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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

OR

TAUBMAN CENTERS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

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 periods 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

The aggregate market value of the 48,985,475 shares of Common Stock held by non-affiliates of the registrant as of March 3, 2005 was $1.1 billion, based upon the closing price $22.89 on the New York Stock Exchange composite tape on June 30, 2004. (For this computation, the registrant has excluded the market value of all shares of its Common Stock directors of the registrant and certain other shareholders; such exclusion shall not be deemed to constitute an admission that any such person is an "affiliate" of the registrant.) As of March 3, 2005, there were outstanding 49,976,870 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the annual shareholders meeting to be held in 2005 are incorporated by reference into Part III.

PART I

Item 1. BUSINESS.

        The following discussion of our business contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our expectations or beliefs concerning future events. We caution that although forward-looking statements reflect our good faith beliefs and best judgment based upon current information, these statements are qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including those risks, uncertainties, and factors detailed from time to time in reports filed with the SEC, and in particular those set forth under the headings “General Risks of the Company” and “Environmental Matters” in this Annual Report on Form 10-K.

The Company

        Taubman Centers, Inc. (“we”, “us”, “our”, or “TCO”) was incorporated in Michigan in 1973 and we had our initial public offering (“IPO”) in 1992. We own a 61% managing general partner’s interest in The Taubman Realty Group Limited Partnership (the “Operating Partnership” or “TRG”), through which we conduct all of our operations.

        We are engaged in the ownership, development, acquisition, and operation of regional shopping centers and interests therein. Our portfolio as of December 31, 2004, included 21 urban and suburban centers located in nine states. Two new centers are under construction in New Jersey and North Carolina. The Operating Partnership also owns certain regional retail shopping center development projects and more than 99% of The Taubman Company LLC (the “Manager”), which manages the shopping centers and provides other services to the Operating Partnership and to us. See the table on page 13 of this report for information regarding the centers.

        We are a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended (the “Code”). In order to satisfy the provisions of the Code applicable to REITs, we must distribute to our shareholders at least 90% of our REIT taxable income and meet certain other requirements. The Operating Partnership’s partnership agreement provides that the Operating Partnership will distribute, at a minimum, sufficient amounts to its partners such that our pro rata share will enable us to pay shareholder dividends (including capital gains dividends that may be required upon the Operating Partnership’s sale of an asset) that will satisfy the REIT provisions of the Code.

Recent Developments

        For a discussion of business developments that occurred in 2004, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A).

The Shopping Center Business

        There are several types of retail shopping centers, varying primarily by size and marketing strategy. Retail shopping centers range from neighborhood centers of less than 100,000 square feet of GLA to regional and super-regional shopping centers. Retail shopping centers in excess of 400,000 square feet of GLA are generally referred to as “regional” shopping centers, while those centers having in excess of 800,000 square feet of GLA are generally referred to as “super-regional” shopping centers. Nineteen of our centers are “super-regional” centers. In this annual report on Form 10-K, the term “regional shopping centers” refers to both regional and super-regional shopping centers. The term “GLA” refers to gross retail space, including anchors and mall tenant areas, and the term “Mall GLA” refers to gross retail space, excluding anchors. The term “anchor” refers to a department store or other large retail store. The term “mall tenants” refers to stores (other than anchors) that are typically specialty retailers and lease space in shopping centers.

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Business of the Company

        We, as managing general partner of the Operating Partnership, are engaged in the ownership, management, leasing, acquisition, development, and expansion of regional shopping centers.

      The centers:

        The most important factor affecting the revenues generated by the centers is leasing to mall tenants (primarily specialty retailers), which represents approximately 90% of revenues. Anchors account for less than 10% of revenues because many own their stores and, in general, those that lease their stores do so at rates substantially lower than those in effect for mall tenants.

        Our portfolio is concentrated in highly productive super-regional shopping centers. Of the 21 centers, 20 had annual rent rolls at December 31, 2004 of over $10 million. We believe that this level of productivity is indicative of the centers’ strong competitive position and is, in significant part, attributable to our business strategy and philosophy. We believe that large shopping centers (including regional and especially super-regional shopping centers) are the least susceptible to direct competition because (among other reasons) anchors and large specialty retail stores do not find it economically attractive to open additional stores in the immediate vicinity of an existing location for fear of competing with themselves. In addition to the advantage of size, we believe that the centers’ success can be attributed in part to their other physical characteristics, such as design, layout, and amenities.

Business Strategy And Philosophy

        We believe that the regional shopping center business is not simply a real estate development business, but rather an operating business in which a retailing approach to the on-going management and leasing of the centers is essential. Thus we:

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        The centers compete for retail consumer spending through diverse, in-depth presentations of predominantly fashion merchandise in an environment intended to facilitate customer shopping. While some centers include stores that target high-end, upscale customers, each center is individually merchandised in light of the demographics of its potential customers within convenient driving distance.

        Our leasing strategy involves assembling a diverse mix of mall tenants in each of the centers in order to attract customers, thereby generating higher sales by mall tenants. High sales by mall tenants make the centers attractive to prospective tenants, thereby increasing the rental rates that prospective tenants are willing to pay. We implement an active leasing strategy to increase the centers’ productivity and to set minimum rents at higher levels. Elements of this strategy include terminating leases of under-performing tenants, renegotiating existing leases, and not leasing space to prospective tenants that (though viable or attractive in certain ways) would not enhance a center’s retail mix.

        Our leasing strategