. These operations create a potential for the release of petroleum products or other hazardous or toxic substances. Also, some of our properties contain asbestos-containing building materials (“ACBM”). Environmental laws require that ACBM be properly managed and maintained, and may impose fines and penalties on building owners or operators for failure to comply with these requirements. These laws may also allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers. We can make no assurance that costs of future environmental compliance will not affect our ability to make distributions to our stockholders or that such costs or other remedial measures will not have a material adverse effect on our business, financial condition or results of operations. None of our recent site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations.

From time to time, the U.S. Environmental Protection Agency (“EPA”) designates certain sites affected by hazardous substances as “Superfund” sites pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). Superfund sites can cover large areas, affecting many different parcels of land. The EPA identifies parties who are considered to be potentially responsible for the hazardous substances at Superfund sites and makes them liable for the costs of responding to the hazardous substances. The parcel of land on which Glendale Center (a property that was disposed of by MPG during 2012) is located lies within a large Superfund site. The site was designated as a Superfund site because the groundwater beneath the site is contaminated. We have not been named, and do not expect to be named, as a potentially responsible party for the site. If we were named, we would likely be required to enter into a de minimis settlement with the EPA and pay nominal damages.


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Independent environmental consultants have conducted Phase I or other environmental site assessments on all of the properties in our portfolio. Site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. These assessments do not generally include soil samplings, subsurface investigations or an asbestos survey. None of the recent site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations.

Insurance

BOA Plaza and EY Plaza are covered under an insurance policy entered into by BPO that provides all risk property and business interruption for BPO’s commercial portfolio with an aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $300.0 million of earthquake insurance. The MPG properties are covered under an insurance policy that provides all risk property and business interruption with an aggregate limit of $1.25 billion and a $130.0 million aggregate limit of earthquake insurance.

In addition, BOA Plaza and EY Plaza are covered by a terrorism insurance policy that provides aggregate coverage of $4.0 billion for all of BPO’s U.S. properties. The MPG properties are covered by a terrorism insurance policy with a $1.25 billion aggregate limit. To the extent an act or acts of terrorism produce losses in excess of the limits in place, the resulting loss could have a material adverse effect on Brookfield DTLA’s consolidated financial statements. Brookfield DTLA is in compliance with the contractual obligations regarding terrorism insurance contained in such agreements. See Item 1A. “Risk Factors—Our insurance may not cover some potential losses or may not be obtainable at commercially reasonable rates, which could adversely affect our financial condition and results of operations.”

Employees

As of December 31, 2013, Brookfield DTLA had no employees. The operations of Brookfield DTLA are managed by employees of BPO.

Corporate Offices

BPO owns the building in which Brookfield DTLA’s operations are managed: 250 Vesey Street, New York, New York 10281, telephone number 212-417-7000. Brookfield DTLA believes that BPO’s current facilities are adequate for Brookfield DTLA’s present needs.

Available Information

Brookfield DTLA files annual, quarterly and current reports, proxy statements, registration statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) with the U.S. Securities and Exchange Commission (the “SEC”). You may read and copy this information at the Public Reference Room of the SEC at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the Office of Investor Education and Advocacy by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains reports, proxy statements and other information about issuers who file electronically with the SEC. The address of the site is http://www.sec.gov. We have included the web address of the SEC as an inactive textual reference only. Except as specifically incorporated by reference into this document, information on this website is not part of this document.


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Item 1A.
Risk Factors.

Factors That May Affect Future Results
(Cautionary Statement Under the Private Securities Litigation Reform Act of 1995)

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995 (as set forth in Section 27A of the U.S. Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Exchange Act). Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, include statements regarding our operations, business, financial condition, expected financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies and outlook, as well as the outlook for North American and international economies for the current fiscal year and subsequent periods, and include words such as “expects,” “anticipates,” “plans,” “believes,” “estimates,” “seeks,” “intends,” “targets,” “projects,” “forecasts,” “likely,” or negative versions thereof and other similar expressions, or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.”

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

Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include, but are not limited to:

•
Risks generally incident to the ownership of real property, including the ability to retain tenants and rent space upon lease expirations, the financial condition and solvency of our tenants, the relative illiquidity of real estate and changes in real estate taxes, regulatory compliance costs and other operating expenses;

•
Risks associated with the Downtown Los Angeles market, which is characterized by challenging leasing conditions, including limited numbers of new tenants coming into the market and the downsizing of large tenants in the market such as accounting firms, banks and law firms;

•
Risks related to increased competition for tenants in the Downtown Los Angeles market, including aggressive attempts by competing landlords to fill large vacancies by providing tenants with lower rental rates, increasing amounts of free rent and providing larger allowances for tenant improvements;

•
The impact or unanticipated impact of general economic, political and market factors in the regions in which Brookfield DTLA or any of its subsidiaries does business;

•
The use of debt to finance Brookfield DTLA’s business or that of its subsidiaries;

•
The behavior of financial markets, including fluctuations in interest rates;

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•
Uncertainties of real estate development or redevelopment;

•
Global equity and capital markets and the availability of equity and debt financing and refinancing within these markets;

•
Risks relating to Brookfield DTLA’s insurance coverage;

•
The possible impact of international conflicts and other developments, including terrorist acts;

•
Potential environmental liabilities;

•
Dependence on management personnel;

•
The ability to complete and effectively integrate acquisitions into existing operations and the ability to attain expected benefits therefrom;

•
Operational and reputational risks;

•
Catastrophic events, such as earthquakes and hurricanes; and

•
Other risks and factors relating to the transactions contemplated by the Merger Agreement including, but not limited to:

•
Increases in operating costs resulting from expenses related to the MPG acquisition;

•
Failure to realize the anticipated benefits and synergies of the transactions contemplated by the Merger Agreement, including as a result of an increase in costs associated with integration or difficulty in integrating the businesses of Brookfield DTLA, the Predecessor Entities and their respective subsidiaries and MPG;

•
Risks resulting from any lawsuits that may arise out of or have arisen as a result of the MPG acquisition or other transactions contemplated by the Merger Agreement; and

•
The impact of legislative, regulatory and competitive changes and other risk factors relating to the real estate industry, as detailed from time to time in the reports of Brookfield DTLA and BPO filed with the SEC.

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

In addition to the other information included in this Annual Report on Form 10-K, including the matters addressed above, you should carefully consider the following risk factors. The risks and uncertainties described below include all of the material risks facing Brookfield DTLA. If any of these risks occur, our business, financial condition and operating results could be harmed, the market value of the Series A preferred stock issued in connection with the MPG acquisition could decline

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and you could lose part or all of your investment. As used in this section, the terms “Brookfield DTLA,” the “Company,” “us,” “we” and “our” refer to Brookfield DTLA together with its direct and indirect subsidiaries and the term “stockholders” means the holders of the Series A preferred stock issued in connection with the MPG acquisition.

RISKS RELATED TO THE OWNERSHIP OF BROOKFIELD DTLA SERIES A PREFERRED STOCK

Brookfield DTLA is dependent upon the assets and operations of its direct and indirect subsidiaries. Brookfield DTLA is a holding company and does not own any material assets other than the equity interests of its subsidiaries, which conduct all of the Company’s operations. As a result, distributions or advances from the Company’s subsidiaries will be the primary source of funds available to meet the obligations of the Company, including any obligation to pay dividends, if declared, or other distributions in respect of the Brookfield DTLA Series A preferred stock. Our current and future obligations and liabilities may limit, and the terms of certain of the equity interests issued in connection with the transactions immediately following the consummation of the merger will limit, the amount of funds available to Brookfield DTLA for any purpose, including for dividends or distributions to holders of its capital stock, including the Series A preferred stock.

Brookfield DTLA’s subsidiaries may in the future issue equity securities that are senior to the equity interests of such subsidiary that are owned, directly or indirectly, by the Company. The respective organizational documents of Brookfield DTLA and its subsidiaries generally do not restrict the issuance of debt or equity by any of Brookfield DTLA’s subsidiaries, and any such issuance may adversely impact the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock. As part of the transactions immediately following the consummation of the merger, subsidiaries of the Company issued equity interests that rank senior to the equity securities of such subsidiaries held indirectly by Brookfield DTLA, and as a result, effectively rank senior to the Series A preferred stock. In addition, to the extent Brookfield DTLA subsequently contributes cash or property to fund the operations of its subsidiaries, Brookfield DTLA will receive senior interests having a priority on distributions senior to the equity securities of such subsidiaries held indirectly by Brookfield DTLA, and as a result, will effectively rank senior to the Series A preferred stock. These issuances will limit the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock.

In addition, the amount of cash Brookfield DTLA currently generates from its operations is not sufficient to cover Brookfield DTLA’s operating, financing and investing activities, resulting in a “negative cash burn,” and there can be no assurance that the amount of Brookfield DTLA’s negative cash burn will decrease, or that it will not increase, in the future. If Brookfield DTLA’s operating cash flow and capital are not sufficient to cover our operating costs or to repay our indebtedness as it comes due, we may issue additional debt and/or equity, including to affiliates of Brookfield DTLA, which issuances could further adversely impact the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock. In many cases, such securities may be issued if authorized by board of directors of Brookfield DTLA without the approval of the holders of the Series A preferred stock.


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The Series A preferred stock effectively ranks junior to any indebtedness of Brookfield DTLA and its subsidiaries. The Series A preferred stock effectively ranks junior to the indebtedness of Brookfield DTLA or any of its direct or indirect subsidiaries. Holders of the Series A preferred stock do not have the right to prevent us from incurring additional indebtedness. As a result, we could become more leveraged, which may increase debt service costs and could adversely affect our cash flows, results of operations and financial condition and the availability of funds for dividends or distributions to holders of Brookfield DTLA’s capital stock, including the Series A preferred stock.

The Series A preferred stock has no stated maturity date, Brookfield DTLA is not obligated to declare and pay dividends on the Series A preferred stock, and Brookfield DTLA may never declare dividends on the Series A preferred stock. The Series A preferred stock has no stated maturity, and accordingly, could remain outstanding indefinitely. In addition, while the Series A preferred stock will accumulate dividends at the stated rate (whether or not authorized by the board of directors of Brookfield DTLA and declared by the Company), there is no requirement that Brookfield DTLA declare and pay dividends on the Series A preferred stock, and Brookfield DTLA may not declare and pay dividends on the Series A preferred stock in the future.

Brookfield DTLA’s ability to pay dividends is limited by the requirements of Maryland law. Brookfield DTLA’s ability to pay dividends on the Series A preferred stock is limited by the laws of the State of Maryland. Under the Maryland General Corporation Law (“MGCL”), a Maryland corporation generally may not make a distribution if, after giving effect to the distribution, the corporation would not be able to pay its debts as the debts become due in the usual course of business or the corporation’s total assets would be less than the sum of its total liabilities plus all prior liquidation preferences (unless the charter of the corporation provides otherwise). Accordingly, Brookfield DTLA generally may not make a distribution (including a dividend payment) on the Series A preferred stock if, after giving effect to the distribution, Brookfield DTLA may not be able to pay its debts as they become due in the usual course of business or total assets would be less than the sum of Brookfield DTLA’s total liabilities plus prior liquidation preferences, if any. There can be no assurance that, if Brookfield DTLA desired to declare and pay dividends, that it would be legally permissible for it to do so.

There was no established trading market for shares of the Series A preferred stock at the time of issuance and the shares may be delisted and deregistered in the future. The Series A preferred stock was issued in connection with the consummation of the transactions contemplated by the Merger Agreement and there was no established trading market for the shares of Series A preferred stock.

Although the Series A preferred stock is currently registered under the Exchange Act and listed on the New York Stock Exchange, we expect that Brookfield DTLA may apply for delisting of the Series A preferred stock in the future provided the requirements for delisting are met. If the Series A preferred stock is delisted, the market for the shares of Series A preferred stock could be adversely affected, though price quotations for the shares of Series A preferred stock might still be available from other sources. Subject to compliance with applicable securities laws, the registration may be terminated if the shares are not listed on a national securities exchange and there are fewer than 300 holders. The extent of the public market for the Series A preferred stock and availability of such quotations would depend upon such factors as the number of holders and/or the aggregate market value of the publicly held shares of Series A preferred stock at such time, the interest in maintaining a market in the Series A preferred stock on the part of securities firms, the possible termination of registration of the Series A preferred stock under the Exchange Act and other factors. Termination of registration would substantially reduce the information required to be furnished to holders of Series A preferred stock.


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Brookfield DTLA’s charter contains provisions that may delay, defer or prevent transactions that may be beneficial to the holders of the Company Series A preferred stock. Brookfield DTLA’s charter contains provisions that are intended to, among other purposes, assist it in qualifying as a REIT. The charter provides that subject to certain exceptions, including exemptions that may be granted by the board of directors of Brookfield DTLA under certain circumstances, no person or entity may beneficially own or constructively own more than 9.8% (by value or by number of shares, whichever is more restrictive) of the outstanding shares of Brookfield DTLA’s common stock or Series A preferred stock. Any attempt to own or transfer shares of Brookfield DTLA’s common stock or Series A preferred stock in excess of the applicable ownership limit without the consent of the board of directors of Brookfield DTLA either will result in the shares being transferred by operation of the charter to a charitable trust, and the person who attempted to acquire such shares will not have any rights in such shares, or in the transfer being void. These restrictions on transferability and ownership will not apply if the board of directors of Brookfield DTLA determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT or if the board of directors of Brookfield DTLA determines that such restrictions are no longer necessary to maintain REIT status. The ownership limit may delay or impede a transaction or a change in control that might be in the best interests of the Brookfield DTLA’s stockholders, including the holders of the Series A preferred stock.

Brookfield DTLA may authorize and issue capital stock without the approval of holders of the Series A preferred stock. While Brookfield DTLA may not, without a vote of the holders of the Series A preferred stock, authorize, create, issue or increase the authorized or issued amount of any class of capital stock ranking senior to the Series A preferred stock with respect to payment of dividends or the distribution of assets upon the liquidation, dissolution or winding up of the affairs of Brookfield DTLA, its charter authorizes the board of directors of Brookfield DTLA, without any action by its stockholders, to (i) amend the charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that Brookfield DTLA has the authority to issue, (ii) issue authorized but unissued shares of common stock or Series A preferred stock, and (iii) classify or reclassify any unissued shares of common stock or Series A preferred stock and to set the preferences, rights and other terms of such classified or unclassified shares. There can be no assurance that the board of directors of Brookfield DTLA will not establish additional classes and/or series of capital stock that would delay, defer or prevent a transaction that may be in the best interests of its stockholders, including the holders of the Series A preferred stock.

Holders of Series A preferred stock have limited voting rights. Brookfield DTLA Holdings owns 100% of the outstanding shares of the common stock and controls 100% of the aggregate voting power of its capital stock, except that holders of the Series A preferred stock have voting rights, under certain circumstances, (1) to elect two preferred stock directors to the board of directors of Brookfield DTLA (referred to as preferred stock directors) and (2) with respect to (i) the creation of additional classes or series of preferred stock that are senior to the Series A preferred stock and (ii) an amendment of its charter (whether by merger, consolidation, transfer or conveyance of all or substantially all of our assets or otherwise) that would materially adversely affect the rights of holders of Series A preferred stock. By virtue of their limited voting rights, holders of Series A preferred stock have limited control over the outcome of any corporate transaction or other matters that Brookfield DTLA confronts. Subject to their limited voting rights or as may be required by applicable law, holders of Series A preferred stock will be unable to block any such matter in their capacity as stockholders or through their representation on the board of directors of Brookfield DTLA, if any, by preferred stock directors (which preferred stock directors are not a majority of the directors comprising the board of directors of Brookfield DTLA).


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Certain provisions of Maryland law could inhibit changes in control. Certain provisions of the MGCL may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could be in the best interests of Brookfield DTLA’s stockholders, including: (1) “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or any affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and supermajority stockholder voting requirements on these combinations; and (2) “control share” provisions that provide that a holder of “control shares” of Brookfield DTLA (defined as shares that, when aggregated with other shares controlled by the stockholder except solely by virtue of a revocable proxy, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) has no voting rights with respect to such shares except to the extent approved by Brookfield DTLA’s stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. Brookfield DTLA has opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL by resolution of the board of directors of Brookfield DTLA, and in the case of the control share provisions of the MGCL pursuant to a provision in its bylaws. However, the board of directors of Brookfield DTLA may by resolution elect to opt in to the business combination provisions of the MGCL and Brookfield DTLA may, by amendment to its bylaws, opt in to the control share provisions of the MGCL in the future. In addition, provided that Brookfield DTLA has a class of equity securities registered under the Exchange Act and at least three independent directors, Subtitle 8 of Title 3 of the MGCL permits Brookfield DTLA to elect to be subject, by provision in its charter or bylaws or a resolution of the board of directors of Brookfield DTLA and notwithstanding any contrary provision in the charter or bylaws, to certain provisions, including, among other provisions, a classified board of directors and a requirement that a vacancy on the board of directors be filled only by the remaining directors and for the remainder of the full term of the class of directors in which the vacancy occurred. Brookfield DTLA’s charter and bylaws and Maryland law also contain other provisions that may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of its stockholders, including the holders of the Series A preferred stock.

BPO controls the management and operation of Brookfield DTLA. Brookfield DTLA is managed by BPO through a direct wholly-owned subsidiary of BPO formed for such purpose (“BPO Manager”). BPO, through its ownership interest in BPO Manager and Brookfield DTLA, controls Brookfield DTLA, including the power to vote to elect all members of the board of directors (other than the preferred stock directors). By virtue of BPO’s control of and substantial ownership in Brookfield DTLA, BPO has significant influence over the outcome of any corporate transaction or other matters that Brookfield DTLA confronts. Subject to any limitations contained in Brookfield DTLA’s charter, bylaws or as may be required by applicable law, holders of the Series A preferred stock will be unable to block any such matter in their capacity as stockholders or through their representation under certain circumstances, if any, by up to two directors on the board of directors (which directors are not a majority of the members comprising the board of directors).


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There may be conflicts of interest in Brookfield DTLA’s relationship with BPO and its affiliates. Following the consummation of the MPG acquisition, Brookfield DTLA and its subsidiaries and DTLA OP entered into agreements with affiliates of BPO pursuant to which such affiliates serve as service providers with respect to the properties that these companies own. These services include property management and various other services. In consideration for the services to be provided under these agreements, BPO’s affiliates are paid fees by Brookfield DTLA and its subsidiaries and DTLA OP. In addition, affiliates of BPO may enter into additional agreements, including additional service agreements, with Brookfield DTLA and its subsidiaries and DTLA OP. There can be no assurance that these agreements will be made on terms that will be at least as favorable to Brookfield DTLA and its subsidiaries and DTLA OP as those that could have been obtained in an arm’s length transaction between parties that are not affiliated. Accordingly, these agreements may involve conflicts between the interest of BPO’s affiliate, on the one hand, and Brookfield DTLA and its subsidiaries and DTLA OP, on the other hand.

Members of Brookfield DTLA’s management team have competing duties to other entities. Brookfield DTLA’s executive officers do not spend all of their time managing its activities and real estate portfolio. Many of Brookfield DTLA’s executive officers allocate most of their time to other businesses and activities. For example, each of Brookfield DTLA’s executive officers is also an employee of BPO or one of its affiliates. None of these individuals is required to devote a specific amount of time to Brookfield DTLA’s affairs. Accordingly, Brookfield DTLA competes with BPO, its affiliates and possibly other entities for the time and attention of these officers.

COMPANY AND REAL ESTATE INDUSTRY RISKS

Brookfield DTLA’s current strategy is to own and invest in commercial properties primarily in the LACBD that are of a high-quality, determined by our view of the certainty of receiving rental payments generated by the tenants of those assets. However, Brookfield DTLA will be subject to various risks specific to its portfolio, the geographies in which it operates and where its properties are located and those inherent in the commercial property business generally. In evaluating Brookfield DTLA and its business, the following challenges, uncertainties and risks should be considered in addition to the other information contained in this Annual Report on Form 10-K:

Brookfield DTLA’s economic performance and the value of its real estate assets are subject to the risks incidental to the ownership and operation of real estate properties. Brookfield DTLA’s economic performance, the value of our real estate assets and, therefore, the value of the Series A preferred stock, is subject to the risks normally associated with the ownership and operation of real estate properties, including but not limited to: downturns and trends in the national, regional and local economic conditions where our properties are located; global economic conditions; the cyclical nature of the real estate industry; adverse economic or real estate developments in Southern California, particularly in the LACBD; local real estate market conditions such as an oversupply of office properties, including space available by sublease, or a reduction in demand for such properties; our liquidity situation, including our failure to obtain additional capital or extend or refinance debt maturities on favorable terms or at all; changes in interest rates and the availability of financing; competition from other properties; changes in market rental rates and our ability to rent space on favorable terms; the bankruptcy, insolvency, credit deterioration or other default of our tenants; the need to periodically renovate, repair and re-lease space and the costs thereof; our failure to qualify as and to maintain our status as a REIT or the status of certain of our subsidiaries as REITs; increases in maintenance, insurance and operating costs; civil disturbances, earthquakes and other natural

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disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses; a decrease in the attractiveness of our properties to tenants; a decrease in the underlying value of our properties; and certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges that must be made regardless of whether or not a property is producing sufficient income to service these expenses.

The results of our business and our financial condition are significantly dependent on the economic conditions and demand for office space in southern California. All of Brookfield DTLA’s properties are located in Los Angeles County, California in the LACBD, which may expose us to greater economic risks than if most of our properties were located in a different geographic region or more geographic regions. Moreover, because our portfolio of properties consists primarily of office buildings, a decrease in the demand for office space (especially Class A office space), particularly in the LACBD, may have a greater adverse effect on our business and financial condition than if we owned a more diversified real estate portfolio. We are susceptible to adverse developments in the markets for office space, particularly in Southern California. Such adverse developments could include oversupply of or reduced demand for office space; declines in property values; business layoffs, downsizings, relocations or industry slowdowns affecting tenants of our properties; changing demographics; increased telecommuting; terrorist targeting of or acts of war against high-rise structures; infrastructure quality; California state budgetary constraints and priorities; increases in real estate and other taxes; costs of complying with state, local and federal government regulations or increased regulation and other factors. In addition, the State of California is generally regarded as more litigious and more highly regulated and taxed than many other U.S. states, which may adversely impact the market, including the demand for, office space in California. There can be no assurance as to the growth of the southern California or the national economy or our future growth rate.

U.S. economic conditions are uncertain. In particular, volatility in the U.S. and international capital markets and the condition of the California economy may adversely affect our liquidity and financial condition, as well as the liquidity and financial condition of tenants in our properties.

Our inability to enter into renewal or new leases on favorable terms for all or a substantial portion of space that will be subject to expiring leases would adversely affect our cash flows, operating results and financial condition. Our income-producing properties will generate revenue through rental payments made by tenants of the properties. Upon the expiry of any lease, there can be no assurance that the lease will be renewed or the tenant replaced. The terms of any lease renewal or extension, or of any new lease for such space may be less favorable to us than the existing lease, and may be less favorable to us than prevailing market terms for similar leases in the relevant market. We would be adversely affected, in particular, if any significant tenant ceases to be a tenant and cannot be replaced on similar or better terms or at all.

Competition may adversely affect our ability to lease available space in our properties. Other developers, managers and owners of office properties compete with us in seeking tenants. Some of the properties of our competitors may be newer, better located or better capitalized than the properties we own. These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to make space available at lower prices than the space in our properties, particularly if there is an oversupply of space available in the market. Competition for tenants could have an adverse effect on our ability to lease our properties and on the rents that we may charge or concessions that we may grant. If our competitors adversely impact our ability to lease our properties, our cash flows, operating results and financial condition may suffer.


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Our ability to realize our strategies and capitalize on our competitive strengths will depend on our ability to effectively operate our properties, maintain good relationships with tenants and remain well capitalized, and our failure to do any of the foregoing could adversely affect our ability to compete effectively in the markets in which we do business.

Reliance on significant tenants could adversely affect our operating results and financial condition. Many of our properties are occupied by one or more significant tenants and our revenues from those properties are materially dependent on the creditworthiness and financial stability of those tenants. Our business would be adversely affected if any of those tenants failed to renew certain of their significant leases, became insolvent, declared bankruptcy or otherwise refused to pay rent in a timely fashion or at all. In the event of a default by one or more of our significant tenants, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing the property. If a lease with a significant tenant is terminated, it may be difficult, costly and time consuming to attract new tenants and lease the property for the rent and on terms as favorable as the previous lease or at all.

We could be adversely impacted by tenant defaults, bankruptcies or insolvencies. A tenant of our properties may experience a downturn in its business, which could cause the loss of that tenant or weaken its financial condition and result in the tenant’s inability to make rental payments when due or, for retail tenants, a reduction in percentage rent payable. If a tenant defaults, we may experience delays and incur costs in enforcing our rights as landlord and protecting our investments. If any tenant becomes a debtor in a case under the U.S. Bankruptcy Code, we cannot evict a tenant solely because of its bankruptcy. In addition, the bankruptcy court may authorize a tenant to reject and terminate its lease. In such a case, our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. In any event, it is unlikely that a bankrupt or insolvent tenant will pay in full the amounts it owes under a lease. The loss of rental payments from tenants and costs of re-leasing would adversely affect our cash flows, operating results and financial condition. In the event of a significant number of lease defaults and/or tenant bankruptcies, our cash flow may not be sufficient to meet all of our obligations and liabilities or to make distributions to Brookfield DTLA stockholders, including holders of the Series A preferred stock.

There are numerous risks associated with the use of debt to finance our business, including refinancing risk. We will incur debt in the ordinary course of our business and therefore will be subject to the risks associated with debt financing. These risks, including the following, may adversely impact our operating results and financial condition: our cash flow may be insufficient to meet required payments of principal and interest; payments of principal and interest on borrowings may leave us with insufficient cash resources to pay operating expenses; we may not be able to refinance indebtedness on our properties at maturity due to business and market factors (including: disruptions and volatility in the capital and credit markets, the estimated cash flow of our properties, and the value (or appraised value) of our properties); financial, competitive, business and other factors, including factors beyond our control; and if refinanced, the terms of a refinancing may not be as favorable to us as the original terms of the related indebtedness. If we are unable to refinance our indebtedness on acceptable terms, or at all, we may need to dispose of one or more of our properties on disadvantageous terms. In addition, prevailing interest rates or other factors at the time of refinancing could increase our interest expense, and if we mortgage property to secure payment of indebtedness and are unable to make mortgage payments, the mortgagee could foreclose upon such property or appoint a receiver to receive an assignment of our rents and leases.


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If we are unable to manage our interest rate risk efficiently, our cash flows and operating results may suffer. Certain of our indebtedness bear interest at a variable rate and we may in the future incur additional variable-rate indebtedness. In addition, we may be required to refinance our debt at higher rates. There can be no assurance that the benchmarks on which our variable-rate indebtedness is based will not increase or that interest rates available for any refinancing in the future will not be higher than the debt being refinanced. Increases in such rates will increase our interest expense and could have an adverse impact on our cash flows and operating results. In addition, though we will attempt to manage interest rate risk, there can be no assurance that we will hedge such exposure effectively or at all in the future. Accordingly, increases in interest rates above that which we anticipate based upon historical trends would adversely affect our cash flows and operating results.

Our substantial indebtedness may adversely affect our operating results and financial condition, and may limit our flexibility to operate our business. Brookfield DTLA currently has aggregate consolidated indebtedness totaling $1.9 billion. After payments of principal and interest on our indebtedness, we may not have sufficient cash resources to operate our properties or meet all of our other obligations. Certain of our indebtedness include lockbox and other cash management provisions, which, under certain circumstances, could limit our ability to utilize available cash flow from the relevant properties. There can be no assurance that terms of debt we incur in the future or modifications to existing debt will not significantly limit our operating and financial flexibility, which may in turn limit our ability to efficiently respond and adapt to changes or competition in our business.

If we are unable to extend, refinance or repay mortgage debt on our properties at maturity, we could default on such debt, which may permit the lenders to foreclose on the applicable property. Proceeds from any disposition of a foreclosed property may not be sufficient to repay the full amount of the underlying debt. If we are unable to extend, refinance or repay our debt as it comes due, our business, financial condition and operating results may be materially and adversely affected. If we are unable to refinance our debt as it matures on acceptable terms, or at all, we may need to dispose of one or more of our properties on disadvantageous terms. Furthermore, even if we are able to obtain extensions on or refinance our existing debt, such extensions or new loans may include operational and financial covenants significantly more restrictive than our current debt covenants and may limit the operation or growth of our business.

Restrictive covenants in indebtedness may limit management’s discretion with respect to certain business matters. Instruments governing our indebtedness may contain restrictive covenants limiting our discretion with respect to certain business matters. These covenants could place significant restrictions on our ability to, among other things, create liens or other encumbrances, pay dividends or make distributions on Brookfield DTLA’s capital stock (including the Series A preferred stock), make certain other payments, investments, loans and guarantees and sell or otherwise dispose of assets and merge or consolidate with another entity. These covenants could also require us to meet certain financial ratios and financial condition tests. Failure to comply with any such covenants could result in a default which, if not cured or waived, could result in acceleration of the relevant indebtedness.


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Brookfield DTLA is subject to obligations under certain “non-recourse carve out” guarantees that may be triggered in the future. All of our properties are encumbered by traditional non-recourse debt obligations. In connection with certain of these loans, Brookfield DTLA entered into “non-recourse carve out” guarantees, which provide for these otherwise non-recourse loans to become partially or fully recourse against Brookfield DTLA or one of its subsidiaries, if certain triggering events occur. Although these events differ from loan to loan, some of the common events include: the special purpose property-owning indirect subsidiaries of Brookfield DTLA filing a voluntary petition for bankruptcy; the special purpose property-owning subsidiary’s failure to maintain its status as a special purpose entity; and, subject to certain conditions, the special purpose property-owning subsidiary’s failure to obtain the lender’s written consent prior to a transfer or conveyance of the associated property, including, in many cases, indirect transfers in connection with a change in control of Brookfield DTLA. In addition, other items that are customarily recourse to a non-recourse carve out guarantor include, but are not limited to, the payment of real property taxes, the breach of representations related to environmental issues or hazardous substances, physical waste of the property, liens which are senior to the mortgage loan and outstanding security deposits.

Increasing utility costs in California may have an adverse effect on our operating results and occupancy levels. The State of California continues to experience issues related to the supply of electricity, water and natural gas. In recent years, shortages of electricity have resulted in increased costs for consumers and certain interruptions in service. Increased consumer costs and consumer perception that the State of California is not able to effectively manage its utility needs may reduce demand for leased space in California office properties. A significant reduction in demand for office space could adversely affect our financial condition and results of operations.

Because real estate investments are illiquid, we may not be able to sell properties when appropriate or desired. Large and high quality office properties like the ones that we own can be hard to sell, especially if local market conditions are poor. Such illiquidity could limit our ability to vary our portfolio promptly in response to changing economic or investment conditions. Additionally, financial difficulties of other property owners resulting in distressed sales could depress real estate values in the market in which we operate in times of illiquidity. These restrictions could reduce our ability to respond to changes in the performance of our investments and could adversely affect our financial condition and results of operations.

The MPG acquisition and related transactions may cause the MPG real estate assets to be revalued for property tax and California Proposition 13 purposes. The MPG acquisition and related transactions may trigger a reassessment of the value of the real estate assets held by MPG for purposes of property taxes and California Proposition 13. To the extent any such revaluation results in an increase in the assessed value of Wells Fargo Center–North Tower, Gas Company Tower, Wells Fargo Center–South Tower and 777 Tower for property taxes and California Proposition 13 purposes, the taxes owed by Brookfield DTLA and its subsidiaries with respect to such assets could be correspondingly increased. Any increase in the amount owed with respect to property taxes and/or California Proposition 13 would decrease cash available for distributions to holders of Brookfield DTLA stock, including holders of the Series A preferred stock, and lower distributions of cash could adversely affect the value of the Series A preferred stock.

Our insurance may not cover some potential losses or may not be obtainable at commercially reasonable rates, which could adversely affect our financial condition and results of operations. We expect to maintain insurance on our properties in amounts and with deductibles that we believe are in line with coverage maintained by owners of similar types of properties, however, we may not be able to obtain coverage at commercially reasonable rates and the insurance we do obtain may not cover all potential losses we might experience. There also are certain types of risks

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(such as war or acts of terrorism, or environmental contamination, such as toxic mold) which are either uninsurable or not economically insurable. Should any uninsured or underinsured loss occur, we could lose our investment in, and anticipated profits and cash flows from, one or more of our properties, and would continue to be obligated to repay any recourse mortgage indebtedness on such properties. Any of these events could adversely impact our business, financial condition and results of operations.

We are subject to possible environmental liabilities and other possible liabilities. As an owner and manager of real property, we are subject to various laws relating to environmental matters. These laws could hold us liable for the costs of removal and remediation of certain hazardous substances or wastes present in our buildings, released or deposited on or in our properties or disposed of at other locations. These costs could be significant and would reduce cash available for our business. The failure to remove or remediate such substances could adversely affect our ability to sell our properties or our ability to borrow using real estate as collateral, and could potentially result in claims or other proceedings against us.

Other laws and regulations govern indoor and outdoor air quality including those that can require the abatement or removal of ACBM in the event of damage, demolition, renovation or remodeling and also govern emissions of and exposure to asbestos fibers in the air. The maintenance and removal of lead paint and certain electrical equipment containing polychlorinated biphenyls (“PCBs”) and underground storage tanks are also regulated by federal and state laws. We are also subject to risks associated with human exposure to chemical or biological contaminants such as molds, pollens, viruses and bacteria which, above certain levels, can be alleged to be connected to allergic or other health effects and symptoms in susceptible individuals. We could incur fines for environmental compliance and be held liable for the costs of remedial action with respect to the foregoing regulated substances or tanks or related claims arising out of environmental contamination or human exposure to contamination at or from our properties.

If excessive moisture accumulates in our buildings or on our building materials, it may trigger mold growth. Mold may emit airborne toxins or irritants. Inadequate ventilation, chemical contamination and other biological contaminants (including pollen, viruses and bacteria) could also impair indoor air quality at our buildings. Impaired indoor air quality may cause a variety of adverse health effects, such as allergic reactions. If mold or other airborne contaminants exist or appear at our properties, we may have to undertake a costly remediation program to contain or remove the contaminants or increase indoor ventilation. If indoor air quality were impaired, we may have to temporarily relocate some or all of a property’s tenants and could be liable to our tenants, their employees or others for property damage and/or personal injury.

Some of the properties that we own contain ACBM and we could be liable for such fines or penalties. We cannot assure our stockholders, including holders of the Series A preferred stock, that costs of future environmental compliance will not affect our ability to make distributions to our stockholders, including distributions or dividends on the Series A preferred stock, or such that costs or other remedial measures will not have a material adverse effect on our business, assets or results of operations.

In addition, some of the properties that we own contain, or may have contained, or are adjacent to or near other properties that have contained or currently contain, underground storage tanks for the storage of petroleum products or other hazardous or toxic substances. If hazardous or toxic substances were released from these tanks, we could incur significant costs or be liable to third parties with respect to the releases. From time to time, the EPA designates certain sites affected

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by hazardous substances as “Superfund” sites pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act. The EPA identifies parties who are considered to be potentially responsible for the hazardous substances at Superfund sites and makes them liable for the costs of responding to the hazardous substances. The parcel of land on which Glendale Center (a property that was disposed of by MPG during 2012) is located within a large Superfund site, and Brookfield DTLA could be named as a potentially responsible party with respect to that site.

Environmental laws and regulations can change rapidly and we may become subject to more stringent environmental laws and regulations in the future. Compliance with more stringent environmental laws and regulations could have an adverse effect on our business, financial condition or results of operations.

Regulations under building codes and human rights codes generally require that public buildings, including office buildings, be made accessible to disabled persons. Non-compliance could result in the imposition of fines by the government or the award of damages to private litigants. If we are required to make substantial alterations and capital expenditures in one or more of our properties to comply with these codes, it could adversely affect our financial condition and results of operations.

We may also incur significant costs complying with other regulations. Our properties will be subject to various federal, state, provincial and local regulatory requirements, such as state, and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. Existing requirements may change and compliance with future requirements may require significant unanticipated expenditures that could affect our cash flow and results from operations.

Existing conditions at some of our properties may expose us to liability related to environmental matters, which may exceed our environmental insurance coverage limits. Independent environmental consultants have conducted Phase I or other environmental site assessments on all of the properties that we own. Site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. These assessments do not generally include soil samplings, subsurface investigations or an asbestos survey, and the assessments may fail to reveal all environmental conditions, liabilities or compliance concerns.

In connection with its due diligence of MPG prior to entering into the Merger Agreement, BPO conducted initial environmental tests at certain of MPG’s Downtown Los Angeles properties and found that a widely used commercial building material used in certain of MPG’s Downtown Los Angeles properties contained ACBM. None of the recent site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on our business, assets or results of operations. However, the assessments may have failed to reveal all environmental conditions, liabilities or compliance concerns. Material environmental conditions, liabilities or compliance concerns may have arisen after the review was completed or may arise in the future and future laws, ordinances or regulations may impose material additional environmental liability.

We expect to maintain environmental insurance coverage for likely and reasonably anticipated potential environmental liability, including liability associated with the discharge, seepage, migration or release of any solid, liquid or gaseous contaminant, however, we may not be able to obtain coverage at commercially reasonable rates and the insurance we do obtain may not cover all potential losses we might experience. There can be no assurance that any environmental insurance coverage we do obtain will be sufficient.

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Losses resulting from the breach of our loan document representations related to environmental issues or hazardous substances will generally be recourse to Brookfield DTLA or one of its subsidiaries pursuant to “non-recourse carve out” guarantees and therefore present a risk to Brookfield DTLA should a special purpose property-owning subsidiary be unable to cover such a loss. We cannot assure our stockholders that costs of future environmental compliance will not affect our ability to pay dividends or distributions to our stockholders, including on the Series A preferred stock, or such costs or other remedial measures will not have a material adverse effect on our business, assets or results of operations.

We may suffer a significant loss resulting from fraud, other illegal acts or inadequate or failed internal processes or systems. We may suffer a significant loss resulting from fraud or other illegal acts or inadequate or failed internal processes or systems. We rely on our employees to follow our policies and processes as well as applicable laws in their activities. Risk of illegal acts or failed systems will be managed through our infrastructure, controls, systems, policies and people, complemented by central groups focusing on enterprise-wide management of specific operational risks such as fraud, trading, outsourcing, and business disruption, as well as people and systems risks. Failure to manage these risks can result in direct or indirect financial loss, reputational impact, regulatory censure or failure in the management of other risks such as credit or market risk.

We may be subject to litigation. In the ordinary course of our business, we expect that we may be subject to litigation from time to time. The outcome of any such proceedings may materially adversely affect us and may continue without resolution for long periods of time. Any litigation may consume substantial amounts of our management’s time and attention, and that time and the devotion of these resources to litigation may, at times, be disproportionate to the amounts at stake in the litigation. The acquisition, ownership and disposition of real property will expose us to certain litigation risks which could result in losses, some of which may be material. Litigation may be commenced with respect to a property we have acquired in relation to activities that took place prior to our acquisition of such property. In addition, at the time of disposition of an individual property, a potential buyer who is passed over in favor of another buyer as part of our efforts to maximize sale proceeds may claim that it should have been afforded the opportunity to purchase the asset or alternatively that such buyer should be awarded due diligence expenses incurred or statutory damages for misrepresentation relating to disclosures made. Similarly, successful buyers may later sue us for losses associated with latent defects or other problems not uncovered in due diligence. We may also be exposed to litigation resulting from the activities of our tenants or their customers.

The pendency of the MPG acquisition may have adversely affected the business and operations of MPG. In connection with the MPG acquisition, tenants of the properties acquired in the MPG acquisition may have delayed or deferred decisions regarding the renewal of their leases, which could adversely impact Brookfield DTLA’s revenues, earnings, cash flows and expenses. In addition, due to operating covenants in the Merger Agreement, during the pendency of the MPG acquisition, MPG may have been unable to pursue certain strategic transactions, undertake certain significant capital projects, undertake certain significant financing transactions or otherwise act outside the ordinary course of business, even if such actions would have proved beneficial to MPG and, following the consummation of the MPG acquisition, to Brookfield DTLA.

Our future results may suffer if we are unable to effectively manage our real estate portfolio. Our future success will depend, in part, upon our ability to manage and successfully monitor our operations, costs, regulatory compliance and service quality, and maintain other necessary internal controls.


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Future terrorist attacks in the United States could harm the demand for and the value of our properties. Future terrorist attacks in the U.S., such as the attacks that occurred in New York City and Washington, D.C. on September 11, 2001, and other acts of terrorism or war could harm the demand for and the value of our properties. Certain of the properties we own are well-known landmarks and may be perceived as more likely terrorist targets than similar, less recognizable properties, which could potentially reduce the demand for and value of these properties. A decrease in demand or value could make it difficult for us to renew leases or re-lease space at lease rates equal to or above historical rates or then-prevailing market rates or to refinance indebtedness related to our properties. Terrorist attacks also could directly impact the value of our properties through damage, destruction, loss or increased security costs, and the availability of insurance for such acts may be limited or more costly. Five of Brookfield DTLA’s properties are located within the Bunker Hill area of Downtown Los Angeles. Because these properties are located so closely together, a terrorist attack on any one of these properties, or in the Downtown Los Angeles or Bunker Hill areas generally, could materially damage, destroy or impair the use by tenants of one or more of these properties. To the extent that our tenants are impacted by future attacks, their ability to continue to honor obligations under their existing leases with us could be adversely affected. Additionally, certain tenants will have termination rights or purchase options in respect of certain casualties.

Climate change may adversely impact our operations and markets. There is significant concern from members of the scientific community and the general public that an increase in global average temperatures due to emissions of greenhouse gases and other human activities have or will cause significant changes in weather patterns and increase the frequency and severity of climate stress events. Climate change, including the impact of global warming, creates physical and financial risk. Physical risks from climate change include an increase in sea level and changes in weather conditions, such as an increase in intense precipitation and extreme heat events, as well as tropical and non-tropical storms. The occurrence of one or more natural disasters, such as hurricanes, fires, floods and earthquakes (whether or not caused by climate change), could cause considerable damage to our properties, disrupt our operations and negatively impact our financial performance. To the extent these events result in significant damage to or closure of one or more of our buildings, our operations and financial performance could be adversely affected through lost tenants and an inability to lease or re-lease the space. In addition, these events could result in significant expenses to restore or remediate a property, increases in fuel (or other energy) prices or a fuel shortage and increases in the costs of insurance if they result in significant loss of property or other insurable damage.

If we are unable to recover from a business disruption on a timely basis, our financial condition and results of operations could be adversely affected. Our business may be vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. If we are unable to recover from a business disruption on a timely basis, our financial condition and results of operations could be adversely affected. We may also incur additional costs to remedy damages caused by such disruptions.


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TAX RISKS

Failure to qualify as or maintain our status as a REIT could have significant adverse consequences to us, our ability to make distributions and the value of our stock, including the Series A preferred stock. To qualify as a REIT, Brookfield DTLA must satisfy a number of asset, income, organizational, operational, dividend distribution, stock ownership and other requirements on an ongoing basis. However, qualification as a REIT involves the application of highly technical and complex provisions of the Code, for which only a limited number of judicial and administrative interpretations exist. Even an inadvertent or technical mistake could jeopardize our REIT qualification. Our qualification as a REIT depends on the satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis.

Our ability to qualify as a REIT will depend on the ability of certain of our subsidiaries that own our commercial property assets to individually satisfy the asset, income, organizational, distribution, stockholder ownership and other requirements discussed above on a continuing basis. Whether these subsidiaries will be able to qualify for taxation as REITs, and therefore whether we will be able to qualify, is a question of fact.

Should we qualify for taxation as a REIT, we intend to operate in a manner that will allow us to continue to qualify as a REIT for federal income tax purposes under the Code. If, for any reason, we subsequently fail to qualify as a REIT and are not entitled to relief under certain Code provisions, we would be unable to elect REIT status for the four taxable years following the year during which we ceased to so qualify.

Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially applicable with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT.

If we fail to qualify for taxation as a REIT in our initial or any subsequent taxable year, we will be subject to corporate-level tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. We may also be subject to state and local taxes if we fail to qualify as a REIT. Any such corporate tax liability could be substantial and would reduce the amount of cash available for investment, debt service and distribution to holders of our stock, which in turn could have an adverse effect on the value of our stock. Distributions to our stockholders if we fail to qualify as a REIT will not be deductible by us, nor will they be required to be made (unless required by the terms of our governing documents). In such event, to the extent of current and accumulated earnings and profits, all distributions to stockholders will be taxable as dividends (whether or not attributable to capital gains of the Company). Subject to certain limitations in the Code, corporate distributees may be eligible for the dividends received deduction. Dividends paid to non-corporate U.S. Holders that constitute qualified dividend income will be eligible for taxation at the preferential rates applicable to long-term capital gains, provided certain conditions are met. As a result of all these factors, our failure to qualify as a REIT could impair our business and operating strategies and adversely affect the value of our stock and our ability to make distributions on our stock, including, in each case, the Series A preferred stock.


20

Even if we qualify as a REIT, we may incur other tax liabilities that could reduce our cash flows. Even if we qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets including, but not limited to, taxes on any undistributed income and property and transfer taxes. In order to avoid federal corporate income tax on our earnings, each year we must distribute to holders of our stock, including holders of the Series A preferred stock, at least 90% of our REIT taxable income, determined before the deductions for dividends paid and excluding any net capital gain. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income and net capital gain, we will be subject to federal corporate income tax on our undistributed REIT taxable income and net capital gain. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to holders of our stock, including holders of the Series A preferred stock, in a calendar year is less than a minimum amount specified under the Code. Any of these taxes would decrease cash available for distributions to holders of our stock, including holders of the Series A preferred stock, and lower distributions of cash could adversely affect the value of the Series A preferred stock.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends. Certain dividends known as qualified dividends currently are subject to the same tax rates as long-term capital gains, which are lower than rates for ordinary income. Dividends payable by REITs, however, generally are not eligible for such reduced rates. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of our stock, including the Series A preferred stock.

You may be deemed to receive a taxable distribution without the receipt of any cash or property. Under Section 305(c) of the Code, holders of Brookfield DTLA Series A preferred stock may be treated for U.S. federal income tax purposes as receiving constructive distributions if the “issue price” of the Series A preferred stock is lower than the redemption price of such Series A preferred stock. If the redemption price exceeds the issue price and, based on all the facts and circumstances as of the date of issuance, redemption pursuant to Brookfield DTLA’s right to redeem is more likely than not to occur, then a holder of Series A preferred stock will be deemed to receive a series of constructive distributions of stock in the total amount of such excess, so long as the amount by which the redemption price exceeds the issue price is not de minimis. These constructive distributions will be deemed to be made to such holders in increasing amounts (on a constant-yield basis) during the period from the date of issuance to the date on which it is most likely that the Series A preferred stock will be redeemed, based on all of the facts and circumstances as of the issue date. In addition, constructive distributions could arise in other circumstances as well. In the event a holder of Series A preferred stock receives a constructive distribution, such holder may incur U.S. federal income tax liability with respect to such constructive distribution without receiving any corresponding distribution of cash with which to pay such taxes.

Applicable REIT laws may restrict certain business activities. As a REIT, we are subject to various restrictions on the types of income we can earn, assets we can own and activities in which we can engage. Business activities that could be impacted by applicable REIT laws include, but are not limited to, activities such as developing alternative uses of real estate, including the development and/or sale of properties. To qualify as a REIT for federal income tax purposes, we must satisfy certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In order to meet these tests, we may be required to forgo investments we might otherwise make. Thus, our compliance with the REIT requirements may hinder our business and operating strategies, financial condition and results of operations.


21

We will participate in transactions and make tax calculations for which the ultimate tax determination may be uncertain. We will participate in many transactions and make tax calculations during the course of our business for which the ultimate tax determination will be uncertain. While we believe we maintain provisions for uncertain tax positions that appropriately reflect our risk, these provisions are made using estimates of the amounts expected to be paid based on a qualitative assessment of several factors. It is possible that liabilities associated with one or more transactions may exceed our provisions due to audits by, or litigation with, relevant taxing authorities which may materially affect our financial condition and results of operations.

Item 1B.
Unresolved Staff Comments.

Not applicable.

Item 2.
Properties.

Lease Terms

Our leases are typically for terms of five to ten years, although we also enter into some short-term as well as some longer-term leases. Our leases usually require the purchase of a minimum number of monthly parking spaces at the property and in many cases contain provisions permitting tenants to renew expiring leases at prevailing market rates. Most of our leases are either triple net or modified gross leases. Triple net and modified gross leases are those in which tenants pay not only base rent but also some or all real estate taxes and operating expenses of the leased property. Tenants typically reimburse us the full direct cost, without regard to a base year or expense stop, for use of lighting, heating and air conditioning during non-business hours, and for a certain number of parking spaces. We are generally responsible for structural repairs.

Historical Percentage Leased and Rental Rates

The following table sets forth, as of the dates indicated, the percentage leased, annualized rent and annualized rent per square foot of Brookfield DTLA’s and the Predecessor Entities’ properties:

 
Percentage Leased
 
Annualized Rent (1)
 
Annualized Rent
per Square Foot (2)
 
 
 
 
 
 
Brookfield DTLA:
 
 
 
 
 
December 31, 2013
83.5
%
 
$
143,813,089

 
$
22.87

Predecessor Entities:
 
 
 
 
 
December 31, 2012
86.5
%
 
$
49,190,747

 
$
21.54

December 31, 2011
84.4
%
 
47,585,381

 
21.35

__________
(1)
Annualized rent represents the annualized monthly contractual rent under existing leases as of the date indicated. This amount reflects total base rent before any rent abatements as of the date indicated and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for leases in effect as of December 31, 2013 for the twelve months ending December 31, 2014 are approximately $13 million, or $1.99 per leased square foot. Total abatements for leases in effect as of December 31, 2012 for the twelve months ended December 31, 2013 were approximately $6 million, or $2.61 per leased square foot. Total abatements for leases in effect as of December 31, 2011 for the twelve months ended December 31, 2012 were approximately $5 million, or $2.29 per leased square foot.
(2)
Annualized rent per square foot represents annualized rent as computed above, divided by leased square feet as of the same date.


22

Leasing Activity

The following table summarizes leasing activity at Brookfield DTLA for the year ended December 31, 2013:

 
Leasing Activity
 
Percentage Leased
 
 
 
 
Leased square feet as of December 31, 2012
2,284,117

 
86.5
 %
Acquisition – Wells Fargo Center–North Tower
1,176,154

 
 
Acquisition – Gas Company Tower
932,617

 
 
Acquisition – Wells Fargo Center–South Tower
1,019,624

 
 
Acquisition – 777 Tower
792,946

 
 
Revised leased square feet as of December 31, 2012
6,205,458

 
82.4
 %
     Expirations
(362,168
)
 
(4.8
)%
     New leases
201,990

 
2.7
 %
     Renewals
243,982

 
3.2
 %
Leased square feet as of December 31, 2013
6,289,262

 
83.5
 %

Property Statistics

The following table presents leasing information for Brookfield DTLA for leases in place as of December 31, 2013:

 
Square Feet
 
Leased % and In-Place Rents
 
 
Number
of
Buildings
 
Number of
Tenants
 
Year
Acquired
 
Net
Building
Rentable
 
% of Net
Rentable
 
%
Leased
 
Total
Annualized
Rent (1)
 
Annualized
Rent
$/RSF (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BOA Plaza
 
1

 
30

 
2006
 
1,405,428

 
18.65
%
 
92.3
%
 
$
29,255,109

 
$
22.56

Wells Fargo Center–North Tower
 
2

 
45

 
2013
 
1,400,639

 
18.59
%
 
83.3
%
 
27,785,261

 
23.81

Gas Company Tower
 
1

 
17

 
2013
 
1,345,163

 
17.85
%
 
71.4
%
 
20,273,538

 
21.10

EY Plaza
 
1

 
74

 
2006
 
1,234,372

 
16.38
%
 
88.7
%
 
23,454,975

 
21.42

Wells Fargo Center–South Tower
 
1

 
16

 
2013
 
1,124,960

 
14.93
%
 
86.0
%
 
24,899,836

 
25.74

777 Tower
 
1

 
38

 
2013
 
1,024,835

 
13.60
%
 
78.3
%
 
18,144,370

 
22.61

 
 
7

 
220

 
 
 
7,535,397

 
100.00
%
 
83.5
%
 
$
143,813,089

 
$
22.87

__________
(1)
Annualized rent represents the annualized monthly contractual rent under existing leases as of December 31, 2013. This amount reflects total base rent before any rent abatements as of December 31, 2013 and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for leases in effect as of December 31, 2013 for the twelve months ending December 31, 2014 are approximately $13 million, or $1.99 per leased square foot.
(2)
Annualized rent per rentable square foot represents annualized rent as computed above, divided by leased square feet as of the same date.


23

Tenant Information

As of December 31, 2013, Brookfield DTLA’s properties were leased to 220 tenants. The following table sets forth the annualized rent and leased square footage of our 20 largest tenants as of December 31, 2013:

Tenant
 

Annualized
Rent (1)
 
% of Total
Annualized
Rent
 
Leased
RSF
 
% of Total
Leased RSF
 
Year of Expiry
 
 
 
 
 
 
 
 
 
 
 
1

Southern California Gas Company
 
$
9,211,081

 
6.4
%
 
461,477

 
7.3
%
 
Various
2

Latham & Watkins LLP
 
10,079,641

 
7.0
%
 
386,437

 
6.1
%
 
Various
3

Wells Fargo Bank National Association
 
7,630,845

 
5.3
%
 
365,418

 
5.8
%
 
Various
4

The Capital Group Companies
 
7,931,531

 
5.5
%
 
324,398

 
5.2
%
 
2018
5

Gibson, Dunn & Crutcher LLP
 
6,384,784

 
4.4
%
 
269,173

 
4.3
%
 
2022
6

Marsh USA, Inc.
 
4,319,480

 
3.0
%
 
214,526

 
3.4
%
 
2018
7

Sidley Austin (CA) LLP
 
4,079,753

 
2.8
%
 
190,821

 
3.0
%
 
Various
8

KPMG LLP
 
4,473,548

 
3.1
%
 
183,117

 
2.9
%
 
2014
9

Shepard, Mullin, Richter
 
3,936,692

 
2.7
%
 
173,959

 
2.8
%
 
2025
10

Oaktree Capital Management, L.P.
 
3,614,973

 
2.5
%
 
169,082

 
2.7
%
 
Various
11

Munger, Tolles & Olsen LLP
 
4,017,050

 
2.8
%
 
160,682

 
2.6
%
 
2022
12

Bank of America N.A.
 
3,866,198

 
2.7
%
 
155,269

 
2.5
%
 
2022
13

Ernst & Young U.S. LLP
 
2,718,495

 
1.9
%
 
120,822

 
1.9
%
 
2022
14

United States of America
 
3,074,579

 
2.1
%
 
119,680

 
1.9
%
 
Various
15

Alston & Bird LLP
 
2,268,524

 
1.6
%
 
105,808

 
1.7
%
 
Various
16

Kirkland & Ellis
 
2,397,840

 
1.7
%
 
100,665

 
1.6
%
 
2020
17

Target Corporation
 
604,283

 
0.4
%
 
97,465

 
1.5
%
 
2033
18

Winston & Strawn LLP
 
2,720,513

 
1.9
%
 
91,170

 
1.4
%
 
2017
19

Bingham McCutchen, LLP
 
1,951,776

 
1.4
%
 
81,324

 
1.3
%
 
2023
20

Reed Smith LLP
 
1,559,493

 
1.1
%
 
79,974

 
1.3
%
 
2022
 
 
 
$
86,841,079

 
60.3
%
 
3,851,267

 
61.2
%
 
 
__________
(1)
Annualized rent is calculated as contractual base rent under existing leases as of December 31, 2013. For those leases where rent has not yet commenced, the first month in which rent is to be received is used to determine annualized rent.


24

The following table sets forth information regarding lease expirations of our 20 largest tenants as of December 31, 2013:

 
 
 
Leased Square Feet as of December 31, 2013
 
 
Tenant
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019
 
Beyond
 
Year of Final Expiry
 
 
(In thousands)
 
 
1

Southern California Gas Company
 
28

 
—

 
—

 
—

 
—

 
56

 
378

 
2026
2

Latham & Watkins LLP
 
—

 
—

 
95

 
—

 
—

 
—

 
291

 
2025
3

Wells Fargo Bank National Association
 
25

 
—

 
8

 
—

 
56

 
—

 
276

 
2023
4

The Capital Group Companies
 
—

 
—

 
—

 
—

 
324

 
—

 
—

 
2018
5

Gibson, Dunn & Crutcher LLP
 
—

 
—

 
—

 
—

 
—

 
—

 
269

 
2022
6

Marsh USA, Inc.
 
—

 
—

 
—

 
—

 
215

 
 
 
 
 
2018
7

Sidley Austin (CA) LLP
 
28

 
—

 
—

 
—

 
—

 
—

 
163

 
2024
8

KPMG LLP
 
183

 
—

 
—

 
—

 
—

 
—

 
—

 
2014
9

Shepard, Mullin, Richter
 
—

 
—

 
—

 
—

 
—

 
—

 
174

 
2025
10

Oaktree Capital Management, L.P.
 
13

 
—

 
—

 
156

 
—

 
—

 
—

 
2017
11

Munger, Tolles & Olsen LLP
 
—

 
—

 
—

 
—

 
—

 
—

 
161

 
2022
12

Bank of America N.A.
 
—

 
—

 
—

 
—

 
—

 
—

 
155

 
2022
13

Ernst & Young U.S. LLP
 
—

 
—

 
—

 
—

 
—

 
—

 
121

 
2022
14

United States of America
 
30

 
90

 
—

 
—

 
—

 
—

 
—

 
2015
15

Alston & Bird LLP
 
26

 
—

 
—

 
—

 
—

 
—

 
80

 
2024
16

Kirkland & Ellis
 
—

 
—

 
—

 
—

 
—

 
—

 
101

 
2020
17

Target Corporation
 
—

 
—

 
—

 
—

 
—

 
—

 
97

 
2033
18

Winston & Strawn LLP
 
—

 
—

 
—

 
91

 
—

 
—

 
—

 
2017
19

Bingham McCutchen, LLP
 
—

 
—

 
—

 
—

 
—

 
—

 
81

 
2023
20

Reed Smith LLP
 
—

 
—

 
—

 
—

 
—

 
—

 
80

 
2022
 
Leased square feet expiring by year
 
333

 
90

 
103

 
247

 
595

 
56

 
2,427

 
 
 
Percentage of leased square feet expiring by year
 
5.3
%
 
1.4
%
 
1.6
%
 
3.9
%
 
9.5
%
 
0.9
%
 
38.6
%
 
 


25

Lease Expirations

The following table presents a summary of lease expirations at Brookfield DTLA for leases in place at December 31, 2013, plus currently available space, for each of the ten calendar years beginning January 1, 2014. This table assumes that none of our tenants exercise renewal options or early termination rights, if any, at or prior to their scheduled expirations.

Year
 
Total Area in
Square Feet
Covered by  Expiring
Leases
 
Percentage
of Leased
Square Feet
 
Annualized
Rent (1)
 
Percentage
of
Annualized
Rent
 
Current Rent
per Leased Square
Foot (2)
 
Rent per
Leased Square Foot
at Expiration (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
494,860

 
7.9
%
 
$
11,828,102

 
8.2
%
 
$
23.90

 
$
23.94

2015
 
285,437

 
4.5
%
 
6,583,832

 
4.5
%
 
23.07

 
23.48

2016
 
407,508

 
6.5
%
 
8,741,861

 
6.1
%
 
21.45

 
22.92

2017
 
598,161

 
9.5
%
 
14,621,216

 
10.2
%
 
24.44

 
26.93

2018
 
858,488

 
13.6
%
 
18,948,956

 
13.2
%
 
22.07

 
24.27

2019
 
423,067

 
6.7
%
 
10,963,293

 
7.6
%
 
25.91

 
31.34

2020
 
291,551

 
4.6
%
 
6,907,160

 
4.8
%
 
23.69

 
29.41

2021
 
135,238

 
2.2
%
 
2,619,698

 
1.8
%
 
19.37

 
23.86

2022
 
802,784

 
12.8
%
 
18,940,611

 
13.2
%
 
23.59

 
30.73

2023
 
642,195

 
10.2
%
 
14,352,256

 
10.0
%
 
22.35

 
30.71

Thereafter
 
1,349,973

 
21.5
%
 
29,306,104

 
20.4
%
 
21.71

 
29.35

Total expiring leases
 
6,289,262

 
100.0
%
 
$
143,813,089

 
100.0
%
 
$
22.87

 
$
27.65

Currently available
 
1,246,135

 
 
 
 
 
 
 
 
 
 
Total rentable square feet
7,535,397

 
 
 
 
 
 
 
 
 
 
__________
(1)
Annualized rent represents the annualized monthly contractual rent under existing leases as of December 31, 2013. This amount reflects total base rent before any rent abatements as of December 31, 2013 and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for leases in effect as of December 31, 2013 for the twelve months ending December 31, 2014 are approximately $13 million, or $1.99 per leased square foot.
(2)
Current rent per leased square foot represents current base rent, divided by total leased square feet as of the same date.
(3)
Rent per leased square foot at expiration represents base rent, including any future rent steps, and thus represents the base rent that will be in place at lease expiration.


26

Indebtedness

As of December 31, 2013, Brookfield DTLA’s debt was comprised of mortgage loans secured by six properties. A summary of our debt as of December 31, 2013 is as follows (in millions, except percentage and year amounts):

 
Principal
Amount
 
Percent of
Total Debt
 
Effective
Interest
Rate
 
Weighted Average
Term to
Maturity
Fixed-rate
$
1,222.5

 
64.43
%
 
5.41
%
 
3 years
Variable-rate swapped to fixed-rate
185.0

 
9.75
%
 
3.93
%
 
7 years
Variable-rate
490.0

 
25.82
%
 
1.93
%
 
4 years
 
$
1,897.5

 
100.00
%
 
4.36
%
 
3 years

See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Part II, Item 8. “Financial Statements and Supplementary Data—Note 5 to Consolidated and Combined Financial Statements.”

Item 3.
Legal Proceedings.

General

Brookfield DTLA and its subsidiaries may be subject to pending legal proceedings and litigation incidental to its business. After consultation with legal counsel, management believes that any liability that may potentially result upon resolution of such matters is not expected to have a material adverse effect on its business, financial condition or consolidated financial statements as a whole.

Merger-Related Litigation

Following the announcement of the execution of the Agreement and Plan of Merger dated as of April 24, 2013, as amended (the “Merger Agreement”), seven putative class actions were filed against Brookfield Office Properties Inc. (“BPO”), Brookfield DTLA, Brookfield DTLA Holdings LLC, Brookfield DTLA Fund Office Trust Inc., Brookfield DTLA Fund Properties (collectively, the “Brookfield Parties”), MPG Office Trust, Inc., MPG Office, L.P., and the members of MPG Office Trust, Inc.’s board of directors. Five of these lawsuits were filed on behalf of MPG Office Trust, Inc.’s common stockholders: (i) two lawsuits, captioned Coyne v. MPG Office Trust, Inc., et al., No. BC507342 (the “Coyne Action”), and Masih v. MPG Office Trust, Inc., et al., No. BC507962 (the “Masih Action”), were filed in the Superior Court of the State of California in Los Angeles County (the “California State Court”) on April 29, 2013 and May 3, 2013, respectively; and (ii) three lawsuits, captioned Kim v. MPG Office Trust, Inc. et al., No. 24‑C-13-002600 (the “Kim Action”), Perkins v. MPG Office Trust, Inc., et al., No. 24-C-13-002778 (the “Perkins Action”) and Dell’Osso v. MPG Office Trust, Inc., et al., No. 24‑C-13-003283 (the “Dell’Osso Action”) were filed in the Circuit Court for Baltimore City, Maryland on May 1, 2013, May 8, 2013 and May 22, 2013, respectively (collectively, the “Common Stock Actions”). Two lawsuits, captioned Cohen v. MPG Office Trust, Inc. et al., No. 24-C-13-004097 (the “Cohen Action”) and Donlan v. Weinstein, et al., No. 24‑C-13-004293 (the “Donlan Action”), were filed on behalf of MPG Office Trust, Inc.’s preferred stockholders in the Circuit Court for Baltimore City, Maryland on June 20, 2013 and July 2, 2013, respectively (collectively, the “Preferred Stock Actions,” together with the Common Stock Actions, the “Merger Litigations”).


27

In each of the Common Stock Actions, the plaintiffs allege, among other things, that MPG Office Trust, Inc.’s board of directors breached their fiduciary duties in connection with the merger by failing to maximize the value of MPG Office Trust, Inc. and ignoring or failing to protect against conflicts of interest, and that the relevant Brookfield Parties named as defendants aided and abetted those breaches of fiduciary duty. The Kim Action further alleges that MPG Office, L.P. also aided and abetted the breaches of fiduciary duty by MPG Office Trust, Inc.’s board of directors, and the Dell’Osso Action further alleges that MPG Office Trust, Inc. and MPG Office, L.P. aided and abetted the breaches of fiduciary duty by MPG Office Trust, Inc.’s board of directors. On June 4, 2013, the Kim and Perkins plaintiffs filed identical, amended complaints in the Circuit Court for Baltimore City, Maryland. On June 5, 2013, the Masih plaintiffs also filed an amended complaint in the Superior Court of the State of California in Los Angeles County. The three amended complaints, as well as the Dell’Osso Action complaint, allege that the preliminary proxy statement filed by MPG Office Trust, Inc. with the U.S. Securities and Exchange Commission (the “SEC”) on May 21, 2013 is false and/or misleading because it fails to include certain details of the process leading up to the merger and fails to provide adequate information concerning MPG Office Trust, Inc.’s financial advisors.

In each of the Preferred Stock Actions, which were brought on behalf of MPG Office Trust, Inc.’s preferred stockholders, the plaintiffs allege, among other things, that, by entering into the Merger Agreement and tender offer, MPG Office Trust, Inc. breached the Articles Supplementary, which governs the issuance of the MPG preferred shares, that MPG Office Trust, Inc.’s board of directors breached their fiduciary duties by agreeing to a merger agreement that violated the preferred stockholders’ contractual rights and that the relevant Brookfield Parties named as defendants aided and abetted those breaches of contract and fiduciary duty. On July 15, 2013, the plaintiffs in the Preferred Stock Actions filed a joint amended complaint in the Circuit Court for Baltimore City, Maryland that further alleged that MPG Office Trust, Inc.’s board of directors failed to disclose material information regarding BPO’s extension of the tender offer.

The plaintiffs in the seven lawsuits sought an injunction against the merger, rescission or rescissory damages in the event the merger has been consummated, an award of fees and costs, including attorneys’ and experts’ fees, and other relief.

On July 10, 2013, solely to avoid the costs, risks and uncertainties inherent in litigation, the Brookfield Parties and the other named defendants in the Common Stock Actions signed a memorandum of understanding (the “MOU”), regarding a proposed settlement of all claims asserted therein. The parties subsequently entered into a stipulation of settlement dated November 21, 2013 providing for the release of all asserted claims, additional disclosures by MPG concerning the merger made prior to the merger’s approval, and the payment, by defendants, of an award of attorneys’ fees and expenses in an amount not to exceed $475,000 (which will ultimately be determined by the California State Court). The asserted claims will not be released until such stipulation of settlement is approved by the court, following a hearing on notice to the proposed class. There can be no assurance that the court will approve the settlement. The hearing for final approval of the settlement is scheduled for June 4, 2014.

In the Preferred Stock Actions, at a hearing on July 24, 2013, the Maryland State Court denied plaintiffs’ motion for preliminary injunction seeking to enjoin the tender offer. The plaintiffs filed a second amended complaint on November 22, 2013 that added additional arguments in support of their allegations that the new preferred shares do not have the same rights as the MPG preferred shares. The defendants moved to dismiss the second amended complaint on December 20, 2013, and briefing on the motion concluded on February 28, 2014. A hearing date on the motion has not been scheduled by the court.


28

While the final outcome with respect to the Merger Litigations cannot be predicted with certainty, in the opinion of management after consultation with external legal counsel, any liability that may arise from such contingencies would not have a material adverse effect on the financial position, results of operations or liquidity of Brookfield DTLA.

Item 4.
Mine Safety Disclosures.

Not applicable.

29

PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.

There is no established public trading market for the registrant’s common stock. All of the registrant’s issued and outstanding common stock is held by Brookfield DTLA Holdings LLC.

The registrant has not paid any cash dividends in the past. Any future dividends declared would be at the discretion of Brookfield DTLA’s board of directors and would depend on its financial condition, results of operations, contractual obligations and the terms of its financing agreements at the time a dividend is considered, and other relevant factors.


30

Item 6.
Selected Financial Data.

The following tables set forth selected consolidated operating and financial data for Brookfield DTLA (for the year ended December 31, 2013) and selected combined operating and financial data for BOA Plaza and EY Plaza (the “Predecessor Entities”) (for the years ended December 31, 2012, 2011, 2010 and 2009):

 
For the Year Ended December 31,
 
2013 (1)
 
2012
 
2011
 
2010
 
2009
 
(In thousands)
Operating Results
 
 
 
 
 
 
 
 
 
Total revenue
$
138,722

 
$
92,917

 
$
92,731

 
$
98,667

 
$
105,174

Total expenses
153,996

 
92,669

 
93,518

 
93,859

 
101,146

Net (loss) income
(15,274
)
 
248

 
(787
)
 
4,808

 
4,028

Net loss attributable to noncontrolling interests:
 
 
 
 
 
 
 
 
 
Series A-1 preferred interest –
    cumulative dividends
(3,586
)
 
—

 
—

 
—

 
—

Series A-1 preferred interest –
    redemption measurement adjustment
(76,305
)
 
—

 
—

 
—

 
—

Senior participating preferred interest – 
    cumulative dividends
(3,500
)
 
—

 
—

 
—

 
—

Series B common interest – allocation
    of net loss
97,934

 
—

 
—

 
—

 
—

Net (loss) income attributable to
    Brookfield DTLA
(731
)
 
248

 
(787
)
 
4,808

 
4,028

Series A preferred stock – cumulative dividends
(3,864
)
 
—

 
—

 
—

 
—

Series A preferred stock – redemption
    measurement adjustment
(82,247
)
 
—

 
—

 
—

 
—

Net (loss) income to common interest
    holders of Brookfield DTLA
$
(86,842
)
 
$
248

 
$
(787
)
 
$
4,808

 
$
4,028

 
 
 
 
 
 
 
 
 
 
Other Information
 
 
 
 
 
 
 
 
 
Cash flows (used in) provided by
     operating activities
$
(2,208
)
 
$
15,159

 
$
23,272

 
$
29,001

 
$
10,905

Cash flows used in
     investing activities
(39,868
)
 
(40,989
)
 
(24,090
)
 
(20,983
)
 
(16,846
)
Cash flows provided by (used in)
     financing activities
232,440

 
24,025

 
323

 
(3,138
)
 
7,404

 
As of December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
 
(In thousands)
Financial Position
 
 
 
 
 
 
 
 
 
Investments in real estate, net
$
2,436,253

 
$
756,072

 
$
734,844

 
$
728,981

 
$
725,179

Total assets
2,946,196

 
859,766

 
836,577

 
832,639

 
832,064

Mortgage loans, net
1,885,605

 
319,678

 
325,747

 
331,539

 
337,026

Total liabilities
2,026,658

 
351,063

 
358,826

 
360,806

 
367,955

Mezzanine equity
911,539

 
—

 
—

 
—

 
—

Stockholders’ equity
7,999

 
—

 
—

 
—

 
—

TRZ Holdings IV LLC’s interest
—

 
508,703

 
477,751

 
471,833

 
464,109

__________
(1)
On October 15, 2013, Brookfield DTLA completed the acquisition of MPG Office Trust, Inc. pursuant to the terms of the Agreement and Plan of Merger dated as of April 24, 2013, as amended. See Item 8. “Financial Statements and Supplementary Data—Note 3 to Consolidated and Combined Financial Statements.”



31

Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated and combined financial statements and the related notes. See Item 8. “Financial Statements and Supplementary Data.”

Overview and Background

Brookfield DTLA Fund Office Trust Investor Inc. (“Brookfield DTLA” or the “Company”) is a Maryland corporation and was incorporated on April 19, 2013. Brookfield DTLA was formed for the purpose of consummating the transactions contemplated in the Agreement and Plan of Merger dated as of April 24, 2013, as amended (the “Merger Agreement”), and the issuance of shares of 7.625% Series A Cumulative Redeemable Preferred Stock (the “Series A preferred stock”) in connection with the acquisition of MPG Office Trust, Inc. and MPG Office, L.P. (together, “MPG”). Brookfield DTLA is a direct subsidiary of Brookfield DTLA Holdings LLC (“Brookfield DTLA Holdings”), a Delaware limited liability company, and an indirect subsidiary of Brookfield Office Properties Inc. (“BPO”).

Prior to October 15, 2013, 333 South Hope Co. LLC (“333 South Hope”) and EYP Realty LLC (“EYP Realty”) were controlled by BPO through its indirect ownership interest in TRZ Holdings IV LLC (“TRZ”). TRZ owned 100% of the member units of 333 South Hope and EYP Realty, and BPO indirectly owns approximately 84% of the member units of TRZ.

On October 15, 2013, through a series of formation transactions TRZ’s interests in 333 South Hope and EYP Realty were contributed to subsidiaries of Brookfield DTLA in exchange for preferred and common interests in Brookfield DTLA Fund Properties II LLC (“New OP”) and a preferred interest in Brookfield DTLA Fund Properties III LLC (“DTLA OP”). 333 South Hope owned Bank of America Plaza (“BOA Plaza”) and EYP Realty owned Ernst & Young Plaza (“EY Plaza”). Both of these Class A commercial properties are located in the Los Angeles Central Business District (the “LACBD”).

Prior to October 15, 2013, Brookfield DTLA had not conducted any business as a separate company and had no material assets or liabilities. The operations of 333 South Hope and EYP Realty (together, the “Predecessor Entities”) contributed to Brookfield DTLA by TRZ on October 15, 2013 are presented in the consolidated and combined financial statements as if they were owned by Brookfield DTLA for all historical periods presented. See Item 8. “Financial Statements and Supplementary Data.”

On October 15, 2013, Brookfield DTLA completed the acquisition of MPG (the “merger”) pursuant to the terms of the Merger Agreement. As part of the transaction, MPG was contributed to New OP in exchange for a preferred interest in New OP. In addition to BOA Plaza and EY Plaza, Brookfield DTLA now owns Wells Fargo Center–North Tower (also known as “Wells Fargo Tower”), Wells Fargo Center–South Tower (also known as “KPMG Tower”), Gas Company Tower and 777 Tower, each of which are Class A office properties located in the LACBD that were formerly owned by MPG.


32
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Brookfield DTLA intends to elect to be taxed as a real estate investment trust (“REIT”) pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax year ended December 31, 2013. Brookfield DTLA intends to conduct its operations so as to qualify as a REIT. Accordingly, Brookfield DTLA will not be subject to U.S. federal income tax, provided that it qualifies as a REIT and distributions to its stockholders generally equal or exceed its taxable income.

Brookfield DTLA receives its income primarily from rental income (including tenant reimbursements) generated from the operations of its office and retail properties, and to a lesser extent, from its parking garages.

Liquidity and Capital Resources

General

Brookfield DTLA’s business requires continued access to adequate cash to fund its liquidity needs. Over the last several years, the Predecessor Entities have maintained their liquidity position through cash generated from operations and contributions from TRZ.

Sources and Uses of Liquidity

Brookfield DTLA’s potential liquidity sources and uses are, among others, as follows:

 
 
Sources
 
 
Uses
 
•
Cash on hand;
 
•
Property operations;
 
•
Cash generated from operations; and
 
•
Capital expenditures;
 
•
Contributions from Brookfield
  DTLA Holdings.
 
•
Payments in connection with loans; and
 
 
 
 
•
Distributions to Brookfield
  DTLA Holdings.

Potential Sources of Liquidity—

Cash on Hand—

As of December 31, 2013, Brookfield DTLA had cash and cash equivalents totaling $196.1 million.

Cash Generated from Operations—

Brookfield DTLA’s cash generated from operations is primarily dependent upon (1) the occupancy level of its portfolio, (2) the rental rates achieved on its leases, and (3) the collectability of rent and other amounts billed to its tenants. Net cash generated from operations is tied to the level of operating expenses, described below under “—Potential Uses of Liquidity.”


33
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Occupancy levels. The following table presents leasing information for Brookfield DTLA for leases in place as of December 31, 2013:

 
 
Square Feet
 
Leased % and In-Place Rents
Property
 
Net
Building
Rentable
 
% of Net
Rentable
 
%
Leased
 
Total
Annualized
Rents (1)
 
Annualized
Rent
$/RSF (2)
 
 
 
 
 
 
 
 
 
 
 
BOA Plaza
 
1,405,428

 
18.65
%
 
92.3
%
 
$
29,255,109

 
$
22.56

Wells Fargo Center–North Tower
 
1,400,639

 
18.59
%
 
83.3
%
 
27,785,261

 
23.81

Gas Company Tower
 
1,345,163

 
17.85
%
 
71.4
%
 
20,273,538

 
21.10

EY Plaza
 
1,234,372

 
16.38
%
 
88.7
%
 
23,454,975

 
21.42

Wells Fargo Center–South Tower
 
1,124,960

 
14.93
%
 
86.0
%
 
24,899,836

 
25.74

777 Tower
 
1,024,835

 
13.60
%
 
78.3
%
 
18,144,370

 
22.61

 
 
7,535,397

 
100.00
%
 
83.5
%
 
$
143,813,089

 
$
22.87

__________
(1)
Annualized rent represents the annualized monthly contractual rent under existing leases as of December 31, 2013. This amount reflects total base rent before any rent abatements as of December 31, 2013 and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for leases in effect as of December 31, 2013 for the twelve months ending December 31, 2014 are approximately $13 million, or $1.99 per leased square foot.
(2)
Annualized rent per rentable square foot represents annualized rent as computed above, divided by leased square feet as of the same date.

The following table presents a summary of lease expirations at Brookfield DTLA for leases in place at December 31, 2013, plus currently available space, for each of the ten calendar years beginning January 1, 2014. This table assumes that none of our tenants exercise renewal options or early termination rights, if any, at or prior to their scheduled expirations.

Year
 
Total Area in
Square Feet
Covered by
Expiring
Leases
 
Percentage
of Leased
Square Feet
 
Annualized
Rent (1)
 
Percentage of
Annualized
Rent
 
Current Rent per
Leased Square Foot (2)
 
Rent per
Leased Square
Foot
at Expiration (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
494,860

 
7.9
%
 
$
11,828,102

 
8.2
%
 
$
23.90

 
$
23.94

2015
 
285,437

 
4.5
%
 
6,583,832

 
4.5
%
 
23.07

 
23.48

2016
 
407,508

 
6.5
%
 
8,741,861

 
6.1
%
 
21.45

 
22.92

2017
 
598,161

 
9.5
%
 
14,621,216

 
10.2
%
 
24.44

 
26.93

2018
 
858,488

 
13.6
%
 
18,948,956

 
13.2
%
 
22.07

 
24.27

2019
 
423,067

 
6.7
%
 
10,963,293

 
7.6
%
 
25.91

 
31.34

2020
 
291,551

 
4.6
%
 
6,907,160

 
4.8
%
 
23.69

 
29.41

2021
 
135,238

 
2.2
%
 
2,619,698

 
1.8
%
 
19.37

 
23.86

2022
 
802,784

 
12.8
%
 
18,940,611

 
13.2
%
 
23.59

 
30.73

2023
 
642,195

 
10.2
%
 
14,352,256

 
10.0
%
 
22.35

 
30.71

Thereafter
 
1,349,973

 
21.5
%
 
29,306,104

 
20.4
%
 
21.71

 
29.35

Total expiring leases
 
6,289,262

 
100.0
%
 
$
143,813,089

 
100.0
%
 
$
22.87

 
$
27.65

Currently available
 
1,246,135

 
 
 
 
 
 
 
 
 
 
Total rentable square feet
7,535,397

 
 
 
 
 
 
 
 
 
 
__________
(1)
Annualized rent represents the annualized monthly contractual rent under existing leases as of December 31, 2013. This amount reflects total base rent before any rent abatements as of December 31, 2013 and is shown on a net basis; thus, for

34
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for leases in effect as of December 31, 2013 for the twelve months ending December 31, 2014 are approximately $13 million, or $1.99 per leased square foot.
(2)
Current rent per leased square foot represents current base rent, divided by total leased square feet as of the same date.
(3)
Rent per leased square foot at expiration represents base rent, including any future rent steps, and thus represents the base rent that will be in place at lease expiration.

Rental Rates and Leasing Activity. Average asking rental rates in the LACBD were essentially flat during the year ended December 31, 2013. Management believes that on average the current in‑place rents are generally close to market in the LACBD.

The following table summarizes leasing activity at Brookfield DTLA for the year ended December 31, 2013:

 
Leasing Activity
 
Percentage Leased
 
 
 
 
Leased square feet as of December 31, 2012
2,284,117

 
86.5
 %
Acquisition – Wells Fargo Center–North Tower
1,176,154

 
 
Acquisition – Gas Company Tower
932,617

 
 
Acquisition – Wells Fargo Center–South Tower
1,019,624

 
 
Acquisition – 777 Tower
792,946

 
 
Revised leased square feet as of December 31, 2012
6,205,458

 
82.4
 %
Expirations
(362,168
)
 
(4.8
)%
New leases
201,990

 
2.7
 %
Renewals
243,982

 
3.2
 %
Leased square feet as of December 31, 2013
6,289,262

 
83.5
 %

Collectability of rent from our tenants. Brookfield DTLA’s rental income depends on collecting rent from tenants, and in particular from its major tenants. In the event of tenant defaults, Brookfield DTLA may experience delays in enforcing its rights as landlord and may incur substantial costs in pursuing legal possession of the tenant’s space and recovery of any amounts due from the tenant. This is particularly true in the case of the bankruptcy or insolvency of a major tenant or where the Federal Deposit Insurance Corporation is acting as receiver.

Contributions from Brookfield DTLA Holdings—

During the year ended December 31, 2013, Brookfield DTLA received contributions from Brookfield DTLA Holdings totaling $195.5 million, of which $189.2 million was used to acquire the common stock of MPG as part of the acquisition and for expenditures totaling $6.3 million for acquisition and transaction costs related to the acquisition of MPG that were incurred by Brookfield DTLA Holdings on behalf of the Company. To the extent that future contributions are needed, Brookfield DTLA Holdings has agreed to fund up to $260 million to the Company, for which it will be entitled to receive a preferred return.


35
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

During the years ended December 31, 2013 and 2012, the Predecessor Entities received contributions from TRZ totaling $5.4 million and $30.7 million, respectively. Contributions received during 2012 were primarily used for the development of and marketing and advertising expenditures related to a retail project at EY Plaza that was completed in the fourth quarter of 2012. The retail portion of EY Plaza contains approximately 330,000 rentable square feet. In the first quarter of 2011, an approximate $50 million renovation began that both modernized the retail premises and created “Taste,” a 500 seat indoor/outdoor dining destination.

Potential Uses of Liquidity—

The following are the projected uses, and some of the potential uses, of cash in the near term.

Property Operations—

The Predecessor Entities have generated sufficient cash from operations to fund their operating activities. In the future, should the cash generated by Brookfield DTLA’s properties, including the properties acquired from MPG, not be sufficient to fund their operations, such cash would be provided by Brookfield DTLA Holdings.

Capital Expenditures—

Capital expenditures fluctuate in any given period, subject to the nature, extent and timing of improvements required to maintain Brookfield DTLA’s properties. Leasing costs also fluctuate in any given period, depending upon such factors as the type of property, the length of the lease, the type of lease, the involvement of external leasing agents and overall market conditions.

Brookfield DTLA expects that leasing activities at its properties, including the properties acquired from MPG, will require material amounts of cash for at least several years. Excluding tenant improvements and leasing commissions, Brookfield DTLA projects spending between $70 million and $75 million over the next ten years, with the majority ($60 million to $65 million) over the next five years. The expected expenditures include, but are not limited to, renovations and physical capital upgrades to Brookfield DTLA’s properties, such as new fire alarm systems, elevator repairs and modernizations, facade work, roof replacement and new turbines.

Payments in Connection with Loans—

As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. BOA Plaza mortgage loans totaling $214.5 million mature on September 7, 2014. Brookfield DTLA intends to refinance these loans prior to or upon maturity. Management expects the refinancing to generate proceeds in excess of the amounts necessary to refinance the existing mortgage loans, pay all fees and other expenses related to the refinancing, and create or maintain related reserves.

Brookfield DTLA currently intends to refinance the existing mortgage loans on Wells Fargo Center–North Tower and Gas Company Tower on or about their scheduled maturity with new debt with a target leverage ratio of approximately 60% to 65%. As the leverage ratio for these loans is significantly above such targeted leverage ratio, Brookfield DTLA anticipates the need for additional cash of

36
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

approximately $273 million to complete these refinancings, all of which will occur prior to 2017. There can be no assurance that any of these refinancings can be accomplished, what terms will be available in the market for these type of financings at the time of any refinancing, or that these refinancings will generate net cash proceeds.

Distributions to Brookfield DTLA Holdings—

During the year ended December 31, 2013, Brookfield DTLA refinanced the mortgage loan secured by EY Plaza and in 2014, Brookfield DLTA intends to refinance the mortgage loans secured by BOA Plaza. If the refinancings generate net cash proceeds to DTLA OP, a subsidiary of Brookfield DTLA, it is anticipated that the net cash proceeds will be distributed by DTLA OP to Brookfield DTLA Holdings.

On March 21, 2014, Brookfield DTLA made a cash distribution to Brookfield DTLA Holdings totaling $70.0 million, which was comprised of $3.5 million in settlement of preferred dividends on the senior participating preferred interest through December 31, 2013 and a return of investment of $66.5 million using proceeds generated by the refinancing of EY Plaza. See “Subsequent Event.”

Indebtedness

As of December 31, 2013, Brookfield DTLA’s debt was comprised of mortgage loans secured by six properties. A summary of our debt as of December 31, 2013 is as follows (in millions, except percentage and year amounts):

 
Principal
Amount
 
Percent of
Total Debt
 
Effective
Interest
Rate
 
Weighted Average
Term to
Maturity
Fixed-rate
$
1,222.5

 
64.43
%
 
5.41
%
 
3 years
Variable-rate swapped to fixed-rate
185.0

 
9.75
%
 
3.93
%
 
7 years
Variable-rate
490.0

 
25.82
%
 
1.93
%
 
4 years
 
$
1,897.5

 
100.00
%
 
4.36
%
 
3 years


37
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Certain information with respect to our indebtedness as of December 31, 2013 is as follows (in thousands, except percentage amounts):

 
Interest
Rate
 
Contractual
Maturity Date
 
Principal
Amount (1)
 
Annual Debt
Service
Floating-Rate Debt
 
 
 
 
 
 
 
Variable-Rate Loans:
 
 
 
 
 
 
 
Wells Fargo Center–South Tower (2)
1.97
%
 
12/1/2016
 
$
290,000

 
$
5,792

777 Tower (3)
1.87
%
 
11/1/2018
 
200,000

 
3,792

Total variable-rate loans
 
 
 
 
490,000

 
9,584

 
 
 
 
 
 
 
 
Variable-Rate Swapped to Fixed-Rate Loan:
 
 
 
 
 
 
 
EY Plaza (4)
3.93
%
 
11/27/2020
 
185,000

 
7,368

Total floating-rate debt
 
 
 
 
675,000

 
16,952

 
 
 
 
 
 
 
 
Fixed-Rate Debt
 
 
 
 
 
 
 
Wells Fargo Center–North Tower
5.70
%
 
4/6/2017
 
550,000

 
31,769

Gas Company Tower
5.10
%
 
8/11/2016
 
458,000

 
23,692

BOA Plaza
5.06
%
 
9/7/2014
 
170,191

 
8,736

BOA Plaza
6.26
%
 
9/7/2014
 
44,321

 
2,813

Total fixed-rate rate debt
 
 
 
 
1,222,512

 
67,010

Total debt
 
 
 
 
1,897,512

 
$
83,962

Debt discounts
 
 
 
 
(11,907
)
 
 
Total debt, net
 
 
 
 
$
1,885,605

 
 
__________
(1)
Assuming no payment has been made in advance of its due date.
(2)
This loan bears interest at LIBOR plus 1.80%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 4.75%.
(3)
This loan bears interest at LIBOR plus 1.70%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 5.75%.
(4)
This loan bears interest at LIBOR plus 1.75%. As required by the loan agreement, we have entered into an interest rate swap agreement to hedge this loan, which effectively fixes the LIBOR portion of the interest rate at 2.178%. The effective interest rate of 3.93% includes interest on the swap.

Mortgage Loans Assumed in Connection with the MPG Acquisition

On October 15, 2013, Brookfield DTLA assumed $1.5 billion of mortgage loans secured by Wells Fargo Center–North Tower, Gas Company Tower, Wells Fargo Center–South Tower and 777 Tower in connection with the MPG acquisition.

In connection with Wells Fargo Center–North Tower loan assumption, Brookfield DTLA Holdings agreed to deposit a total of $10.0 million into a collateral reserve account held by the lender, of which $5.0 million was deposited on October 15, 2013. The remaining $5.0 million will be paid in installments of $1.25 million in April 2014, October 2014, April 2015, and October 2015.


38
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Mortgage Loan Refinancings

Wells Fargo Center–South Tower—

On November 8, 2013, Brookfield DTLA Holdings refinanced the $334.6 million mortgage loan secured by the Wells Fargo Center–South Tower office property, which was acquired by Brookfield DTLA in the MPG acquisition. In connection with the refinancing, Brookfield DTLA repaid $44.6 million of principal.

The new $290.0 million mortgage loan bears interest at a rate equal to LIBOR plus 1.80%, matures on December 1, 2016 and requires the payment of interest-only until maturity. Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). The mortgage loan can be repaid at any time prior to maturity, in whole or in part, with the payment of a prepayment fee (as specified in the loan agreement) until December 1, 2015, after which the loan can be repaid without penalty.

EY Plaza—

On November 27, 2013, Brookfield DTLA Holdings refinanced the mortgage loan secured by the EY Plaza office property and received net proceeds totaling $183.3 million, of which $99.5 million was used to repay the mortgage loan that previously encumbered the property with the remaining $83.8 million to be used for general corporate purposes.

On March 21, 2014, Brookfield DTLA made a cash distribution to Brookfield DTLA Holdings totaling $70.0 million, which was comprised of $3.5 million in settlement of preferred dividends on the senior participating preferred interest through December 31, 2013 and a return of investment of $66.5 million using proceeds generated by the refinancing of EY Plaza. See “Subsequent Event.”

The new $185.0 million mortgage loan bears interest at a rate equal to LIBOR plus 1.75%, matures on November 27, 2020 and requires the payment of interest-only until December 1, 2015, when the loan will require the payment of principal and interest until maturity. The mortgage loan can be repaid at any time prior to maturity, in whole or in part, without penalty.

Non-Recourse Carve Out Guarantees

All of Brookfield DTLA’s $1.9 billion of mortgage debt is subject to “non-recourse carve out” guarantees that expire upon elimination of the underlying loan obligations. Under these guarantees, these otherwise non‑recourse loans can become partially or fully recourse against Brookfield DTLA Holdings if certain triggering events occur. Although these events differ from loan to loan, some of the common events include:

•
The special purpose property-owning subsidiary’s or Brookfield DTLA Holdings’ filing a voluntary petition for bankruptcy;

•
The special purpose property-owning subsidiary’s failure to maintain its status as a special purpose entity;


39
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

•
Subject to certain conditions, the special purpose property-owning subsidiary’s failure to obtain the lender’s written consent prior to any subordinate financing or other voluntary lien encumbering the associated property; and

•
Subject to certain conditions, the special purpose property-owning subsidiary’s failure to obtain the lender’s written consent prior to a transfer or conveyance of the associated property, including, in some cases, indirect transfers in connection with a change in control of Brookfield DTLA Holdings or Brookfield DTLA.

In addition, other items that are customarily recourse to a non-recourse carve out guarantor include, but are not limited to, the payment of real property taxes, the breach of representations related to environmental issues or hazardous substances, physical waste of the property, liens which are senior to the mortgage loan and outstanding security deposits.

The maximum amount Brookfield DTLA Holdings would be required to pay under a “non‑recourse carve out” guarantee is the principal amount of the loan (or a total of $1.9 billion as of December 31, 2013 for all loans). This maximum amount does not include liabilities related to environmental issues or hazardous substances. Losses resulting from the breach of our loan agreement representations related to environmental issues or hazardous substances are generally recourse to Brookfield DTLA Holdings pursuant to our “non-recourse carve out” guarantees and any such losses would be in addition to the total principal amounts of our loans. The potential losses are not quantifiable and can be material in certain circumstances, depending on the severity of the environmental or hazardous substance issues. Since each of our non-recourse loans is secured by the office building owned by the special purpose property-owning subsidiary, the amount due to the lender from Brookfield DTLA Holdings in the event a “non-recourse carve out” guarantee is triggered could subsequently be partially or fully mitigated by the net proceeds received from any disposition of the office building; however, such proceeds may not be sufficient to cover the maximum potential amount due, depending on the particular asset.

Debt Reporting

Pursuant to the terms of certain of our mortgage loan agreements, Brookfield DTLA is required to report a debt service coverage ratio (“DSCR”) calculated using the formulas specified in the underlying loan agreements. We have submitted the required reports to the lenders for the measurement periods ended December 31, 2013 and were in compliance with the amounts required by the loan agreements, with the exception of Gas Company Tower.

Under the Gas Company Tower mortgage loan, we reported a DSCR of 1.02 to 1.00, calculated using actual debt service under the loan, and a DSCR of 0.81 to 1.00, calculated using actual debt service plus a hypothetical principal payment using a 30-year amortization schedule. Because the reported DSCR using the actual debt service plus a hypothetical principal payment was less than 1.00 to 1.00, the lender could seek to remove Brookfield Properties Management (CA) Inc. as property manager of Gas Company Tower.


40
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Pursuant to the terms of the Gas Company Tower, Wells Fargo Center–South Tower, Wells Fargo Center–North Tower, and EY Plaza mortgage loan agreements, we are required to provide annual audited financial statements of Brookfield DTLA Holdings to the lenders or agents. The receipt of any opinion other than an “unqualified” audit opinion on our annual audited financial statements is an event of default under the loan agreements for the properties listed above. If an event of default occurs, the lenders have the right to pursue the remedies contained in the loan documents, including acceleration of all or a portion of the debt and foreclosure.

Results of Operations—Brookfield DTLA

Comparison of the Year Ended December 31, 2013 to December 31, 2012

Consolidated and Combined Statements of Operations Information
(In millions, except percentage amounts)
 
For the Year Ended
 
Increase/
(Decrease)
 
%
Change
 
12/31/2013
 
12/31/2012
 
 
Revenue:
 
 
 
 
 
 
 
Rental income
$
78.0

 
$
51.8

 
$
26.2

 
51
%
Tenant reimbursements
40.9

 
28.0

 
12.9

 
46
%
Parking
16.6

 
10.2

 
6.4

 
63
%
Interest and other
3.2

 
2.9

 
0.3

 
10
%
Total revenue
138.7

 
92.9

 
45.8

 
49
%
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental property operating and maintenance
47.4

 
33.3

 
14.1

 
42
%
Real estate taxes
14.6

 
8.6

 
6.0

 
70
%
Parking
4.0

 
2.7

 
1.3

 
48
%
Other expense
9.1

 
1.2

 
7.9

 
658
%
Depreciation and amortization
46.7

 
29.0

 
17.7

 
61
%
Interest
32.2

 
17.9

 
14.3

 
80
%
Total expenses
154.0

 
92.7

 
61.3

 
66
%
Net (loss) income
$
(15.3
)
 
$
0.2

 
$
(15.5
)
 
 

Rental Income

Rental income increased $26.2 million, or 51%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012, primarily due to the acquisition of MPG, which contributed $21.6 million to rental revenue during the fourth quarter of 2013. In addition, the completion of a retail project at EY Plaza during the fourth quarter of 2012 increased rental income during 2013 by $3.0 million. The modernized retail premises of EY Plaza contain approximately 330,000 rentable square feet and feature “Taste,” a 500 seat indoor/outdoor dining destination.


41
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Tenant Reimbursements Revenue

Tenant reimbursements revenue increased $12.9 million, or 46%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012, primarily due to the acquisition of MPG, which contributed $10.4 million to tenant reimbursements revenue during the fourth quarter of 2013. In addition, the completion of the EY Plaza retail project increased tenant reimbursements revenue during 2013 by $1.1 million.

Parking Revenue

Parking revenue increased $6.4 million, or 63%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012, primarily due to the acquisition of MPG, which contributed $5.1 million to parking revenue during the fourth quarter of 2013.

Interest and Other Revenue

Interest and other revenue increased $0.3 million, or 10%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012, mainly due to various sundry amounts.

Rental Property Operating and Maintenance Expense

Rental property operating and maintenance expense increased $14.1 million, or 42%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012, primarily due to the acquisition of MPG, which contributed $11.1 million to rental property operating and maintenance expense during the fourth quarter of 2013. In addition, the completion of the EY Plaza retail project increased rental property operating and maintenance expense during 2013 by $1.7 million.

Real Estate Taxes Expense

Real estate taxes expense increased $6.0 million, or 70%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012, primarily due to the acquisition of MPG, which contributed $4.4 million to real estate taxes expense during the fourth quarter of 2013. In addition, higher property valuations in Los Angeles County increased real estate taxes expense for BOA Plaza and EY Plaza during 2013.

Parking Expense

Parking expense increased $1.3 million, or 48%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012, primarily due to the acquisition of MPG, which contributed $1.1 million to parking expense during the fourth quarter of 2013.

Other Expense

Other expense increased $7.9 million for the year ended December 31, 2013 as compared to the year ended December 31, 2012 as a result of marketing and advertising expenditures leading up to the opening of the EY Plaza retail project during the fourth quarter of 2012 as well as expenditures totaling $6.8 million for acquisition and transaction costs related to the acquisition of MPG that were incurred by Brookfield DTLA Holdings on behalf of the Company.


42
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Depreciation and Amortization Expense

Depreciation and amortization expense increased $17.7 million, or 61%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012, primarily due to the acquisition of MPG, which contributed $16.6 million to depreciation and amortization expense during the fourth quarter of 2013.

Interest Expense

Interest expense increased $14.3 million, or 80%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012, primarily due to the acquisition of MPG, which contributed $14.4 million to interest expense during the fourth quarter of 2013.

Comparison of the Year Ended December 31, 2012 to December 31, 2011

Combined Statements of Operations Information
(In millions, except percentage amounts)
 
For the Year Ended
 
Increase/
(Decrease)
 
%
Change
 
12/31/2012
 
12/31/2011
 
 
Revenue:
 
 
 
 
 
 
 
Rental income
$
51.8

 
$
51.9

 
$
(0.1
)
 
—
 %
Tenant reimbursements
28.0

 
27.9

 
0.1

 
—
 %
Parking
10.2

 
9.6

 
0.6

 
6
 %
Interest and other
2.9

 
3.3

 
(0.4
)
 
(12
)%
Total revenue
92.9

 
92.7

 
0.2

 
—
 %
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental property operating and maintenance
33.3

 
32.6

 
0.7

 
2
 %
Real estate taxes
8.6

 
8.2

 
0.4

 
5
 %
Parking
2.7

 
2.2

 
0.5

 
23
 %
Other expense
1.2

 
1.7

 
(0.5
)
 
(30
)%
Depreciation and amortization
29.0

 
30.7

 
(1.7
)
 
(6
)%
Interest
17.9

 
18.1

 
(0.2
)
 
(1
)%
Total expenses
92.7

 
93.5

 
(0.8
)
 
(1
)%
Net income (loss)
$
0.2

 
$
(0.8
)
 
$
1.0

 
 

Rental Income

Rental income for the year ended December 31, 2012 was relatively flat compared to the year ended December 31, 2011.

Parking Revenue

Parking revenue increased $0.6 million, or 6%, for the year ended December 31, 2012 as compared to the year ended December 31, 2011, primarily as a result of increased revenues at the BOA Plaza garage.


43
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Interest and Other Revenue

Interest and other revenue decreased $0.4 million, or 12%, for the year ended December 31, 2012 as compared to the year ended December 31, 2011, mainly due to miscellaneous sundry amounts.

Parking Expense

Parking expense increased $0.5 million, or 23%, for the year ended December 31, 2012 as compared to the year ended December 31, 2011 commensurate with an increase in parking revenue.

Other Expense

Other expense decreased $0.5 million, or 30%, for the year ended December 31, 2012 as compared to the year ended December 31, 2011, primarily due to various sundry amounts.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased $1.7 million, or 6%, for the year ended December 31, 2012 as compared to the year ended December 31, 2011, primarily due to various lease expirations in 2011.

Results of Operations—MPG Office Trust, Inc.

The acquisition of MPG will have a material impact on the future results of operations of Brookfield DTLA. Brookfield DTLA’s net loss of $15.3 million for the year ended December 31, 2013 includes $16.4 million of losses (including $6.8 million of transaction costs) attributable to the MPG properties. The operating losses generated by the MPG properties can be attributed to several factors:

•
As of December 31, 2013, the MPG properties were 79.6% leased as compared to 90.6% leased for the Predecessor Entities’ properties. This lower level of occupancy results in lower proportionate net operating income.

•
Brookfield DTLA assumed debt totaling $1.5 billion upon the acquisition of MPG. The MPG properties, namely Gas Company Tower and Wells Fargo Center–North Tower, carry higher levels of debt than the Predecessor Entities’ properties, which result in higher proportional interest charges. Interest expense related to the debt on the MPG properties for the year ending December 31, 2014 is estimated to be approximately $65.0 million, compared to interest expense of $17.7 million recognized for the Predecessor Entities’ properties for the year ended December 31, 2013.

•
Depreciation and amortization charges attributable to the MPG properties, including amounts attributable to amortization of intangible assets and liabilities, will be higher on a relative basis than the Predecessor Entities’ properties. Depreciation and amortization for the Predecessor Entities’ properties aggregated $28.9 million for the year ended December 31, 2013. Depreciation and amortization for the MPG properties for the year ending December 31, 2014 is estimated to be approximately $74.8 million.


44
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

MPG previously filed annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains an Internet website that contains reports, proxy statements and other information about issuers, like MPG, who file electronically with the SEC. The reports and other information previously filed by MPG with the SEC are available at http://www.sec.gov.

Comparison of the Nine Months Ended September 30, 2013 to September 30, 2012

Consolidated Statements of Operations Information
(In millions, except percentage amounts)
 
For the Nine Months Ended
 
Increase/
(Decrease)
 
%
Change
 
9/30/2013
 
9/30/2012
 
 
Revenue:
 
 
 
 
 
 
 
Rental income
$
73.6

 
$
74.4

 
$
(0.8
)
 
(1
)%
Tenant reimbursements
39.8

 
38.4

 
1.4

 
4
 %
Parking
16.7

 
17.1

 
(0.4
)
 
(2
)%
Management, leasing and development services
0.2

 
2.2

 
(2.0
)
 
(91
)%
Interest and other
0.6

 
14.7

 
(14.1
)
 
(96
)%
Total revenue
130.9

 
146.8

 
(15.9
)
 
(11
)%
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental property operating and maintenance
31.2

 
32.3

 
(1.1
)
 
(3
)%
Real estate taxes
11.9

 
11.5

 
0.4

 
3
 %
Parking
4.4

 
4.5

 
(0.1
)
 
(2
)%
General and administrative
25.2

 
17.7

 
7.5

 
42
 %
Other expense
—

 
2.8

 
(2.8
)
 
(100
)%
Depreciation and amortization
34.9

 
36.5

 
(1.6
)
 
(4
)%
Impairment of long-lived assets
—

 
2.1

 
(2.1
)
 
(100
)%
Interest
65.1

 
74.5

 
(9.4
)
 
(13
)%
Total expenses
172.7

 
181.9

 
(9.2
)
 
(5
)%
Loss from continuing operations before equity in
    net income of unconsolidated joint venture
(41.8
)
 
(35.1
)
 
(6.7
)
 
 
Equity in net income of unconsolidated joint venture
—

 
14.3

 
(14.3
)
 
 
Loss from continuing operations
$
(41.8
)
 
$
(20.8
)
 
$
(21.0
)
 
 
Income from discontinued operations
$
155.4

 
$
206.5

 
$
(51.1
)
 
 

Tenant Reimbursements Revenue

Tenant reimbursements revenue increased $1.4 million, or 4%, for the nine months ended September 30, 2013 as compared to September 30, 2012, mainly due to increased collections from certain tenants that was partially offset by lower occupancy as a result of lease expirations during 2013.

Management, Leasing and Development Services Revenue

Management, leasing and development services revenue decreased $2.0 million, or 91%, for the nine months ended September 30, 2013 as compared to September 30, 2012, due to a reduction in leasing commissions earned from MPG’s joint venture with Beacon Capital Partners, LLC (“Beacon Capital”) (the “joint venture”).


45
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Interest and Other Revenue

Interest and other revenue decreased $14.1 million, or 96%, for the nine months ended September 30, 2013 as compared to September 30, 2012, primarily due to a termination payment received during 2012 from Beacon Capital related to the joint venture.

Rental Property Operating and Maintenance Expense

Rental property operating and maintenance expense decreased $1.1 million, or 3%, for the nine months ended September 30, 2013 as compared to September 30, 2012, mainly due to lower occupancy as a result of lease expirations during 2013.

General and Administrative Expense

General and administrative expense increased $7.5 million, or 42%, for the nine months ended September 30, 2013 as compared to September 30, 2012, mainly due to increased professional services fees related to the merger with Brookfield DTLA and accrual of a lease takeover obligation related to a former tenant.

Other Expense

Other expense decreased $2.8 million, or 100%, for the nine months ended September 30, 2013 as compared to September 30, 2012, primarily due to a payment in 2012 of $2.0 million for a release of all claims under the guaranty of partial payment associated with the 3800 Chapman mortgage loan (a property that was disposed of by MPG during 2012).

Depreciation and Amortization Expense

Depreciation and amortization expense decreased $1.6 million, or 4%, for the nine months ended September 30, 2013 as compared to September 30, 2012, as a result of lower amortization of lease-related costs as a result of lease expirations during 2013.

Impairment of Long-Lived Assets

Impairment of long-lived assets decreased $2.1 million, or 100%, for the nine months ended September 30, 2013 as compared to September 30, 2012, as a result of an impairment charge recorded in 2012 to reduce the carrying amount of an investment in real estate to estimated fair value, less costs to sell, for which there was no comparable activity during 2013.

Interest Expense

Interest expense decreased $9.4 million, or 13%, for the nine months ended September 30, 2013 as compared to September 30, 2012, primarily due to the expiration of the Wells Fargo Center–South Tower interest rate swap on August 9, 2012.


46
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Equity in Net Income of Unconsolidated Joint Venture

Equity in net income of unconsolidated joint venture decreased $14.3 million for the nine months ended September 30, 2013 as compared to September 30, 2012 due to the recognition of MPG’s 20% share of the gain on the sale of real estate of Wells Fargo Center–Denver and San Diego Tech Center by the joint venture in 2012, with no comparable activity during 2013.

Discontinued Operations

MPG’s income from discontinued operations of $155.4 million for the nine months ended September 30, 2013 is primarily comprised of a gain on sale of real estate totaling $157.3 million related to the disposition of the US Bank Tower, the Westlawn off-site parking garage and Plaza Las Fuentes. MPG’s income from discontinued operations of $206.5 million for the nine months ended September 30, 2012 is primarily comprised of a $195.0 million gain on settlement of debt recorded in connection with the disposition of Brea Corporate Place and Brea Financial Commons (the “Brea Campus”), Stadium Towers Plaza, 700 North Central, 801 North Brand, Glendale Center and 500 Orange Tower and a $66.7 million gain on the sale of real estate recorded in connection with the disposition of the Brea Campus, Stadium Towers Plaza, the City Tower development site, 700 North Central, 801 North Brand, Glendale Center and 500 Orange Tower.


47
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Comparison of the Year Ended December 31, 2012 to December 31, 2011

Consolidated Statements of Operations Information
(In millions, except percentage amounts)
 
For the Year Ended
 
Increase/
(Decrease)
 
%
Change
 
12/31/2012
 
12/31/2011
 
 
Revenue:
 
 
 
 
 
 
 
Rental income
$
99.4

 
$
110.1

 
$
(10.7
)
 
(10
)%
Tenant reimbursements
50.9

 
53.6

 
(2.7
)
 
(5
)%
Parking
22.7

 
22.8

 
(0.1
)
 
—
 %
Management, leasing and development services
2.4

 
6.8

 
(4.4
)
 
(65
)%
Interest and other
15.1

 
1.8

 
13.3

 
739
 %
Total revenue
190.5

 
195.1

 
(4.6
)
 
(2
)%
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental property operating and maintenance
43.3

 
42.3

 
1.0

 
2
 %
Real estate taxes
15.5

 
15.4

 
0.1

 
1
 %
Parking
6.1

 
6.2

 
(0.1
)
 
(2
)%
General and administrative
24.4

 
24.2

 
0.2

 
1
 %
Other expense
4.8

 
1.9

 
2.9

 
153
 %
Depreciation and amortization
48.5

 
51.7

 
(3.2
)
 
(6
)%
Impairment of long-lived assets
2.1

 
—

 
2.1

 
100
 %
Interest
96.4

 
103.7

 
(7.3
)
 
(7
)%
Total expenses
241.1

 
245.4

 
(4.3
)
 
(2
)%
Loss from continuing operations before equity in
    net income of unconsolidated joint venture and
    gain on sale of interest in unconsolidated joint venture
(50.6
)
 
(50.3
)
 
(0.3
)
 
 
Equity in net income of unconsolidated joint venture
14.3

 
0.1

 
14.2

 
 
Gain on sale of interest in unconsolidated joint venture
50.1

 
—

 
50.1

 
 
Income (loss) from continuing operations
$
13.8

 
$
(50.2
)
 
$
64.0

 
 
Income from discontinued operations
$
382.1

 
$
148.5

 
$
233.6

 
 

Rental Income

Rental income decreased $10.7 million, or 10%, for the year ended December 31, 2012 as compared to December 31, 2011, primarily due to decreases in occupancy as a result of lease expirations during 2012.

Tenant Reimbursements Revenue

Tenant reimbursements revenue decreased $2.7 million, or 5%, for the year ended December 31, 2012 as compared to December 31, 2011, primarily due to lower occupancy as a result of lease expirations during 2012.


48
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Management, Leasing and Development Services Revenue

Management, leasing and development services revenue decreased $4.4 million, or 65%, for the year ended December 31, 2012 as compared to December 31, 2011, mainly due to a reduction in leasing commissions earned from the joint venture. Additionally, management and advisory fee revenue earned from the joint venture declined due to fewer properties under management as a result of the disposition by the joint venture of Wells Fargo Center–Denver and San Diego Tech Center on March 30, 2012.

Interest and Other Revenue

Interest and other revenue increased $13.3 million for the year ended December 31, 2012 as compared to December 31, 2011, primarily due to a termination payment received from Beacon Capital related to the joint venture.

Other Expense

Other expense increased $2.9 million, or 153%, for the year ended December 31, 2012 as compared to December 31, 2011, primarily due to the accrual of alternative minimum tax resulting from taxable income generated by property dispositions during 2012, for which there was no comparable activity during 2011.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased $3.2 million, or 6%, for the year ended December 31, 2012 as compared to December 31, 2011, primarily due to lower amortization of lease‑related costs during 2012 as a result of lease terminations and the sale of the Westin® Pasadena Hotel during 2011.

Impairment of Long-Lived Assets

For the year ended December 31, 2012, MPG recorded a $2.1 million impairment charge to reduce the carrying amount of an investment in real estate to estimated fair value, less costs to sell, for which there was no comparable activity during 2011.

Interest Expense

Interest expense decreased $7.3 million, or 7%, for the year ended December 31, 2012 as compared to December 31, 2011, primarily due to the expiration of the Wells Fargo Center–South Tower interest rate swap on August 9, 2012.

Equity in Net Income of Unconsolidated Joint Venture

Equity in net income of unconsolidated joint venture increased $14.2 million for the year ended December 31, 2012 reflecting MPG’s 20% share of the gain on sale of Wells Fargo Center–Denver by the joint venture, for which there was no comparable activity during 2011.


49
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Gain on Sale of Interest in Unconsolidated Joint Venture

Gain on sale of interest in unconsolidated joint venture increased $50.1 million for the year ended December 31, 2012 as a result of the sale of MPG’s remaining 20% interest in the joint venture to an affiliate of Beacon Capital, for which there was no comparable activity during 2011.

Discontinued Operations

Income from discontinued operations of $382.1 million for the year ended December 31, 2012 is comprised primarily of gains on settlement of debt related to the disposition of 700 North Central, 801 North Brand, the Brea Campus, Stadium Towers Plaza, Glendale Center, 500 Orange Tower, Two California Plaza and 3800 Chapman and gains on sale of real estate related to the disposition of the properties mentioned above and the City Tower development site. Income from discontinued operations of $148.5 million for the year ended December 31, 2011 is comprised primarily of gains on settlement of debt related to the disposition of 550 South Hope, City Tower, 2600 Michelson and 701 North Brand and gains on sale of real estate related to the disposition of the Westin® Pasadena Hotel, City Tower, 550 South Hope and 701 North Brand.

Cash Flow

The following summary discussion of Brookfield DTLA’s cash flow is based on the consolidated and combined statements of cash flows in Item 8. “Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in its cash flow for the periods presented below.

 
For the Year Ended December 31,
 
Increase/
(Decrease)
 
2013
 
2012
 
 
(In thousands)
Net cash (used in) provided by operating activities
$
(2,208
)
 
$
15,159

 
$
(17,367
)
Net cash used in investing activities
(39,868
)
 
(40,989
)
 
(1,121
)
Net cash provided by financing activities
232,440

 
24,025

 
208,415


Operating Activities

Brookfield DTLA’s cash flow from operating activities is primarily dependent upon (1) the occupancy level of its portfolio, (2) the rental rates achieved on its leases, and (3) the collectability of rent and other amounts billed to tenants and is also tied to the level of operating expenses. Net cash used in operating activities for the year ended December 31, 2013 totaled $2.2 million compared to net cash provided by operating activities of $15.2 million for the year ended December 31, 2012. The $17.4 million decrease was primarily the result of operating losses generated by the properties acquired from MPG.


50
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Investing Activities

Brookfield DTLA’s cash flow from investing activities is generally impacted by the amount of capital expenditures for its properties. Net cash used in investing activities totaled $39.9 million for the year ended December 31, 2013, compared to net cash used in investing activities of $41.0 million during the year ended December 31, 2012. Net cash used to acquire the MPG portfolio totaled $33.5 million, with various capital and restricted cash changes generating the remainder of the change between 2013 and 2012.

Financing Activities

Brookfield DTLA’s cash flow from financing activities is generally impacted by its loan activity, less any dividends and distributions paid to stockholders and distributions to affiliated companies, if any. Net cash provided by financing activities totaled $232.4 million for the year ended December 31, 2013, compared to net cash provided by financing activities of $24.0 million during the year ended December 31, 2012. The primary driver of the increase was the $189.2 million contributed by Brookfield DTLA Holdings to the Company to fund the acquisition of the common stock of MPG.

Off-Balance Sheet Arrangements

Brookfield DTLA and the Predecessor Entities did not have any off-balance sheet arrangements as of December 31, 2013 and 2012, respectively.

Contractual Obligations

The following table provides information with respect to Brookfield DTLA’s commitments as of December 31, 2013, including any guaranteed or minimum commitments under contractual obligations.

 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
 
(In thousands)
Principal payments on
     mortgage loans
$
214,512

 
$
311

 
$
751,831

 
$
554,026

 
$
204,232

 
$
172,600

 
$
1,897,512

Interest payments –
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate debt (1)
63,340

 
55,461

 
46,331

 
8,269

 
—

 
—

 
173,401

Variable-rate swapped to
     fixed rate debt
7,458

 
7,368

 
7,306

 
7,130

 
6,985

 
13,104

 
49,351

Variable-rate debt (2)
9,584

 
9,584

 
9,134

 
3,792

 
3,169

 
—

 
35,263

Tenant-related commitments (3)
48,320

 
2,032

 
580

 
8,109

 
—

 
9,040

 
68,081

 
$
343,214

 
$
74,756

 
$
815,182

 
$
581,326

 
$
214,386

 
$
194,744

 
$
2,223,608

__________
(1)
Interest payments on fixed-rate debt are calculated based on contractual interest rates and scheduled maturity dates.
(2)
Interest payments on variable-rate debt are calculated based on scheduled maturity dates and the one-month LIBOR rate in place on the debt as of December 31, 2013 plus the contractual spread per the loan agreements.
(3)
Tenant-related commitments include tenant improvements and leasing commissions and are based on executed leases as of December 31, 2013.


51
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Related Party Transactions

Management Agreements

The Predecessor Entities entered into arrangements with Brookfield Properties Management LLC, which is affiliated through common ownership with BPO, under which the affiliate provides property management and various other services. On October 15, 2013, these agreements were transferred to BOP Management Inc., an affiliate of BPO. The MPG properties entered into similar arrangements with BOP Management Inc. after the closing of the acquisition on October 15, 2013. Property management fees under these agreements are calculated based on 3.0% of rents collected (as defined in the management agreements).

A summary of costs incurred by Brookfield DTLA and the Predecessor Entities under these arrangements is as follows (in thousands):

 
For the Year Ended December 31,
 
2013
 
2012
 
2011
Management fees expense
$
3,667

 
$
2,670

 
$
2,748

General, administrative and reimbursable expenses
1,190

 
1,278

 
1,196

Leasing and construction management fees
786

 
1,137

 
2,273


Insurance Agreement

BOA Plaza and EY Plaza are covered under an insurance policy entered into by BPO that provides all risk property and business interruption for BPO’s commercial portfolio with an aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $300.0 million of earthquake insurance. The MPG properties are covered under an insurance policy that provides all risk property and business interruption with an aggregate limit of $1.25 billion and a $130.0 million aggregate limit of earthquake insurance.

In addition, BOA Plaza and EY Plaza are covered by a terrorism insurance policy that provides aggregate coverage of $4.0 billion for all of BPO’s U.S. properties. The MPG properties are covered by a terrorism insurance policy with a $1.25 billion aggregate limit. Brookfield DTLA is in compliance with the contractual obligations regarding terrorism insurance contained in such agreements.

Insurance premiums for BOA Plaza and EY Plaza are paid by an affiliate company under common control through BPO. Brookfield DTLA reimburses the affiliate company for the actual cost of such premiums.

A summary of costs incurred by the Predecessor Entities under this arrangement is as follows (in thousands):

 
For the Year Ended December 31,
 
2013
 
2012
 
2011
Insurance expense
$
4,949

 
$
4,664

 
$
4,489



52
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Litigation

See Part I, Item 3. “Legal Proceedings.”

Critical Accounting Policies

Critical accounting policies are those that are both significant to the overall presentation of Brookfield DTLA’s financial condition and results of operations and require management to make difficult, complex or subjective judgments. Brookfield DTLA considers the following to be its critical accounting policies:

Business Combinations

Purchase accounting is applied to the assets and liabilities related to all real estate investments acquired from third parties. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, the purchase price of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and tenant improvements, and identifiable intangible assets and liabilities, consisting of the value of above- and below-market leases, in-place leases, and tenant relationships, based in each case on their fair value. Management may be required to use considerable judgment when allocating the fair value of assets and liabilities acquired.

The principal valuation technique employed by Brookfield DTLA in determining the fair value of identified assets acquired and liabilities assumed is the income approach, which is then compared to the cost approach. Tangible values for investments in real estate are calculated based on replacement costs for like type quality assets. Above- and below-market lease values are determined by comparing in-place rents with current market rents. In‑place lease amounts are determined by calculating the potential lost revenue during the replacement of the current leases in place. Leasing commissions and legal/marketing fees are determined based upon market allowances pro-rated over the remaining lease terms. Mortgage loans assumed in an acquisition are analyzed using current market terms for similar debt.

Consolidation

The Company consolidates entities in which it has a controlling financial interest. In determining whether Brookfield DTLA has a controlling financial interest in an entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity (“VIE”) and Brookfield DTLA is the primary beneficiary.

A VIE is broadly defined as an entity where either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support.


53
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. Brookfield DTLA qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE.

The Company determined that New OP is a VIE and as a result of having the power to direct the significant activities of New OP and exposure to the economic performance of New OP, Brookfield DTLA meets the two conditions for being the primary beneficiary. Brookfield DTLA is required to continually evaluate its VIE relationships and consolidation conclusion.

Impairment Evaluation

Real estate is reviewed for impairment if events or changes in circumstances indicate that the carrying amount of the real estate may not be recoverable. In such an event, a comparison is made of the current and projected operating cash flows of the property into the foreseeable future on an undiscounted basis to the carrying amount of the real estate. If the undiscounted cash flows expected to be generated by an asset are less than its carrying amount, an impairment provision would be recorded to write down the carrying amount of such asset to its fair value. Brookfield DTLA assesses fair value based on estimated cash flow projections utilizing appropriate discount and capitalization rates and available market information. Projections of future cash flow take into account the specific business plan for the property and management’s best estimate of the most probable set of economic conditions expected to prevail in the market. The assessment as to whether our investment in real estate is impaired is highly subjective. The calculations involve management’s best estimate of the holding period, market comparables, future occupancy levels, rental rates, capitalization rates, lease‑up periods and capital requirements for each property. A change in any one of more of these factors could materially impact whether a property is impaired as of any given valuation date. Management believes no impairment of Brookfield DTLA’s or the Predecessor Entities’ real estate assets existed at December 31, 2013 and 2012, respectively.

Revenue Recognition

Rental income from leases providing for periodic increases in base rent is recognized on a straight-line basis over the noncancelable term of the respective leases. Any amounts paid to a tenant for improvements owned or costs incurred by the tenant are treated as tenant inducements. Amortization of tenant inducements is recorded on a straight-line basis over the term of the related lease as a reduction of rental income.

Differences between rental income and the contractual amounts due are recorded as deferred rents receivable. Recoveries of operating expenses and real estate taxes are recorded as tenant reimbursements in the period during which the expenses are incurred.

54
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Allowance for Doubtful Accounts

Brookfield DTLA periodically evaluates the collectability of amounts due from tenants and maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under the lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. Brookfield DTLA also evaluates its deferred rent receivable to consider if an allowance is necessary. The allowance for doubtful accounts totaled $0.4 million as of December 31, 2013. There was no allowance for doubtful accounts necessary as of December 31, 2012.

Effects of Inflation

Substantially all of Brookfield DTLA’s office leases provide for separate real estate tax and operating expense escalations. In addition, many of the leases provide for fixed base rent increases. Brookfield DTLA believes that inflationary increases may be at least partially offset by the contractual rent increases and expense escalations described above.

Recent Accounting Pronouncements

In February 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The objective of this ASU is to improve the reporting of reclassifications of various components out of accumulated other comprehensive income and requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the statement of operations or as a separate disclosure in the accompanying notes to the financial statements. The guidance in ASU 2013-02 became effective for Brookfield DTLA beginning January 1, 2013. The implementation of this pronouncement did not have a material impact on Brookfield DTLA’s consolidated financial statements.

Subsequent Event

On March 21, 2014, Brookfield DTLA made a cash distribution to Brookfield DTLA Holdings totaling $70.0 million, which was comprised of $3.5 million in settlement of preferred dividends on the senior participating preferred interest through December 31, 2013 and a return of investment of $66.5 million using proceeds generated by the refinancing of EY Plaza.



55

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

Interest rate fluctuations may impact Brookfield DTLA’s results of operations and cash flow. As of December 31, 2013, $675.0 million, or 35.6%, of Brookfield DTLA’s debt bears interest at variable rates based on one-month LIBOR. Brookfield DTLA does not trade in financial instruments for speculative purposes.

Brookfield DTLA’s interest rate swap and cap agreements outstanding as of December 31, 2013 are as follows (in thousands, except rate and date information):

 
 
Notional
Value
 
Strike
Rate
 
Effective
Date 
 
Expiration
Date
 
Fair
Value
Interest rate swap
 
$
185,000

 
2.178
%
 
11/27/2013
 
11/2/2020
 
$
1,007

Interest rate cap
 
290,000

 
4.750
%
 
11/8/2013
 
12/1/2016
 
352

Interest rate cap
 
200,000

 
5.750
%
 
10/15/2013
 
10/15/2018
 
1,248

 
 
 
 
 
 
 
 
 
 
$
2,607


Interest Rate Sensitivity

The impact of an assumed 50 basis point movement in interest rates would have had the following impact during the year ended December 31, 2013 (in thousands):

 
 
 
Fair Value of
 
Interest
Expense
 
Mortgage
Loans
 
Interest
Rate Swap
50 basis point increase
$
2,450

 
$
(14,175
)
 
$
6,620

50 basis point decrease
(833
)
 
13,986

 
(4,810
)

The impact of a 50 basis point increase or decrease in interest rates would have an immaterial effect on the fair value of Brookfield DTLA’s interest rate cap agreements as of December 31, 2013.

These amounts were determined considering the impact of hypothetical interest rates on Brookfield DTLA’s financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Furthermore, in the event of a change of the magnitude discussed above, management may take actions to further mitigate Brookfield DTLA’s exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in Brookfield DTLA’s financial structure.



56

Item 8.
Financial Statements and Supplementary Data.

Index to Consolidated and Combined Financial Statements




57

Report of Independent Registered Public Accounting Firm




To the Board of Directors and Stockholders of
Brookfield DTLA Fund Office Trust Investor Inc.
New York, NY

We have audited the accompanying consolidated and combined balance sheets of Brookfield DTLA Fund Office Trust Investor Inc. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated and combined statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.


/s/ DELOITTE & TOUCHE LLP


New York, New York
April 4, 2014



58

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONSOLIDATED AND COMBINED BALANCE SHEETS

 
December 31, 2013
 
December 31, 2012
 
(In thousands, except share amounts)
 
 
 
 
ASSETS
 
 
 
Investments in real estate:
 
 
 
Land
$
229,039

 
$
101,548

Buildings and improvements
2,141,821

 
676,420

Tenant improvements
187,005

 
70,604

 
2,557,865

 
848,572

Less: accumulated depreciation
(121,612
)
 
(92,500
)
Investments in real estate, net
2,436,253

 
756,072

 
 
 
 
Cash and cash equivalents
196,071

 
5,707

Restricted cash
22,797

 
—

Rents, deferred rents and other receivables, net
53,306

 
30,437

Due from affiliates, net
—

 
1,785

Intangible assets, net
157,088

 
28,203

Deferred charges, net
61,371

 
25,022

Prepaid and other assets
19,310

 
12,540

Total assets
$
2,946,196

 
$
859,766

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
   
Mortgage loans, net
$
1,885,605

 
$
319,678

Accounts payable and other liabilities
60,637

 
21,170

Due to affiliates, net
35,615

 
—

Intangible liabilities, net
44,801

 
10,215

Total liabilities
2,026,658

 
351,063

 
 
 
 
Commitments and Contingencies (See Note 14)

 

 
 
 
 
Mezzanine Equity:
 
 
   
7.625% Series A Cumulative Redeemable Preferred Stock,
    $0.01 par value, 9,730,370 shares issued and
    outstanding as of December 31, 2013
339,101

 
—

Noncontrolling Interests:
 
 
 
Series A-1 preferred interest
314,658

 
—

Senior participating preferred interest
257,780

 
—

Total mezzanine equity
911,539

 
—

Stockholders’ Equity:
 
 
 
Common stock, $0.01 par value, 1,000 shares
    issued and outstanding as of December 31, 2013
—

 
—

Additional paid-in capital
191,710

 
—

Accumulated deficit
(89,177
)
 
—

TRZ Holdings IV LLC’s interest
—

 
508,703

Accumulated other comprehensive income
480

 
—

Noncontrolling interest – Series B common interest
(95,014
)
 
—

Total stockholders’ equity
7,999

 
508,703

Total liabilities and equity
$
2,946,196

 
$
859,766



See accompanying notes to consolidated and combined financial statements.

59

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

 
For the Year Ended December 31,
 
2013
 
2012
 
2011
 
(In thousands)
Revenue:
 
 
 
 
 
Rental income
$
78,031

 
$
51,815

 
$
51,935

Tenant reimbursements
40,933

 
28,041

 
27,899

Parking
16,531

 
10,143

 
9,611

Interest and other
3,227

 
2,918

 
3,286

Total revenue
138,722

 
92,917

 
92,731

Expenses:
 
 
 
 
 
Rental property operating and maintenance
47,454

 
33,346

 
32,569

Real estate taxes
14,604

 
8,579

 
8,232

Parking
3,977

 
2,690

 
2,207

Other expense
9,096

 
1,191

 
1,672

Depreciation and amortization
46,682

 
29,013

 
30,678

Interest
32,183

 
17,850

 
18,160

Total expenses
153,996

 
92,669

 
93,518

 
 
 
 
 
 
Net (loss) income
(15,274
)
 
248

 
(787
)
 
 
 
 
 
 
Net loss attributable to noncontrolling interests:
 
 
 
 
 
Series A-1 preferred interest – cumulative dividends
(3,586
)
 
—

 
—

Series A-1 preferred interest –
    redemption measurement adjustment
(76,305
)
 
—

 
—

Senior participating preferred interest –
    cumulative dividends
(3,500
)
 
—

 
—

Series B common interest – allocation of net loss
97,934

 
—

 
—

Net loss attributable to Brookfield DTLA
(731
)
 
248

 
(787
)
Series A preferred stock – cumulative dividends
(3,864
)
 
—

 
—

Series A preferred stock – redemption
    measurement adjustment
(82,247
)
 
—

 
—

Net (loss) income available to common interest
    holders of Brookfield DTLA
$
(86,842
)
 
$
248

 
$
(787
)










See accompanying notes to consolidated and combined financial statements.

60

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 
For the Year Ended December 31,
 
2013
 
2012
 
2011
 
(In thousands)
 
 
 
 
 
 
Net (loss) income
$
(15,274
)
 
$
248

 
$
(787
)
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
Derivative transactions:
 
 
 
 
 
Derivative holding gains
1,007

 
—

 
—

 
 
 
 
 
 
Comprehensive (loss) income
(14,267
)
 
248

 
(787
)
Comprehensive loss attributable to
    noncontrolling interests
14,016

 
—

 
—

Comprehensive (loss) income available to
    common interest holders of Brookfield DTLA
$
(251
)
 
$
248

 
$
(787
)

























See accompanying notes to consolidated and combined financial statements.


61

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS’ EQUITY

 
 
Number of Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumu-
lated
Deficit
 
TRZ Holdings
IV LLC’s Interest
 
Accumu-lated Other Compre-hensive Income
 
Non-
controlling Interest
 
Total
Stock-
holders’
Equity
 
 
Common
Stock
 
 
 
 
 
 
 
 
 
(In thousands, except share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2010
 
—

 
$
—

 
$
—

 
$
—

 
$
471,833

 
$
—

 
$
—

 
$
471,833

Net loss attributable to
    TRZ Holdings IV LLC
 
 
 
 
 
 
 
 
 
(787
)
 
 
 
 
 
(787
)
Contributions from
     TRZ Holdings IV LLC, net
 
 
 
 
 
 
 
 
 
6,705

 
 
 
 
 
6,705

Balance, December 31, 2011
 
—

 
—

 
—

 
—

 
477,751

 
—

 
—

 
477,751

Net income attributable to
    TRZ Holdings IV LLC
 
 
 
 
 
 
 
 
 
248

 
 
 
 
 
248

Contributions from
     TRZ Holdings IV LLC, net
 
 
 
 
 
 
 
 
 
30,704

 
 
 
 
 
30,704

Balance, December 31, 2012
 
—

 
—

 
—

 
—

 
508,703

 
—

 
—

 
508,703

Net (loss) income
 
 
 
 
 
 
 
(3,066
)
 
2,335

 
 
 
(14,543
)
 
(15,274
)
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
480

 
527

 
1,007

Contributions from
     TRZ Holdings IV LLC, net
 
 
 
 
 
 
 
 
 
5,402

 
 
 
 
 
5,402

Non-cash distribution to
    TRZ Holdings IV LLC
 
 
 
 
 
 
 
 
 
(25,000
)
 
 
 
 
 
(25,000
)
Exchange of
    predecessor equity
 
 
 
 
 
 
 
 
 
(491,440
)
 
 
 
2,393

 
(489,047
)
Issuance of common stock,
    net of offering costs
 
1,000

 
—

 
191,710

 
 
 
 
 
 
 
 
 
191,710

Dividends on Series A
    Preferred Stock, Series A-1
    preferred interest and
    senior participating
    preferred interest
 
 
 
 
 
 
 
(86,111
)
 
 
 
 
 
(83,391
)
 
(169,502
)
Balance, December 31, 2013
 
1,000

 
$
—

 
$
191,710

 
$
(89,177
)
 
$
—

 
$
480

 
$
(95,014
)
 
$
7,999






















See accompanying notes to consolidated and combined financial statements.

62

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

 
For the Year Ended December 31,
 
2013
 
2012
 
2011
 
(In thousands)
Cash flows from operating activities:
 
 
 
 
 
Net (loss) income
$
(15,274
)
 
$
248

 
$
(787
)
Adjustments to reconcile net (loss) income to
     net cash (used in) provided by
     operating activities:
 
 
 
 
 
Depreciation and amortization
46,682

 
29,013

 
30,678

Provision for doubtful accounts
357

 
—

 
140

Amortization of below-market leases/
     above-market leases
(5,321
)
 
(2,159
)
 
(2,376
)
Straight-line rent amortization
(8,541
)
 
(6,426
)
 
(2,526
)
Deemed contribution from Brookfield DTLA
     Holdings for costs related to the acquisition
     of MPG
6,314

 
—

 
—

Amortization of tenant inducements
987

 
804

 
357

Amortization of debt discounts
951

 
610

 
589

Changes in assets and liabilities:
 
 
 
 
 
Rents, deferred rents and other receivables
(5,422
)
 
(840
)
 
648

Due from affiliates
—

 
(1,870
)
 
4,400

Deferred charges
(7,323
)
 
(4,206
)
 
(6,164
)
Prepaid and other assets
(10,757
)
 
(2,805
)
 
(3,898
)
Accounts payable and other liabilities
(4,861
)
 
2,790

 
2,211

Net cash (used in) provided by operating activities
(2,208
)
 
15,159

 
23,272

Cash flows from investing activities:
 
 
 
 
 
Acquisition of MPG
(189,202
)
 
—

 
—

Cash acquired in acquisition of MPG
155,685

 
—

 
—

Expenditures for improvements to real estate
(24,297
)
 
(40,989
)
 
(24,201
)
Decrease in restricted cash
17,946

 
—

 
111

Net cash used in investing activities
(39,868
)
 
(40,989
)
 
(24,090
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from mortgage loans
475,000

 
—

 
—

Principal payments on mortgage loans
(441,364
)
 
(6,679
)
 
(6,382
)
Contributions from Brookfield DTLA Holdings
189,202

 
—

 
—

Contributions from TRZ Holdings IV LLC, net
5,402

 
30,704

 
6,705

Due to affiliates
12,400

 
—

 
—

Financing fees paid
(4,366
)
 
—

 
—

Offering costs
(3,834
)
 
—

 
—

Net cash provided by financing activities
232,440

 
24,025

 
323

Net change in cash and cash equivalents
190,364

 
(1,805
)
 
(495
)
Cash and cash equivalents at beginning of year
5,707

 
7,512

 
8,007

Cash and cash equivalents at end of year
$
196,071

 
$
5,707

 
$
7,512


63

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (continued)

 
For the Year Ended December 31,
 
2013
 
2012
 
2011
 
(In thousands)
Supplemental disclosure of cash flow information:
 
 
 
 
 
Cash paid for interest
$
26,337

 
$
17,256

 
$
17,552

 
 
 
 
 
 
Supplemental disclosure of non-cash investing and
     financing activities:
 
 
 
 
 
Issuance of Series A preferred stock in connection
    with the acquisition of MPG
$
252,990

 
$
—

 
$
—

Issuance of note to TRZ Holdings IV LLC
25,000

 
—

 
—

Accrued deferred leasing costs
3,844

 
1,120

 
1,999

Accrual for real estate improvements
7,074

 
2,992

 
3,415

Increase in fair value of interest rate swap
1,007

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
















See accompanying notes to consolidated and combined financial statements.

64
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


Note 1—Organization and Description of Business

General

Brookfield DTLA Fund Office Trust Investor Inc. (“Brookfield DTLA” or the “Company”) is a Maryland corporation and was incorporated on April 19, 2013. Brookfield DTLA was formed for the purpose of consummating the transactions contemplated in the Agreement and Plan of Merger dated as of April 24, 2013, as amended (the “Merger Agreement”), and the issuance of shares of 7.625% Series A Cumulative Redeemable Preferred Stock (the “Series A preferred stock”) in connection with the acquisition of MPG Office Trust, Inc. and MPG Office, L.P. (together, “MPG”). Brookfield DTLA is a direct subsidiary of Brookfield DTLA Holdings LLC (“Brookfield DTLA Holdings”), a Delaware limited liability company, and an indirect subsidiary of Brookfield Office Properties Inc. (“BPO”).

Prior to October 15, 2013, 333 South Hope Co. LLC (“333 South Hope”) and EYP Realty LLC (“EYP Realty”) were controlled by BPO through its indirect ownership interest in TRZ Holdings IV LLC (“TRZ”). TRZ owned 100% of the member units of 333 South Hope and EYP Realty, and BPO indirectly owns approximately 84% of the member units of TRZ.

On October 15, 2013, through a series of formation transactions TRZ’s interests in 333 South Hope and EYP Realty were contributed to subsidiaries of Brookfield DTLA in exchange for preferred and common interests in Brookfield DTLA Fund Properties II LLC (“New OP”) and a preferred interest in Brookfield DTLA Fund Properties III LLC (“DTLA OP”). 333 South Hope owned Bank of America Plaza (“BOA Plaza”) and EYP Realty owned Ernst & Young Plaza (“EY Plaza”). Both of these Class A commercial properties are located in the Los Angeles Central Business District (the “LACBD”).

MPG Acquisition

On October 15, 2013, Brookfield DTLA completed the acquisition of MPG (the “merger”) pursuant to the terms of the Merger Agreement. As part of the transaction, MPG was contributed to New OP in exchange for a preferred interest in New OP. See Note 3 “Acquisition of MPG Office Trust, Inc.” In addition to BOA Plaza and EY Plaza, Brookfield DTLA now owns Wells Fargo Center–North Tower (also known as “Wells Fargo Tower”), Wells Fargo Center–South Tower (also known as “KPMG Tower”), Gas Company Tower and 777 Tower, each of which are Class A office properties located in the LACBD that were formerly owned by MPG.

Note 2—Basis of Presentation and Summary of Significant Accounting Policies

Predecessor Entities

Prior to October 15, 2013, Brookfield DTLA had not conducted any business as a separate company and had no material assets or liabilities. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the contribution of 333 South Hope and EYP Realty (together, the “Predecessor Entities”) constitute a transaction between entities under common control. A combination between entities that already share the same parent is not considered a business combination because there is no change in control at the parent level. Accordingly, the operations of the Predecessor Entities contributed to Brookfield DTLA by TRZ on October 15, 2013 are presented in the accompanying consolidated and combined financial statements as if they were owned by Brookfield DTLA for all historical periods presented and the assets and liabilities of BOA Plaza and EY Plaza were recorded at the

65
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

carrying values reflected in the books and records of 333 South Hope and EYP Realty. As such, no gain or loss has been recorded in the consolidated statement of operations for the year ended December 31, 2013 due to this transaction. As a result of the transaction, TRZ’s interest in the Predecessor Entities was exchanged for a preferred and common interest in New OP and a preferred interest in DTLA OP. As a result of certain redemption features in the preferred instruments, these instruments have been classified in the consolidated and combined balance sheet as mezzanine equity. See Note 6 “Mezzanine Equity.”

As used in these consolidated and combined financial statements and related notes, the terms “Brookfield DTLA,” the “Company,” “us,” “we” and “our” refer to the combination of Brookfield DTLA Fund Office Trust Investor Inc. and the Predecessor Entities.

Principles of Consolidation and Combination and Basis of Presentation

The accompanying consolidated and combined financial statements are prepared in accordance with GAAP. The consolidated balance sheet as of December 31, 2013 includes the accounts of Brookfield DTLA and subsidiaries in which it has a controlling financial interest. The combined balance sheet as of December 31, 2012 includes the accounts of the Predecessor Entities on a combined basis in accordance with GAAP. The accompanying consolidated and combined statements of operations for the year ended December 31, 2013 include the accounts of the Predecessor Entities on a combined basis from January 1, 2013 through October 15, 2013 (the date of the merger); and the consolidated accounts of Brookfield DTLA from October 15, 2013 (the date of the merger) through December 31, 2013. The accompanying combined statements of operations for the years ended December 31, 2012 and 2011 include the accounts of the Predecessor Entities on a combined basis. All intercompany transactions have been eliminated in consolidation and combination as of and for the years ended December 31, 2013, 2012 and 2011.

The Company consolidates entities in which it has a controlling financial interest. In determining whether Brookfield DTLA has a controlling financial interest in an entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity (“VIE”) and Brookfield DTLA is the primary beneficiary.

A VIE is broadly defined as an entity where either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support.

A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. Brookfield DTLA qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE.


66
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

Consideration of various factors includes, but is not limited to, Brookfield DTLA’s ability to direct the activities that most significantly impact the VIE’s economic performance, its form of ownership interest, its representation on the VIE’s governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and its ability to replace the manager of and/or liquidate the entity.

The Company earns a return through an indirect investment in New OP. Brookfield DTLA Holdings, the parent of Brookfield DTLA, owns all of the common interest in New OP. Brookfield DTLA has an indirect preferred stock interest in New OP and its wholly owned subsidiary is the managing member of New OP.

The Company determined that New OP is a VIE and as a result of having the power to direct the significant activities of New OP and exposure to the economic performance of New OP, Brookfield DTLA meets the two conditions for being the primary beneficiary. Brookfield DTLA is required to continually evaluate its VIE relationships and consolidation conclusion.

Use of Estimates

The preparation of consolidated and combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. For example, estimates and assumptions have been made with respect to fair values of assets and liabilities for purposes of applying the acquisition method of accounting, the useful lives of assets, recoverable amounts of receivables, impairment of long‑lived assets and fair value of debt. Actual results could ultimately differ from such estimates.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The objective of this ASU is to improve the reporting of reclassifications of various components out of accumulated other comprehensive income and requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the statement of operations or as a separate disclosure in the accompanying notes to the financial statements. The guidance in ASU 2013-02 became effective for Brookfield DTLA beginning January 1, 2013. The implementation of this pronouncement did not have a material impact on Brookfield DTLA’s consolidated financial statements.

Significant Accounting Policies

Business Combinations—

Purchase accounting is applied to the assets and liabilities related to all real estate investments acquired from third parties. In accordance with FASB Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, the purchase price of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and tenant improvements, and identifiable intangible assets and liabilities, consisting of the value of above- and below-market leases, in-place leases, and tenant relationships, based in each case on their fair value.

67
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

The principal valuation technique employed by Brookfield DTLA in determining the fair value of identified assets acquired and liabilities assumed is the income approach, which is then compared to the cost approach. Tangible values for investments in real estate are calculated based on replacement costs for like type quality assets. Above- and below-market lease values are determined by comparing in-place rents with current market rents. In‑place lease amounts are determined by calculating the potential lost revenue during the replacement of the current leases in place. Leasing commissions and legal/marketing fees are determined based upon market allowances pro-rated over the remaining lease terms. Mortgage loans assumed in an acquisition are analyzed using current market terms for similar debt.

The value of the acquired above-market and below-market leases are amortized and recorded as either a decrease (in the case of above-market leases) or an increase (in the case of below-market leases) to rental income in the consolidated and combined statements of operations over the remaining term of the associated lease. The value of tenant relationships is amortized over the expected term of the relationship, which includes an estimated probability of lease renewal. The value of in-place leases is amortized as an expense over the remaining life of the leases. Amortization of tenant relationships and in-place leases is included in depreciation and amortization in the consolidated and combined statements of operations.

Investments in Real Estate—

Land is carried at cost. Buildings and improvements are recorded at historical cost and are depreciated on a straight-line basis over the estimated useful life of the building, which is 60 years with an estimated salvage value of 5%. Tenant improvements that are determined to be assets of Brookfield DTLA are recorded at cost; amortization is included in depreciation and amortization expense in the consolidated and combined statements of operations on a straight-line basis over the shorter of the useful life or the applicable lease term.

Depreciation expense related to investments in real estate during the years ended December 31, 2013, 2012 and 2011 was $29.1 million, $19.3 million and $19.4 million, respectively.

Real estate is reviewed for impairment if events or changes in circumstances indicate that the carrying amount of the real estate may not be recoverable. In such an event, a comparison is made of the current and projected operating cash flows of the property into the foreseeable future on an undiscounted basis to the carrying amount of the real estate. If the undiscounted cash flows expected to be generated by an asset are less than its carrying amount, an impairment provision would be recorded to write down the carrying amount of such asset to its fair value. Brookfield DTLA assesses fair value based on estimated cash flow projections utilizing appropriate discount and capitalization rates and available market information. Projections of future cash flow take into account the specific business plan for the property and management’s best estimate of the most probable set of economic conditions expected to prevail in the market. Management believes no impairment of Brookfield DTLA’s or the Predecessor Entities’ real estate assets existed at December 31, 2013 and 2012, respectively.

Cash and Cash Equivalents—

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


68
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

Restricted Cash—

Restricted cash consists primarily of deposits for tenant improvements and leasing commissions, real estate taxes and insurance reserves, debt service reserves and other items as required by our loan agreements.

Rents, Deferred Rents and Other Receivables, Net—

Differences between rental income and the contractual amounts due are recorded as deferred rents receivable in the consolidated and combined balance sheets. Brookfield DTLA evaluates its deferred rent receivable to consider if an allowance is necessary.

Rents, deferred rents and other receivables, net also includes any amounts paid to a tenant for improvements owned or costs incurred by the tenant are treated as tenant inducements and are presented in the consolidated and combined balance sheet net of accumulated amortization totaling $2.7 million and $1.7 million as of December 31, 2013 and 2012, respectively. Amortization of tenant inducements is recorded on a straight-line basis over the term of the related lease as a reduction of rental income in the consolidated and combined statements of operations.

Brookfield DTLA periodically evaluates the collectability of amounts due from tenants and maintains an allowance for doubtful accounts in the consolidated and combined balance sheets for estimated losses resulting from the inability of tenants to make required payments under the lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates.

The allowance for doubtful accounts for Brookfield DTLA totaled $0.4 million as of December 31, 2013. There was no allowance for doubtful accounts necessary for the Predecessor Entities as of December 31, 2012. For the years ended December 31, 2013 and 2011, Brookfield DTLA and the Predecessor Entities recorded provisions for doubtful accounts of $0.4 million and $0.1 million, respectively. There was no provision for doubtful accounts recorded for the year ended December 31, 2012.

Due (to) from Affiliates, Net—

Amounts due to/from affiliates, net consist of related party receivables and payables from affiliates of BPO for advances made primarily for trade purposes. These amounts are due on demand and are non‑interest bearing.

The Company is indebted to BOP Management Inc. under a $25.0 million promissory note dated October 11, 2013 that matures on October 15, 2015, which is included in due to affiliates, net in the consolidated balance sheet as of December 31, 2013. The note bears interest at 3.25%, which is payable semi-annually. For the year ended December 31, 2013, the Company accrued $0.2 million of interest expense related to this note.


69
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

Deferred Charges, Net—

Leasing costs, primarily commissions related to leasing activities, are deferred and are presented as deferred charges in the consolidated and combined balance sheet net of accumulated amortization totaling $17.9 million and $14.6 million as of December 31, 2013 and 2012, respectively. Deferred leasing costs amortized on a straight-line basis over the terms of the related leases as part of depreciation and amortization in the consolidated and combined statements of operations.

Prepaid and Other Assets, Net—

Prepaid and other assets include prepaid insurance, prepaid real estate taxes and other operating costs.

Mortgage Loans, Net—

Mortgage loans are presented in the consolidated and combined balances sheet net of unamortized debt discounts totaling $11.9 million and $1.0 million as of December 31, 2013 and 2012, respectively.

Debt discounts totaling $1.0 million, $0.6 million and $0.6 million were amortized during the years ended December 31, 2013, 2012 and 2011, respectively, over the terms of the related mortgage loans on a basis that approximates the effective interest method and were included as part of interest expense in the consolidated and combined statements of operations.

Revenue Recognition—

Rental income from leases providing for periodic increases in base rent is recognized on a straight-line basis over the noncancelable term of the respective leases. Recoveries of operating expenses and real estate taxes are recorded as tenant reimbursements in the consolidated and combined statements of operations in the period during which the expenses are incurred.

Income Taxes—

Brookfield DTLA intends to elect to be taxed as a real estate investment trust (“REIT”) pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax year ended December 31, 2013. Brookfield DTLA intends to conduct its operations so as to qualify as a REIT. Accordingly, Brookfield DTLA will not be subject to U.S. federal income tax, provided that it qualifies as a REIT and distributions to its stockholders generally equal or exceed its taxable income.

However, qualification and taxation as a REIT depends upon Brookfield DTLA’s ability to meet the various qualification tests imposed under the Code related to annual operating results, asset diversification, distribution levels and diversity of stock ownership. Accordingly, no assurance can be given that Brookfield DTLA will be organized or be able to operate in a manner so as to qualify or remain qualified as a REIT. If Brookfield DTLA fails to qualify as a REIT in any taxable year, it will be subject to federal and state income tax on its taxable income at regular corporate tax rates, and it may be ineligible to qualify as a REIT for four subsequent tax years. Brookfield DTLA may also be subject to certain state or local income taxes, or franchise taxes on its REIT activities.


70
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

Brookfield DTLA has made no provision for income taxes in its consolidated and combined financial statements. Brookfield DTLA’s taxable income or loss is different than its financial statement income or loss.

Brookfield DTLA recognizes tax benefits from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more likely than not recognition threshold. Brookfield DTLA and the Predecessor Entities had no unrecognized tax benefits of December 31, 2013 and 2012, respectively, and Brookfield DTLA does not expect its unrecognized tax benefits balance to change during the next 12 months. The Predecessor Entities’ 2009, 2010, 2011 and 2012 tax years remain open due to the statute of limitations and may be subject to examination by federal, state and local tax authorities.

Derivative Financial Instruments—

Brookfield DTLA uses interest rate swap contracts and interest rate cap contracts to manage risk from fluctuations in interest rates as well as to hedge anticipated future financing transactions. Interest rate swaps involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps involve the receipt of variable-rate amounts beyond a specified strike price over the life of the agreements without exchange of the underlying principal amount. The Company believes these agreements are with counterparties who are creditworthy financial institutions.

Brookfield DTLA adheres to the provisions of ASC Subtopic 815-10-15, Derivatives and Hedging (“ASC 815-10-15”). ASC 815-10-15 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires the recognition of all derivative instruments as assets or liabilities in the Company’s consolidated and combined balance sheet at fair value. Changes in the fair value of derivative instruments that are not designated as hedges, or that do not meet the hedge accounting criteria in ASC 815-10-15, are required to be reported through the statement of operations.

Segment Reporting

Brookfield DTLA operates in a single reportable segment referred to as its office segment, which includes the operation and management of commercial office properties. Each of Brookfield DTLA’s operating properties is considered a separate operating segment, as each property earns revenues and incurs expenses, individual operating results are reviewed and discrete financial information is available. Management does not distinguish or group Brookfield DTLA’s consolidated operations based on geography, size or type. Brookfield DTLA’s operating properties have similar economic characteristics and provide similar products and services to tenants. As a result, Brookfield DTLA’s operating properties are aggregated into a single reportable segment.


71
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

Accounting for Conditional Asset Retirement Obligations

Brookfield DTLA has evaluated whether it has any conditional asset retirement obligations, which are a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional upon future events that may or may not be within an entity’s control. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Accordingly, Brookfield DTLA recognized a liability for a conditional asset retirement obligation.

Note 3—Acquisition of MPG Office Trust, Inc.

On October 15, 2013, Brookfield DTLA completed the acquisition of MPG. At the effective time of the merger, (i) each issued and outstanding share of MPG common stock was automatically converted into, and canceled in exchange for, the right to receive $3.15 in cash, without interest and less any required withholding tax and (ii) each issued and outstanding share of the 7.625% Series A Cumulative Redeemable Preferred Stock of MPG (the “MPG Preferred Stock”) automatically, and without a vote by the holders of MPG Preferred Stock, was converted into and canceled in exchange for, the right to receive one share of the Company’s Series A preferred stock.

The components of the purchase price paid by Brookfield DTLA in connection with the MPG acquisition are as follows:

MPG common stock and noncontrolling common units
57,540,216

MPG in-the-money equity awards
2,524,079

 
60,064,295

Merger consideration per common share
$
3.15

Cash consideration – common stock
$
189,202,529

 
 
Fair value of Series A preferred stock issued by Brookfield DTLA
252,989,620

 
 
Total purchase price
$
442,192,149


The cash consideration paid was settled using cash contributed to Brookfield DTLA by Brookfield DTLA Holdings. The fair value of the 9,730,370 shares of Series A preferred stock issued by the Company in the merger was based on an estimate of fair value of $26.00 per share. The valuation was based on available trading information for the MPG Preferred Stock and the Company’s Series A preferred stock on the day prior to and subsequent to the transaction, respectively.

In connection with the acquisition, DTLA Fund Holding Co., a subsidiary of Brookfield DTLA Holdings, made a tender offer to purchase all of the issued and outstanding shares of MPG Preferred Stock for cash consideration of $25.00 per share (the “offer price”). A total of 372,901 shares of MPG Preferred Stock were validly tendered into the offer and the holders thereof received the offer price for such shares. At the effective time of the merger, each share of MPG Preferred Stock that was issued and outstanding immediately prior to the merger, including each share of MPG Preferred Stock acquired by DTLA Fund Holding Co. in the offer, was exchanged for one share of Series A preferred stock of the Company with rights, terms and conditions substantially identical to those of the MPG Preferred Stock.


72
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

The acquisition of MPG is being accounted for in accordance with ASC Topic 805, Business Combinations. Brookfield DTLA recognized the assets and liabilities of MPG at fair value in its consolidated balance sheet as of October 15, 2013. The following is a preliminary estimate of the fair value assigned to the identified assets acquired and liabilities assumed (in millions):

Purchase price
$
442

Identified Assets Acquired:
 
Investments in real estate
$
1,685

Cash and cash equivalents
156

Restricted cash
41

Rents, deferred rents and other receivables
3

Intangible assets
140

Deferred charges
31

Prepaid and other assets
3

Liabilities Assumed:
 
Mortgage loans
(1,531
)
Accounts payable and other liabilities
(46
)
Intangible liabilities
(40
)
Total identified assets acquired, net
442

Residual amount
$
—


Brookfield DTLA incurred acquisition and transaction-related costs of $6.8 million, which are included in other expense in the consolidated statement of operations for the year ended December 31, 2013. Of that amount, $6.3 million was paid by Brookfield DTLA Holdings and was treated as a contribution in the consolidated statement of stockholders’ equity for the year ended December 31, 2013. No transaction costs were incurred during the years ended December 31, 2012 and 2011.

Pro Forma Financial Information

The results of operations of MPG are included in the consolidated statement of operations from October 15, 2013 (the date of acquisition) through December 31, 2013. During the year ended December 31, 2013, Brookfield DTLA recorded $38.8 million of total revenue and $16.4 million of net loss generated by the properties acquired from MPG.

Condensed pro forma financial information for the years ended December 31, 2013 and 2012, assuming the MPG acquisition had occurred as of January 1, 2012, is presented below for comparative purposes (in millions):

 
For the Year Ended December 31,
 
2013
 
2012
 
(Unaudited)
Total revenue
$
272.8

 
$
280.0

Net loss
(103.4
)
 
(86.6
)


73
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

The condensed pro forma financial information is not necessarily indicative of what the actual results of operations of Brookfield DTLA would have been assuming the MPG acquisition had been consummated as of January 1, 2012, nor does it purport to represent the results of operations for future periods. Pro forma adjustments include the amortization of acquired intangible assets and liabilities, and depreciation and amortization.

Note 4—Intangible Assets and Liabilities

Our intangible assets and liabilities are summarized as follows (in thousands):

 
December 31, 2013
 
December 31, 2012
Intangible Assets
 
 
 
In-place leases
$
110,380

 
$
6,503

Tenant relationships
46,248

 
46,248

Above-market leases
38,913

 
2,301

 
195,541

 
55,052

Accumulated amortization
(38,453
)
 
(26,849
)
Intangible assets, net
$
157,088

 
$
28,203

 
 
 
 
Intangible Liabilities
 
 
 
Below-market leases
$
76,438

 
$
36,669

Accumulated amortization
(31,637
)
 
(26,454
)
Intangible liabilities, net
$
44,801

 
$
10,215


The impact of the amortization of acquired below-market leases, net of acquired above-market leases, on rental income and of acquired in-place leases and tenant relationships on depreciation and amortization expense is as follows (in thousands):

 
For the Year Ended December 31,
 
2013
 
2012
 
2011
Rental income
$
5,321

 
$
2,159

 
$
2,376

Depreciation and amortization expense
10,111

 
5,745

 
7,387


As of December 31, 2013, the estimate of the amortization/accretion of intangible assets and liabilities over the next five years is as follows (in thousands):

 
In-Place
Leases
 
Other Intangible Assets
 
Intangible
Liabilities
2014
$
25,359

 
$
10,916

 
$
6,649

2015
18,425

 
9,733

 
7,112

2016
15,351

 
8,597

 
6,433

2017
9,484

 
5,794

 
5,855

2018
6,829

 
4,901

 
4,081

Thereafter
24,259

 
17,440

 
14,671

 
$
99,707

 
$
57,381

 
$
44,801



74
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

Note 5—Mortgage Loans

Brookfield DTLA’s debt is as follows (in thousands, except percentage amounts):

 
Contractual
Maturity Date
 
 
 
Principal Amount as of
 
 
Interest Rate
 
December 31, 2013
 
December 31, 2012
Floating-Rate Debt
 
 
 
 
 
 
 
Variable-Rate Loans:
 
 
 
 
 
 
 
Wells Fargo Center–South Tower (1)
12/1/2016
 
1.97
%
 
$
290,000

 
$
—

777 Tower (2)
11/1/2018
 
1.87
%
 
200,000

 
—

Total variable-rate loans
 
 
 
 
490,000

 
—

 
 
 
 
 
 
 
 
Variable-Rate Swapped to Fixed-Rate Loan:
 
 
 
 
 
 
 
EY Plaza (3)
11/27/2020
 
3.93
%
 
185,000

 
—

Total floating-rate debt
 
 
 
 
675,000

 
—

 
 
 
 
 
 
 
 
Fixed-Rate Debt:
 
 
 
 
 
 
 
Wells Fargo Center–North Tower
4/6/2017
 
5.70
%
 
550,000

 
—

Gas Company Tower
8/11/2016
 
5.10
%
 
458,000

 
—

BOA Plaza
9/7/2014
 
5.06
%
 
170,191

 
173,734

BOA Plaza
9/7/2014
 
6.26
%
 
44,321

 
45,243

Total fixed-rate debt
 
 
 
 
1,222,512

 
218,977

 
 
 
 
 
 
 
 
Debt Refinanced:
 
 
 
 
EY Plaza
 
 
 
 
—

 
101,716

Total debt
 
 
 
 
1,897,512

 
320,693

Debt discounts
 
 
 
 
(11,907
)
 
(1,015
)
Total debt, net
 
 
 
 
$
1,885,605

 
$
319,678

__________
(1)
This loan bears interest at LIBOR plus 1.80%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 4.75%.
(2)
This loan bears interest at LIBOR plus 1.70%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 5.75%.
(3)
This loan bears interest at LIBOR plus 1.75%. As required by the loan agreement, we have entered into an interest rate swap agreement to hedge this loan, which effectively fixes the LIBOR portion of the interest rate at 2.178%. The effective interest rate of 3.93% includes interest on the swap.

The weighted average interest rate of our debt was 4.36% as of December 31, 2013 and 5.23% as of December 31, 2012.

As of December 31, 2013, our debt to be repaid in the next five years is as follows (in thousands):

2014
$
214,512

2015
311

2016
751,831

2017
554,026

2018
204,232

Thereafter
172,600

 
$
1,897,512



75
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

As of December 31, 2013, $185.0 million of our debt may be prepaid without penalty, $672.5 million may be defeased (as defined in the underlying loan agreements), $550.0 million may be prepaid with prepayment penalties or defeased (as defined in the underlying loan agreement) at our option, $290.0 million may be prepaid with prepayment penalties, and $200.0 million is locked out from prepayment until November 1, 2015.

The BOA Plaza mortgage loans mature on September 7, 2014. Brookfield DTLA intends to refinance these loans prior to or upon maturity. Management expects the refinancing will generate proceeds in excess of the amounts necessary to refinance the existing mortgage loans, pay all fees and other expenses related to the refinancing, and create or maintain related reserves.

Mortgage Loans Assumed in Connection with the MPG Acquisition

Wells Fargo Center–North Tower—

In connection with the MPG acquisition, Brookfield DTLA Holdings assumed the $550.0 million mortgage loan secured by the Wells Fargo Center–North Tower office property on October 15, 2013. The mortgage loan bears interest at a fixed rate of 5.70%, matures on April 6, 2017 and requires the payment of interest-only until maturity. The mortgage loan can be repaid at any time prior to maturity, in whole or in part, with the payment of a prepayment fee (as specified in the loan agreement) until October 6, 2016, after which the loan can be repaid without penalty. The mortgage loan can also be defeased at any time prior to maturity.

In connection with loan assumption, Brookfield DTLA Holdings agreed to deposit a total of $10.0 million into a collateral reserve account held by the lender, of which $5.0 million was deposited on October 15, 2013 and is included as part of restricted cash in the consolidated balance sheet as of December 31, 2013. The remaining $5.0 million will be paid in installments of $1.25 million in April 2014, October 2014, April 2015, and October 2015.

Gas Company Tower—

In connection with the MPG acquisition, Brookfield DTLA Holdings assumed the $458.0 million mortgage loan secured by the Gas Company Tower office property on October 15, 2013. The mortgage loan bears interest at a fixed rate of 5.10%, matures on August 11, 2016 and requires the payment of interest-only until maturity. The mortgage loan can be defeased at any time prior to maturity (as specified in the loan agreement). On or after May 11, 2016, the loan can be repaid, in whole or in part, without penalty.

In connection with tax indemnification agreements entered into with MPG Office, L.P. prior to the acquisition of MPG by Brookfield DTLA, Robert F. Maguire III, certain entities owned or controlled by Mr. Maguire, and other contributors to MPG at the time of its initial public offering guaranteed a portion of the Wells Fargo Center–North Tower and Gas Company Tower mortgage loans. As of December 31, 2013, $591.8 million of these loans is subject to such guarantees.


76
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

Wells Fargo Center–South Tower—

In connection with the MPG acquisition, Brookfield DTLA Holdings assumed the $334.6 million mortgage loan secured by the Wells Fargo Center–South Tower office property on October 15, 2013. The mortgage loan bore interest at a variable rate of LIBOR plus 3.00% on the A-Note and LIBOR plus 5.10% on the B-Note and was scheduled to mature on January 9, 2014. As discussed below, this loan was refinanced by Brookfield DTLA Holdings on November 8, 2013.

777 Tower—

In connection with the MPG acquisition, Brookfield DTLA Holdings assumed the $200.0 million mortgage loan secured by the 777 Tower office property on October 15, 2013.

The loan bears interest at a rate equal to LIBOR plus 1.70%, matures on November 1, 2018 and requires the payment of interest-only until maturity. Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). The mortgage loan is locked out from prepayment until November 1, 2015. Thereafter, the mortgage loan can be repaid at any time prior to maturity, in whole or in part, with the payment of a prepayment fee (as specified in the loan agreement) until November 1, 2017, after which the loan can be repaid without penalty.

Mortgage Loan Refinancings

Wells Fargo Center–South Tower—

On November 8, 2013, Brookfield DTLA Holdings refinanced the $334.6 million mortgage loan secured by Wells Fargo Center–South Tower. In connection with the refinancing, Brookfield DTLA repaid $44.6 million of principal.

The new $290.0 million mortgage loan bears interest at a rate equal to LIBOR plus 1.80%, matures on December 1, 2016 and requires the payment of interest-only until maturity. Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). The mortgage loan can be repaid at any time prior to maturity, in whole or in part, with the payment of a prepayment fee (as specified in the loan agreement) until December 1, 2015, after which the loan can be repaid without penalty.

EY Plaza—

On November 27, 2013, Brookfield DTLA Holdings refinanced the mortgage loan secured by the EY Plaza office property and received net proceeds totaling $183.3 million, of which $99.5 million was used to repay the mortgage loan that previously encumbered the property with the remaining $83.8 million to be used for general corporate purposes.

On March 21, 2014, Brookfield DTLA made a cash distribution to Brookfield DTLA Holdings totaling $70.0 million, which was comprised of $3.5 million in settlement of preferred dividends on the senior participating preferred interest through December 31, 2013 and a return of investment of $66.5 million using proceeds generated by the refinancing of EY Plaza. See Note 17 “Subsequent Event.”


77
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

The new $185.0 million mortgage loan bears interest at a rate equal to LIBOR plus 1.75%, matures on November 27, 2020 and requires the payment of interest-only until December 1, 2015, when the loan will require the payment of principal and interest until maturity. The mortgage loan can be repaid at any time prior to maturity, in whole or in part, without penalty.

Non-Recourse Carve Out Guarantees

All of Brookfield DTLA’s $1.9 billion of mortgage debt is subject to “non-recourse carve out” guarantees that expire upon elimination of the underlying loan obligations. Under these guarantees, these otherwise non‑recourse loans can become partially or fully recourse against Brookfield DTLA Holdings if certain triggering events occur. Although these events differ from loan to loan, some of the common events include:

•
The special purpose property-owning subsidiary’s or Brookfield DTLA Holdings’ filing a voluntary petition for bankruptcy;

•
The special purpose property-owning subsidiary’s failure to maintain its status as a special purpose entity;

•
Subject to certain conditions, the special purpose property-owning subsidiary’s failure to obtain the lender’s written consent prior to any subordinate financing or other voluntary lien encumbering the associated property; and

•
Subject to certain conditions, the special purpose property-owning subsidiary’s failure to obtain the lender’s written consent prior to a transfer or conveyance of the associated property, including, in some cases, indirect transfers in connection with a change in control of Brookfield DTLA Holdings or Brookfield DTLA.

In addition, other items that are customarily recourse to a non-recourse carve out guarantor include, but are not limited to, the payment of real property taxes, the breach of representations related to environmental issues or hazardous substances, physical waste of the property, liens which are senior to the mortgage loan and outstanding security deposits.

The maximum amount Brookfield DTLA Holdings would be required to pay under a “non‑recourse carve out” guarantee is the principal amount of the loan (or a total of $1.9 billion as of December 31, 2013 for all loans). This maximum amount does not include liabilities related to environmental issues or hazardous substances. Losses resulting from the breach of our loan agreement representations related to environmental issues or hazardous substances are generally recourse to Brookfield DTLA Holdings pursuant to the “non-recourse carve out” guarantees and any such losses would be in addition to the total principal amounts of the loans. The potential losses are not quantifiable and can be material in certain circumstances, depending on the severity of the environmental or hazardous substance issues. Since each of our non-recourse loans is secured by the office building owned by the special purpose property-owning subsidiary, the amount due to the lender from Brookfield DTLA Holdings in the event a “non-recourse carve out” guarantee is triggered could subsequently be partially or fully mitigated by the net proceeds received from any disposition of the office building; however, such proceeds may not be sufficient to cover the maximum potential amount due, depending on the particular asset.


78
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

Debt Reporting

Pursuant to the terms of certain of our mortgage loan agreements, Brookfield DTLA is required to report a debt service coverage ratio (“DSCR”) calculated using the formulas specified in the underlying loan agreements. We have submitted the required reports to the lenders for the measurement periods ended December 31, 2013 and were in compliance with the amounts required by the loan agreements, with the exception of Gas Company Tower.

Under the Gas Company Tower mortgage loan, we reported a DSCR of 1.02 to 1.00, calculated using actual debt service under the loan, and a DSCR of 0.81 to 1.00, calculated using actual debt service plus a hypothetical principal payment using a 30-year amortization schedule. Because the reported DSCR using the actual debt service plus a hypothetical principal payment was less than 1.00 to 1.00, the lender could seek to remove Brookfield Properties Management (CA) Inc. as property manager of Gas Company Tower.

Pursuant to the terms of the Gas Company Tower, Wells Fargo Center–South Tower, Wells Fargo Center–North Tower, and EY Plaza mortgage loan agreements, we are required to provide annual audited financial statements of Brookfield DTLA Holdings to the lenders or agents. The receipt of any opinion other than an “unqualified” audit opinion on our annual audited financial statements is an event of default under the loan agreements for the properties listed above. If an event of default occurs, the lenders have the right to pursue the remedies contained in the loan documents, including acceleration of all or a portion of the debt and foreclosure.

Note 6—Mezzanine Equity

Mezzanine equity in the consolidated balance sheet as of December 31, 2013 is comprised of the Series A preferred stock, a Series A-1 preferred interest and a senior participating preferred interest (the “Preferred Interests”). The Series A-1 preferred interest and senior participating preferred interest are held by a noncontrolling interest holder. The Preferred Interests are classified in mezzanine equity because they are callable and the holder of the Series A-1 preferred interest and senior participating preferred interest (which also owns some of the Series A preferred stock) indirectly controls the ability to elect to redeem such instruments, through its controlling interest in the Company and its subsidiaries. There is no commitment or obligation on the part of Brookfield DTLA or Brookfield DTLA Holdings to redeem the Preferred Interests. See “—Senior Participating Preferred Interest” below and Note 17 “Subsequent Event” for a discussion of distributions paid related to the senior participating preferred interest.

The Preferred Interests included within mezzanine equity were recorded at fair value on the date of issuance and have been adjusted to the greater of their carrying amount or redemption value as of December 31, 2013. Adjustments to increase the carrying amount to redemption value are recorded in the consolidated statement of operations as a redemption measurement adjustment.

Series A Preferred Stock

Brookfield DTLA is authorized to issue up to 10,000,000 shares of Series A preferred stock, $0.01 par value per share, with a liquidation preference of $25.00 per share.


79
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

In connection with the MPG acquisition, DTLA Fund Holding Co., a subsidiary of Brookfield DTLA Holdings, made a tender offer to purchase all of the issued and outstanding shares of MPG Preferred Stock for cash consideration of $25.00 per share (the “offer price”). A total of 372,901 shares of MPG Preferred Stock were validly tendered into the offer and the holders thereof received the offer price for such shares. At the effective time of the merger, each share of MPG Preferred Stock that was issued and outstanding immediately prior to the merger, including each share of MPG Preferred Stock acquired by DTLA Fund Holding Co. in the offer, was exchanged for one share of Series A preferred stock with rights, terms and conditions substantially identical to those of the MPG Preferred Stock.

As of December 31, 2013, 9,730,370 shares of Series A preferred stock were outstanding, of which 9,357,469 shares were issued to third parties and 372,901 shares were issued to DTLA Fund Holding Co., a subsidiary of Brookfield DTLA Holdings. No dividends were declared on the Series A preferred stock during the year ended December 31, 2013. Dividends on the Series A preferred stock are cumulative, and therefore, will continue to accrue at an annual rate of $1.90625 per share. As of December 31, 2013, the cumulative amount of unpaid dividends totals $95.8 million and has been reflected in the carrying amount of the Series A preferred stock.

The Series A preferred stock does not have a stated maturity and is not subject to any sinking fund or mandatory redemption provisions. Upon liquidation, dissolution or winding up, the Series A preferred stock will rank senior to our common stock with respect to the payment of distributions. We may, at our option, redeem the Series A preferred stock, in whole or in part, for cash at a redemption price of $25.00 per share, plus all accumulated and unpaid dividends on such Series A preferred stock up to and including the redemption date. The Series A preferred stock is not convertible into or exchangeable for any other property or securities of Brookfield DTLA.

The Series A preferred stock is reported at its redemption value of $339.1 million calculated using the redemption price of $25.00 per share plus all accumulated and unpaid dividends on such Series A preferred stock through December 31, 2013.

Series A-1 Preferred Interest

On October 15, 2013, New OP issued a Series A-1 preferred interest to Brookfield DTLA Holdings or wholly owned subsidiaries of Brookfield DTLA Holdings with a stated value of $225.7 million in connection with the formation of Brookfield DTLA and the MPG acquisition. The Series A-1 preferred interest has mirror rights to the Series A preferred stock.

The Series A-1 preferred interest is reported at its redemption value of $314.7 million calculated using its estimated fair value of $234.8 million plus $79.9 million of cumulative dividends on such Series A-1 preferred interest through December 31, 2013.

Senior Participating Preferred Interest

On October 15, 2013, DTLA OP issued a senior participating preferred interest to Brookfield DTLA Holdings in connection with the formation of Brookfield DTLA and the MPG acquisition. The senior participating preferred interest is comprised of $240.0 million in preferred interests with a 7.0% coupon and a 4.0% participating interest in the residual value of Brookfield DTLA Fund Properties III LLC, who owns 333 South Hope and EYP Realty.


80
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

The senior participating preferred interest is reported at its redemption value of $257.8 million calculated using the value of the preferred and participating interests totaling $254.3 million plus $3.5 million of dividends on the preferred interest through December 31, 2013.

On March 21, 2014, Brookfield DTLA made a cash distribution to Brookfield DTLA Holdings totaling $70.0 million, which was comprised of $3.5 million in settlement of preferred dividends on the senior participating preferred interest through December 31, 2013 and a return of investment of $66.5 million using proceeds generated by the refinancing of EY Plaza. See Note 17 “Subsequent Event.”

Distributions

Brookfield DTLA has not paid any cash dividends in the past. Any future dividends declared would be at the discretion of Brookfield DTLA’s board of directors and would depend on its financial condition, results of operations, contractual obligations and the terms of its financing agreements at the time a dividend is considered, and other relevant factors.

Change in Mezzanine Equity

A summary of the change in mezzanine equity for the year ended December 31, 2013 is as follows (in thousands, except share amounts):

 
 
Number of
Shares of
Series A
Preferred
Stock
 
Series A
Preferred
Stock
 
Noncontrolling Interests
 
Mezzanine
Equity
 
 
 
 
Series A-1
Preferred
Interest
 
Senior
Participating
Preferred
Interest
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2012
 
—

 
$
—

 
$
—

 
$
—

 
$
—

Issuance of Series A preferred stock
 
9,730,370

 
252,990

 
 
 
 
 
252,990

Issuance of Series A-1 preferred interest
 
 
 
 
 
234,767

 
 
 
234,767

Issuance of senior participating preferred interest
 
 
 
 
 
 
 
254,280

 
254,280

Cumulative dividends
 
 
 
3,864

 
3,586

 
3,500

 
10,950

Redemption measurement adjustment
 
 
 
82,247

 
76,305

 
 
 
158,552

Balance, December 31, 2013
 
9,730,370

 
$
339,101

 
$
314,658

 
$
257,780

 
$
911,539


Note 7—Stockholders’ Equity

Brookfield DTLA is authorized to issue up to 1,000,000 shares of common stock, $0.01 par value per share.

On April 24, 2013, Brookfield DTLA received an initial contribution of $1,000 from Brookfield DTLA Holdings in exchange for 1,000 shares of Brookfield DTLA common stock. An additional $27,000 was contributed by Brookfield DTLA Holdings on September 30, 2013. As of December 31, 2013, 1,000 shares of common stock were outstanding. No dividends were declared on the common stock during the year ended December 31, 2013.


81
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

Brookfield DTLA has not paid any cash dividends in the past. Any future dividends declared would be at the discretion of Brookfield DTLA’s board of directors and would depend on its financial condition, results of operations, contractual obligations and the terms of its financing agreements at the time a dividend is considered, and other relevant factors.

Note 8—Noncontrolling Interests

Mezzanine Equity Component

The Series A-1 preferred interest and senior participating preferred interest consist of equity interests of New OP and DTLA OP that are owned directly by Brookfield DTLA Holdings. These noncontrolling interests are presented in mezzanine equity in the consolidated balance sheet as of December 31, 2013. See Note 6 “Mezzanine Equity.”

Stockholders’ Equity Component

The Series B common interest ranks junior to the Series A preferred stock as to dividends and upon liquidation and is presented in the consolidated balance sheet as of December 31, 2013 as noncontrolling interest.

Note 9—Accumulated Other Comprehensive Income

A summary of the change in accumulated other comprehensive income related to our cash flow hedges is as follows (in thousands):

 
For the Year Ended December 31,
 
2013
 
2012
 
2011
Balance at beginning of year
$
—

 
$
—

 
$
—

Other comprehensive income before reclassifications
1,007

 
—

 
—

Amounts reclassified from accumulated other
     comprehensive income
—

 
—

 
—

Net current-period other comprehensive income
1,007

 
—

 
—

Balance at end of year
$
1,007

 
$
—

 
$
—



82
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

Note 10—Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).

ASC Topic 820 established a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three categories:

•
Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date.

•
Level 2—Observable prices that are based on inputs not quoted in active markets, but corroborated by market data.

•
Level 3—Unobservable prices that are used when little or no market data is available.

The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. Brookfield DTLA utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible, as well as consider counterparty credit risk in its assessment of fair value.

Recurring Measurements

The valuation of Brookfield DTLA’s interest rate swap is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flow of the derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. We have incorporated credit valuation adjustments to appropriately reflect both our own and the respective counterparty’s non-performance risk in the fair value measurements.

Brookfield DTLA’s assets measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, are as follows (in thousands):

 
 
 
 
Fair Value Measurements Using
Assets
 
Total
Fair
Value
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Interest rate swap at:
 
 
 
 
 
 
 
 
December 31, 2013
 
$
1,007

 
$
—

 
$
1,007

 
$
—

December 31, 2012
 
—

 
—

 
—

 
—

December 31, 2011
 
—

 
—

 
—

 
—



83
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

Note 11—Financial Instruments

Derivative Financial Instruments

A summary of the fair value of Brookfield DTLA’s derivative financial instruments is as follows (in thousands):

 
 
 
Fair Value
 
Balance Sheet Location
 
December 31, 2013
 
December 31, 2012
Derivatives designated as cash flow hedging
    instruments:
 
 
 
 
 
Interest rate swap
Prepaid and other assets
 
$
1,007

 
$
—


A summary of the effect of derivative financial instruments reported in the consolidated and combined financial statements is as follows (in thousands):

 
Amount of Gain
Recognized in AOCI
 
Amount of Gain/(Loss)
Reclassified from
AOCI to Statement
of Operations
Derivatives designated as cash flow hedging instruments:
 
 
 
Interest rate swap for the year ended:
 
 
 
December 31, 2013
$
1,007

 
$
—

December 31, 2012
—

 
—

December 31, 2011
—

 
—


Interest Rate Swap—

As of December 31, 2013, we held an interest rate swap with a notional amount of $185.0 million, which was assigned to the EY Plaza mortgage loan. The swap requires net settlement each month and expires on November 2, 2020.

Interest Rate Caps—

We hold interest rate caps pursuant to the terms of certain of our mortgage agreements with the following notional amounts (in thousands):

 
December 31, 2013
 
December 31, 2012
Wells Fargo Center–South Tower
$
290,000

 
$
—

777 Tower
200,000

 
—

 
$
490,000

 
$
—


The fair value of our interest rate caps was $1.6 million as of December 31, 2013.


84
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

Other Financial Instruments

Brookfield DTLA’s other financial instruments that are exposed to concentrations of credit risk consist primarily of cash and accounts receivable. Management routinely assesses the financial strength of its tenants and, as a consequence, believes that its accounts receivable credit risk exposure is limited. Brookfield DTLA places its temporary cash investments with federally insured institutions. Cash balances with any one institution may at times be in excess of the federally insured limits.

The estimated fair value and face value of our mortgage loans are as follows (in thousands):

 
December 31, 2013
 
December 31, 2012
Estimated fair value
$
1,902,343

 
$
330,267

Face value
1,897,512

 
320,693


We calculated the estimated fair value of our mortgage loans by discounting the future contractual cash flows of the loans using current risk adjusted rates available to borrowers with similar credit ratings. The estimated fair value of mortgage loans is classified as Level 3.

Note 12—Related Party Transactions

Management Agreements

The Predecessor Entities entered into arrangements with Brookfield Properties Management LLC, which is affiliated through common ownership with BPO, under which the affiliate provides property management and various other services. On October 15, 2013, these agreements were transferred to BOP Management Inc., an affiliate of BPO. The MPG properties entered into similar arrangements with BOP Management Inc. after the closing of the acquisition on October 15, 2013. Property management fees under these agreements are calculated based on 3.0% of rents collected (as defined in the management agreements).

A summary of costs incurred by Brookfield DTLA and the Predecessor Entities under these arrangements is as follows (in thousands):

 
For the Year Ended December 31,
 
2013
 
2012
 
2011
Management fees expense
$
3,667

 
$
2,670

 
$
2,748

General, administrative and reimbursable expenses
1,190

 
1,278

 
1,196

Leasing and construction management fees
786

 
1,137

 
2,273


Insurance Agreements

BOA Plaza and EY Plaza are covered under an insurance policy entered into by BPO that provides all risk property and business interruption for BPO’s commercial portfolio with an aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $300.0 million of earthquake insurance. The MPG properties are covered under an insurance policy that provides all risk property and business interruption with an aggregate limit of $1.25 billion and a $130.0 million aggregate limit of earthquake insurance.


85
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

In addition, BOA Plaza and EY Plaza are covered by a terrorism insurance policy that provides aggregate coverage of $4.0 billion for all of BPO’s U.S. properties. The MPG properties are covered by a terrorism insurance policy with a $1.25 billion aggregate limit. Brookfield DTLA is in compliance with the contractual obligations regarding terrorism insurance contained in such agreements.

Insurance premiums for BOA Plaza and EY Plaza are paid by an affiliate company under common control through BPO. Brookfield DTLA reimburses the affiliate company for the actual cost of such premiums.

A summary of costs incurred by the Predecessor Entities under this arrangement is as follows (in thousands):

 
For the Year Ended December 31,
 
2013
 
2012
 
2011
Insurance expense
$
4,949

 
$
4,664

 
$
4,489


Note 13—Rental Income

Brookfield DTLA’s properties are leased to tenants under net operating leases with initial expiration dates ranging from 2014 to 2026. The future minimum rental income (on a non-straight-line basis) to be received under noncancelable tenant operating leases in effect as of December 31, 2013 is as follows (in thousands):

2014
$
128,607

2015
129,240

2016
124,583

2017
121,900

2018
102,192

Thereafter
451,315

 
$
1,057,837


The future minimum rental income shown above excludes amounts that are not fixed in accordance with a tenant’s lease, but are based upon a percentage of reimbursement of actual operating expenses and amortization of above- and below-market leases.

Note 14—Commitments and Contingencies

Tenant Concentration

Brookfield DTLA generally does not require collateral or other security from its tenants, other than security deposits or letters of credit. Our credit risk is mitigated by the high quality of our existing tenant base, review of prospective tenants’ risk profiles prior to lease execution, and frequent monitoring of our tenant portfolio to identify problem tenants. However, since we have a significant concentration of rental revenue from certain tenants, the inability of those tenants to make their lease payments could have a material adverse effect on our results of operations, cash flow or financial condition.


86
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

A significant portion of Brookfield DTLA’s rental income and tenant reimbursements revenue is generated by a small number of tenants. During the years ended December 31, 2013, 2012 and 2011, one tenant, The Capital Group Companies, accounted for more than 10% of our consolidated and combined rental income and tenant reimbursements revenue.

During the years ended December 31, 2013, 2012 and 2011, BOA Plaza and EY Plaza each contributed more than 10% of Brookfield DTLA’s consolidated and combined revenue. The revenue generated by these properties totaled 72%, 100% and 100% of Brookfield DTLA’s consolidated and combined revenue during the years ended December 31, 2013, 2012 and 2011, respectively.

Litigation

General—

Brookfield DTLA and its subsidiaries may be subject to pending legal proceedings and litigation incidental to its business. After consultation with legal counsel, management believes that any liability that may potentially result upon resolution of such matters is not expected to have a material adverse effect on its business, financial condition or consolidated financial statements as a whole.

Merger-Related Litigation—

Following the announcement of the execution of the Agreement and Plan of Merger dated as of April 24, 2013, as amended (the “Merger Agreement”), seven putative class actions were filed against Brookfield Office Properties Inc. (“BPO”), Brookfield DTLA, Brookfield DTLA Holdings LLC, Brookfield DTLA Fund Office Trust Inc., Brookfield DTLA Fund Properties (collectively, the “Brookfield Parties”), MPG Office Trust, Inc., MPG Office, L.P., and the members of MPG Office Trust, Inc.’s board of directors. Five of these lawsuits were filed on behalf of MPG Office Trust, Inc.’s common stockholders: (i) two lawsuits, captioned Coyne v. MPG Office Trust, Inc., et al., No. BC507342 (the “Coyne Action”), and Masih v. MPG Office Trust, Inc., et al., No. BC507962 (the “Masih Action”), were filed in the Superior Court of the State of California in Los Angeles County (the “California State Court”) on April 29, 2013 and May 3, 2013, respectively; and (ii) three lawsuits, captioned Kim v. MPG Office Trust, Inc. et al., No. 24‑C-13-002600 (the “Kim Action”), Perkins v. MPG Office Trust, Inc., et al., No. 24-C-13-002778 (the “Perkins Action”) and Dell’Osso v. MPG Office Trust, Inc., et al., No. 24‑C-13-003283 (the “Dell’Osso Action”) were filed in the Circuit Court for Baltimore City, Maryland on May 1, 2013, May 8, 2013 and May 22, 2013, respectively (collectively, the “Common Stock Actions”). Two lawsuits, captioned Cohen v. MPG Office Trust, Inc. et al., No. 24-C-13-004097 (the “Cohen Action”) and Donlan v. Weinstein, et al., No. 24‑C-13-004293 (the “Donlan Action”), were filed on behalf of MPG Office Trust, Inc.’s preferred stockholders in the Circuit Court for Baltimore City, Maryland on June 20, 2013 and July 2, 2013, respectively (collectively, the “Preferred Stock Actions,” together with the Common Stock Actions, the “Merger Litigations”).

In each of the Common Stock Actions, the plaintiffs allege, among other things, that MPG Office Trust, Inc.’s board of directors breached their fiduciary duties in connection with the merger by failing to maximize the value of MPG Office Trust, Inc. and ignoring or failing to protect against conflicts of interest, and that the relevant Brookfield Parties named as defendants aided and abetted those breaches of fiduciary duty. The Kim Action further alleges that MPG Office, L.P. also aided and abetted the breaches of fiduciary duty by MPG Office Trust, Inc.’s board of directors, and the Dell’Osso Action further alleges that MPG Office Trust, Inc. and MPG Office, L.P. aided and abetted the breaches of fiduciary duty by

87
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

MPG Office Trust, Inc.’s board of directors. On June 4, 2013, the Kim and Perkins plaintiffs filed identical, amended complaints in the Circuit Court for Baltimore City, Maryland. On June 5, 2013, the Masih plaintiffs also filed an amended complaint in the Superior Court of the State of California in Los Angeles County. The three amended complaints, as well as the Dell’Osso Action complaint, allege that the preliminary proxy statement filed by MPG Office Trust, Inc. with the U.S. Securities and Exchange Commission (the “SEC”) on May 21, 2013 is false and/or misleading because it fails to include certain details of the process leading up to the merger and fails to provide adequate information concerning MPG Office Trust, Inc.’s financial advisors.

In each of the Preferred Stock Actions, which were brought on behalf of MPG Office Trust, Inc.’s preferred stockholders, the plaintiffs allege, among other things, that, by entering into the Merger Agreement and tender offer, MPG Office Trust, Inc. breached the Articles Supplementary, which governs the issuance of the MPG preferred shares, that MPG Office Trust, Inc.’s board of directors breached their fiduciary duties by agreeing to a merger agreement that violated the preferred stockholders’ contractual rights and that the relevant Brookfield Parties named as defendants aided and abetted those breaches of contract and fiduciary duty. On July 15, 2013, the plaintiffs in the Preferred Stock Actions filed a joint amended complaint in the Circuit Court for Baltimore City, Maryland that further alleged that MPG Office Trust, Inc.’s board of directors failed to disclose material information regarding BPO’s extension of the tender offer.

The plaintiffs in the seven lawsuits sought an injunction against the merger, rescission or rescissory damages in the event the merger has been consummated, an award of fees and costs, including attorneys’ and experts’ fees, and other relief.

On July 10, 2013, solely to avoid the costs, risks and uncertainties inherent in litigation, the Brookfield Parties and the other named defendants in the Common Stock Actions signed a memorandum of understanding (the “MOU”), regarding a proposed settlement of all claims asserted therein. The parties subsequently entered into a stipulation of settlement dated November 21, 2013 providing for the release of all asserted claims, additional disclosures by MPG concerning the merger made prior to the merger’s approval, and the payment, by defendants, of an award of attorneys’ fees and expenses in an amount not to exceed $475,000 (which will ultimately be determined by the California State Court), which has been recorded as a liability as of December 31, 2013 as part of accounts payable and other liabilities in the consolidated balance sheet. The asserted claims will not be released until such stipulation of settlement is approved by the court, following a hearing on notice to the proposed class. There can be no assurance that the court will approve the settlement. The hearing for final approval of the settlement is scheduled for June 4, 2014.

In the Preferred Stock Actions, at a hearing on July 24, 2013, the Maryland State Court denied plaintiffs’ motion for preliminary injunction seeking to enjoin the tender offer. The plaintiffs filed a second amended complaint on November 22, 2013 that added additional arguments in support of their allegations that the new preferred shares do not have the same rights as the MPG preferred shares. The defendants moved to dismiss the second amended complaint on December 20, 2013, and briefing on the motion concluded on February 28, 2014. A hearing date on the motion has not been scheduled by the court.

While the final outcome with respect to the Merger Litigations cannot be predicted with certainty, in the opinion of management after consultation with external legal counsel, any liability that may arise from such contingencies would not have a material adverse effect on the financial position, results of operations or liquidity of Brookfield DTLA.


88
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

Note 15—Quarterly Financial Information (Unaudited)

 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
(In thousands)
Year Ended December 31, 2013 (1)
 
 
 
 
 
 
 
Revenue
$
23,920

 
$
25,104

 
$
25,234

 
$
64,464

Expenses
23,375

 
24,501

 
24,203

 
81,917

Net income (loss)
545

 
603

 
1,031

 
(17,453
)
Net loss attributable to noncontrolling interests:
 
 
 
 
 
 
 
Series A-1 preferred interest –
    cumulative dividends
—

 
—

 
—

 
(3,586
)
Series A-1 preferred interest –
    redemption measurement adjustment
—

 
—

 
—

 
(76,305
)
Senior participating preferred interest – 
    cumulative dividends
—

 
—

 
—

 
(3,500
)
Series B common interest – allocation of net loss
—

 
—

 
—

 
97,934

Net income (loss) attributable to Brookfield DTLA
545

 
603

 
1,031

 
(2,910
)
Series A preferred stock – cumulative dividends
—

 
—

 
—

 
(3,864
)
Series A preferred stock – redemption
    measurement adjustment
—

 
—

 
—

 
(82,247
)
Net income (loss) available to common interest
    holders of Brookfield DTLA
$
545

 
$
603

 
$
1,031

 
$
(89,021
)
 
 
 
 
 
 
 
 
Year Ended December 31, 2012
 
 
 
 
 
 
 
Revenue
$
22,794

 
$
23,442

 
$
22,703

 
$
23,978

Expenses
21,851

 
22,884

 
22,537

 
25,397

Net income (loss)
$
943

 
$
558

 
$
166

 
$
(1,419
)
__________
(1)
On October 15, 2013, Brookfield DTLA completed the acquisition of MPG pursuant to the terms of the Merger Agreement. See Note 3 “Acquisition of MPG Office Trust, Inc.”


89
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

Note 16—Investments in Real Estate

A summary of information related to Brookfield DTLA’s investments in real estate as of December 31, 2013 is as follows (in thousands):

 
 
Encum-
brances
 
Initial Cost
to Company
 
Costs Capitalized
Subsequent to
Acquisition
 
Gross Amount at Which
Carried at Close of Period
 
Accum-
ulated
Depre-
ciation (2)
 
Year
Acquired
(a) or
Con-
structed (c)
 
Land
 
Buildings and
Improve-
ments
Improve-
ments
 
Carrying
Costs
Land
 
Buildings
and
Improve-
ments
 
Total (1)
Los Angeles, CA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Center–
    North Tower
        333 S. Grand
           Avenue
 
$
550,000

 
$
41,508

 
$
458,096

 
$
41

 
$
—

 
$
41,508

 
$
458,137

 
$
499,645

 
$
(2,940
)
 
2013 (a)
BOA Plaza
     333 S. Hope
          Street
 
214,512

 
54,163

 
354,422

 
41,825

 
—

 
54,163

 
396,247

 
450,410

 
(62,914
)
 
2006 (a)
Wells Fargo Center–South Tower
     355 S. Grand
          Avenue
 
290,000

 
21,231

 
401,508

 
4

 
—

 
21,231

 
401,512

 
422,743

 
(2,087
)
 
2013 (a)
Gas Company
     Tower
     525-555 W.
          Fifth Street
 
458,000

 
20,742

 
396,127

 
150

 
—

 
20,742

 
396,277

 
417,019

 
(2,053
)
 
2013 (a)
EY Plaza
      725 S. Figueroa
          Street
 
185,000

 
47,385

 
286,982

 
87,458

 
—

 
47,385

 
374,440

 
421,825

 
(49,676
)
 
2006 (a)
777 Tower
      777 S. Figueroa
          Street
 
200,000

 
38,010

 
302,153

 
60

 
—

 
38,010

 
302,213

 
340,223

 
(1,942
)
 
2013 (a)
Miscellaneous
     investments
 
—

 
6,000

 
—

 
—

 
—

 
6,000

 
—

 
6,000

 
—

 
 
 
 
$
1,897,512

 
$
229,039

 
$
2,199,288

 
$
129,538

 
$
—

 
$
229,039

 
$
2,328,826

 
$
2,557,865

 
$
(121,612
)
 
 
__________
(1)
The aggregate gross cost of Brookfield DTLA’s investments in real estate for federal income tax purposes approximated $3.0 billion as of December 31, 2013.
(2)
Depreciation in the consolidated and combined statements of operations is computed on a straight-line basis over the following estimated useful lives: buildings and improvements (60 years, with an estimated salvage value of 5%) and tenant improvements (the shorter of the useful life or the applicable lease term).


90
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

The following is a reconciliation of Brookfield DTLA’s and the Predecessor Entities’ investments in real estate and accumulated depreciation (in thousands):

 
For the Year Ended December 31,
 
2013
 
2012
 
2011
Investments in Real Estate
 
 
 
 
 
Balance at beginning of period
$
848,572

 
$
821,648

 
$
799,059

Additions during period:
 
 
 
 
 
Acquisitions
1,685,375

 
—

 
—

Improvements
23,918

 
40,566

 
25,278

Deductions during period:
 
 
 
 
 
Other
—

 
(13,642
)
 
(2,689
)
Balance at close of period
$
2,557,865

 
$
848,572

 
$
821,648

Accumulated Depreciation
 
 
 
 
 
Balance at beginning of period
$
(92,500
)
 
$
(86,804
)
 
$
(70,078
)
Additions during period:
 
 
 
 
 
Depreciation expense
(29,112
)
 
(19,338
)
 
(19,415
)
Deductions during period:
 
 
 
 
 
Other
—

 
13,642

 
2,689

Balance at close of period
$
(121,612
)
 
$
(92,500
)
 
$
(86,804
)

Note 17—Subsequent Event

On March 21, 2014, Brookfield DTLA made a cash distribution to Brookfield DTLA Holdings totaling $70.0 million, which was comprised of $3.5 million in settlement of preferred dividends on the senior participating preferred interest through December 31, 2013 and a return of investment of $66.5 million using proceeds generated by the refinancing of EY Plaza.


91

Item 9.
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.

None.

Item 9A.
Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Brookfield DTLA maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed in its reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to its management, including its principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), Brookfield DTLA carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and its principal financial officer, of the effectiveness of the design and operation of Brookfield DTLA’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, Mitchell E. Rudin, Brookfield DTLA’s principal executive officer, and Bryan K. Davis, Brookfield DTLA’s principal financial officer, concluded that these disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2013.

Management’s Annual Report on Internal Control over Financial Reporting

This Annual Report on Form 10-K does not include a report on management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies.

Changes in Internal Control over Financial Reporting

There have been no changes in Brookfield DTLA’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2013 that have materially affected, or that are reasonable likely to materially affect, our internal control over financial reporting.

Item 9B.
Other Information.

None.


92

PART III

Item 10.
Directors, Executive Officers and Corporate Governance.

The information required under this Item is incorporated herein by reference to Brookfield DTLA’s Notice of Annual Meeting of Stockholders and Proxy Statement or Annual Report on Form 10-K/A, which we intend to file with the SEC within 120 days after December 31, 2013.

Item 11.    Executive Compensation.

The information required under this Item is incorporated herein by reference to Brookfield DTLA’s Notice of Annual Meeting of Stockholders and Proxy Statement or Annual Report on Form 10-K/A, which we intend to file with the SEC within 120 days after December 31, 2013.

Item 12.     
Security Ownership of Certain Beneficial Owners and Management
                   
and Related Stockholder Matters.

The information required under this Item is incorporated herein by reference to Brookfield DTLA’s Notice of Annual Meeting of Stockholders and Proxy Statement or Annual Report on Form 10-K/A, which we intend to file with the SEC within 120 days after December 31, 2013.

Item 13.
Certain Relationships and Related Transactions, and Director Independence.

The information required under this Item is incorporated herein by reference to Brookfield DTLA’s Notice of Annual Meeting of Stockholders and Proxy Statement or Annual Report on Form 10-K/A, which we intend to file with the SEC within 120 days after December 31, 2013.

Item 14.
Principal Accounting Fees and Services.

The information required under this Item is incorporated herein by reference to Brookfield DTLA’s Notice of Annual Meeting of Stockholders and Proxy Statement or Annual Report on Form 10-K/A, which we intend to file with the SEC within 120 days after December 31, 2013.


93

PART IV

Item 15.
Exhibits, Financial Statement Schedules.

(a)
The following documents are filed as part of this Annual Report on Form 10-K:

1.
Financial Statements

See Part II, Item 8. “Financial Statements and Supplementary Data.”

2.
Financial Statement Schedules for the Years Ended December 31, 2013, 2012 and 2011

All financial statement schedules are omitted because they are not applicable, or the required information is included in the consolidated and combined financial statements or notes thereto. See Part II, Item 8. “Financial Statements and Supplementary Data.”

3.
Exhibits (listed by number corresponding to Item 601 of Regulation S-K)

 
 
 
 
Incorporated by Reference
Exhibit No.
 
Exhibit Description
 
Form
 
File No.
 
Exhibit No.
 
Filing Date
 
 
 
 
 
 
 
 
 
 
 
2.1†
 
Agreement and Plan of
Merger by and among
MPG Office Trust, Inc.,
MPG Office, L.P.,
Brookfield DTLA
Holdings L.P.,
Brookfield DTLA Fund
Office Trust Investor
Inc., DTLA Fund Office
Trust Inc., and
Brookfield DTLA Fund
Properties LLC dated as
of April 24, 2013
8-K
 
001-31717
 
2.1
 
April 25, 2013
 
 
 
 
 
 
 
 
 
 
 
2.2
 
Waiver and First
Amendment to Agreement
and Plan of Merger, dated
as of May 19, 2013, by
and among
MPG Office Trust, Inc.,
MPG Office, L.P.,
Brookfield DTLA
Holdings LLC (which was
converted from a
Delaware limited
partnership on
May 10, 2013),
Brookfield DTLA Fund
Office Trust Investor Inc.,
Brookfield DTLA
Fund Office Trust Inc.,
and Brookfield DTLA
Fund Properties LLC
 
8-K
 
001-31717
 
2.1
 
May 20, 2013
 
 
 
 
 
 
 
 
 
 
 

94

 
 
 
 
Incorporated by Reference
Exhibit No.
 
Exhibit Description
 
Form
 
File No.
 
Exhibit No.
 
Filing Date
 
 
 
 
 
 
 
 
 
 
 
2.3
 
Second Amendment to
Agreement and Plan of
Merger, dated as of
July 10, 2013, by and
among MPG Office
Trust, Inc., MPG Office,
L.P., Brookfield DTLA
Holdings LLC (which
was converted from
a Delaware limited partnership on
May 10, 2013), Brookfield DTLA
Fund Office Trust
Investor Inc.,
Brookfield DTLA
Fund Office Trust Inc.,
and Brookfield DTLA
Fund Properties LLC
 
8-K
 
001-31717
 
2.1
 
July 11, 2013
 
 
 
 
 
 
 
 
 
 
 
2.4
 
Third Amendment to
Agreement and Plan of
Merger, dated as of
August 14, 2013, by and
among MPG Office
Trust, Inc., MPG Office,
L.P., Brookfield DTLA
Holdings LLC (which
was converted from a
Delaware limited
partnership on
May 10, 2013),
Brookfield DTLA
Fund Office Trust
Investor Inc.,
Brookfield DTLA
Fund Office Trust Inc.,
and Brookfield DTLA
Fund Properties LLC
 
8-K
 
001-31717
 
2.1
 
August 15, 2013
 
 
 
 
 
 
 
 
 
 
 
3.1
 
Articles of Incorporation
of Brookfield DTLA Fund
Office Trust Investor Inc.
 
S-4
 
333-189273
 
3.1
 
June 12, 2013
 
 
 
 
 
 
 
 
 
 
 
3.2
 
Amended and Restated
Bylaws of Brookfield
DTLA Fund Office Trust
Investor Inc.
 
S-4/A
 
333-189273
 
3.2
 
October 9, 2013
 
 
 
 
 
 
 
 
 
 
 
3.3
 
Articles of Incorporation
of Brookfield DTLA
Fund Office Trust Inc.
 
S-4
 
333-189273
 
3.3
 
June 12, 2013
 
 
 
 
 
 
 
 
 
 
 
3.4
 
Bylaws of Brookfield
DTLA Fund Office
Trust Inc.
 
S-4
 
333-189273
 
3.4
 
June 12, 2013
 
 
 
 
 
 
 
 
 
 
 


95

 
 
 
 
Incorporated by Reference
Exhibit No.
 
Exhibit Description
 
Form
 
File No.
 
Exhibit No.
 
Filing Date
 
 
 
 
 
 
 
 
 
 
 
3.5
 
Articles of Amendment of
Brookfield DTLA Fund
Office Trust Inc.
 
S-4/A
 
333-189273
 
3.5
 
October 9, 2013
 
 
 
 
 
 
 
 
 
 
 
3.6
 
Articles Supplementary of
Brookfield DTLA Fund
Office Trust Investor Inc.
7.625% Series A
Cumulative Redeemable
Preferred Stock
 
S-4/A
 
333-189273
 
4.1
 
August 27, 2013
 
 
 
 
 
 
 
 
 
 
 
3.7
 
Articles Supplementary of
Brookfield DTLA Fund
Office Trust Investor Inc.
15% Series B
Cumulative Nonvoting
Preferred Stock
 
S-4/A
 
333-189273
 
4.2
 
August 27, 2013
 
 
 
 
 
 
 
 
 
 
 
3.8
 
Articles Supplementary of
Brookfield DTLA Fund
Office Trust Inc.
7.625% Series A
Cumulative Redeemable
Preferred Stock
 
S-4/A
 
333-189273
 
4.3
 
August 27, 2013
 
 
 
 
 
 
 
 
 
 
 
3.9
 
Articles Supplementary of
Brookfield DTLA Fund
Office Trust Inc.
15% Series B
Cumulative Nonvoting
Preferred Stock
 
S-4/A
 
333-189273
 
4.4
 
August 27, 2013
 
 
 
 
 
 
 
 
 
 
 
4.1*
 
Form of Certificate of
Series A Preferred Stock
of Brookfield DTLA Fund
Office Trust Investor Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1
 
Form of Indemnity Agreement
 
8-K
 
001-36135
 
10.1
 
November 4, 2013
 
 
 
 
 
 
 
 
 
 
 
10.2
 
Exhibit F to Contribution
Agreement between
Robert F. Maguire III,
certain other contributors
and MPG Office, L.P.,
dated as of
November 11, 2002, as
amended effective
May 31, 2003
 
10-K
 
001-31717
 
10.25
 
March 31, 2010
 
 
 
 
 
 
 
 
 
 
 

96

 
 
 
 
Incorporated by Reference
Exhibit No.
 
Exhibit Description
 
Form
 
File No.
 
Exhibit No.
 
Filing Date
 
 
 
 
 
 
 
 
 
 
 
10.3
 
Exhibit G to Contribution
Agreement between
Philadelphia Plaza-Phase
II and MPG Office, L.P.,
dated as of
November 8, 2002, as
amended effective
May 31, 2003
 
10-K
 
001-31717
 
10.27
 
March 31, 2010
 
 
 
 
 
 
 
 
 
 
 
10.4††
 
Loan Agreement, dated as
of April 4, 2007, between
North Tower, LLC, as
Borrower, and
Lehman Ali Inc. and
Greenwich Capital
Financial Products, Inc.,
together, as Lender
 
10-K
 
001-31717
 
10.47
 
March 18, 2013
 
 
 
 
 
 
 
 
 
 
 
10.5
 
Consent and
Acknowledgment
Agreement, dated
as of October 15, 2013,
by and among U.S. Bank
National Association, as
Trustee, Successor-in-Interest to Bank of
America, N.A., as Trustee
for the registered holders
of GS Mortgage Securities Corporation II,
commercial mortgage
pass-through certificates,
Series 2007-GG10, as
Lender, North Tower,
LLC, as Borrower,
MPG Office, L.P., as
Old Guarantor, and
Brookfield DTLA
Holdings LLC, as
New Guarantor
 
8-K
 
001-36135
 
10.11
 
April 7, 2014
 
 
 
 
 
 
 
 
 
 
 
10.6††
 
Loan Agreement, dated as
of August 7, 2006,
between
Maguire Properties –
555 W. Fifth, LLC,
Maguire Properties –
350 S. Figueroa, LLC and
Nomura Credit &
Capital, Inc.
 
10-K/A
 
001-31717
 
10.48
 
July 26, 2013

97

 
 
 
 
Incorporated by Reference
Exhibit No.
 
Exhibit Description
 
Form
 
File No.
 
Exhibit No.
 
Filing Date
 
 
 
 
 
 
 
 
 
 
 
10.7
 
Promissory Note A-1,
dated as of
August 7, 2006, between
Maguire Properties –
555 W. Fifth, LLC,
Maguire Properties –
350 S. Figueroa, LLC and
Nomura Credit &
Capital, Inc.
 
8-K
 
001-31717
 
99.2
 
August 11, 2006
 
 
 
 
 
 
 
 
 
 
 
10.8
 
Promissory Note A-2,
dated as of
August 7, 2006, between
Maguire Properties –
555 W. Fifth, LLC,
Maguire Properties –
350 S. Figueroa, LLC and
Nomura Credit &
Capital, Inc.
 
8-K
 
001-31717
 
99.3
 
August 11, 2006
 
 
 
 
 
 
 
 
 
 
 
10.9
 
Guaranty Agreement,
dated as of
August 7, 2006, by
MPG Office, L.P. in favor
of Nomura Credit &
Capital, Inc.
 
8-K
 
001-31717
 
99.4
 
August 11, 2006
 
 
 
 
 
 
 
 
 
 
 
10.10
 
Omnibus Amendment to
Loan Documents, dated as
of July 2, 2010, by and
among Maguire Properties
– 555 W. Fifth, LLC and
Maguire Properties –
350 S. Figueroa, LLC, as
Borrower,
MPG Office, L.P., as
Manager and Guarantor,
and Bank of America,
National Association, as
Lender
 
8-K
 
001-31717
 
99.1
 
July 7, 2010
 
 
 
 
 
 
 
 
 
 
 
10.11
 
Loan Agreement, dated
as of August 27, 2004,
between Trizec 333 LA,
LLC, as Borrower, and
Morgan Stanley Mortgage
Capital Inc. and
Metropolitan Life
Insurance Company
collectively, as Lender
 
8-K
 
001-36135
 
10.1
 
April 7, 2014

98

 
 
 
 
Incorporated by Reference
Exhibit No.
 
Exhibit Description
 
Form
 
File No.
 
Exhibit No.
 
Filing Date
 
 
 
 
 
 
 
 
 
 
 
10.12
 
Deed of Trust, Security
Agreement and Fixture
Filing by Maguire
Properties – 777 Tower,
LLC, as Trustor to
Fidelity National Title
Insurance Company, as
Trustee for the benefit of
Metropolitan Life
Insurance Company,
as Beneficiary, dated
October 15, 2013
 
8-K
 
001-36135
 
10.2
 
April 7, 2014
 
 
 
 
 
 
 
 
 
 
 
10.13
 
Promissory Note, dated as
of October 15, 2013,
between Maguire
Properties – 777 Tower,
LLC and Metropolitan
Life Insurance Company
 
8-K
 
001-36135
 
10.3
 
April 7, 2014
 
 
 
 
 
 
 
 
 
 
 
10.14
 
Deed of Trust, Security
Agreement and Fixture
Filing by Maguire
Properties – 355 S. Grand,
LLC, as Trustor to
Fidelity National Title
Insurance Company, as
Trustee for the benefit of
Metropolitan Life
Insurance Company, as
Beneficiary, dated
November 8, 2013
 
8-K
 
001-36135
 
10.4
 
April 7, 2014
 
 
 
 
 
 
 
 
 
 
 
10.15
 
Promissory Note, dated as
of November 8, 2013,
between Maguire
Properties – 355 S. Grand,
LLC and Metropolitan
Life Insurance Company
 
8-K
 
001-36135
 
10.5
 
April 7, 2014
 
 
 
 
 
 
 
 
 
 
 
10.16
 
Loan Agreement, between
EYP Realty, LLC, as
Borrower and Wells
Fargo Bank, National
Association, as
Administrative Agent,
Wells Fargo Securities,
LLC, as Sole Lead
Arranger and Sole
Bookrunner and the
financial institutions now
or hereafter signatories
hereto and their assignees
pursuant to Section 13.12,
as Lenders, entered into
as of November 27, 2013
 
8-K
 
001-36135
 
10.6
 
April 7, 2014


99

 
 
 
 
Incorporated by Reference
Exhibit No.
 
Exhibit Description
 
Form
 
File No.
 
Exhibit No.
 
Filing Date
 
 
 
 
 
 
 
 
 
 
 
10.17
 
Promissory Note, dated as
of January 2, 2014,
between EYP Realty, LLC
and Wells Fargo Bank,
National Association
 
8-K
 
001-36135
 
10.7
 
April 7, 2014
 
 
 
 
 
 
 
 
 
 
 
10.18
 
Promissory Note, dated as
of January 2, 2014,
between EYP Realty, LLC
and PNC Bank, National
Association
 
8-K
 
001-36135
 
10.8
 
April 7, 2014
 
 
 
 
 
 
 
 
 
 
 
10.19
 
Promissory Note, dated as
of December 18, 2013,
between EYP Realty, LLC
and Aozora Bank, Ltd.
 
8-K
 
001-36135
 
10.9
 
April 7, 2014
 
 
 
 
 
 
 
 
 
 
 
10.20
 
Assignment and
Assumption Agreement,
dated as of
January 2, 2014, between
Wells Fargo Bank,
National Association and
PNC Bank, National
Association
 
8-K
 
001-36135
 
10.10
 
April 7, 2014
 
 
 
 
 
 
 
 
 
 
 
21.1*
 
List of Subsidiaries of the
Registrant as of
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.1*
 
Certification of Principal
Executive Officer dated
April 7, 2014 pursuant
to Section 302 of the
Sarbanes-Oxley Act
of 2002
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.2*
 
Certification of Principal
Financial Officer
dated April 7, 2014
pursuant to Section 302 of
the Sarbanes-Oxley Act
of 2002
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32.1**
 
Certification of Principal
Executive Officer and
Principal Financial
Officer dated
April 7, 2014 pursuant
to 18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the
Sarbanes-Oxley
Act of 2002 (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


100

 
 
 
 
Incorporated by Reference
Exhibit No.
 
Exhibit Description
 
Form
 
File No.
 
Exhibit No.
 
Filing Date
 
 
 
 
 
 
 
 
 
 
 
101.INS**
 
XBRL Instance Document
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.SCH**
 
XBRL Taxonomy
Extension Schema
Document
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.CAL**
 
XBRL Taxonomy
Extension Calculation
Linkbase Document
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.DEF**
 
XBRL Taxonomy
Extension Definition
Linkbase Document
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.LAB**
 
XBRL Taxonomy
Extension Label
Linkbase Document
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.PRE**
 
XBRL Taxonomy
Extension Presentation
Linkbase Document
 
 
 
 
 
 
 
 

(b)
Exhibits Required by Item 601 of Regulation S-K

See Item 3 above.

(c)
Financial Statement Schedules

See Item 2 above.

__________
*
Filed herewith.
**
Furnished herewith.
†
Pursuant to Regulation S-K 601(b)(2), we have not filed exhibits and schedules related to this agreement. Copies of such exhibits and schedules will be furnished supplementally to the SEC upon request.
††
Confidential treatment has been requested with respect to certain portions of this agreement.
(1)
This exhibit should not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934.



101

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:
April 7, 2014

 
BROOKFIELD DTLA FUND OFFICE
    TRUST INVESTOR INC.
 
 
Registrant
 
 
 
 
 
 
By:
/s/ MITCHELL E. RUDIN
 
 
 
Mitchell E. Rudin
 
 
 
President and Chief Executive Officer,
 
 
 
U.S. Commercial Operations
 
 
 
(Principal executive officer)
 


102

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 
 
 
 
Date:
April 7, 2014
By:
/s/ MITCHELL E. RUDIN
 
 
 
Mitchell E. Rudin
President and Chief Executive Officer,
U.S. Commercial Operations,
and Director
(Principal executive officer)
 
 
 
 
 
April 7, 2014
By:
/s/ BRYAN K. DAVIS
 
 
 
Bryan K. Davis
Chief Financial Officer and Director
(Principal financial and accounting officer)
 
 
 
 
 
April 7, 2014
By:
/s/ G. MARK BROWN
 
 
 
G. Mark Brown
Global Chief Investment Officer and Director
 
 
 
 
 
April 7, 2014
By:
/s/ ROBERT M. DEUTSCHMAN
 
 
 
Robert M. Deutschman
Director
 
 
 
 
 
April 7, 2014
By:
/s/ EDWARD J. RATINOFF
 
 
 
Edward J. Ratinoff
Director
 
 
 
 
 
April 7, 2014
By:
/s/ PAUL L. SCHULMAN
 
 
 
Paul L. Schulman
Director
 
 
 
 
 
April 7, 2014
By:
/s/ ROBERT L. STELZL
 
 
 
Robert L. Stelzl
Director



103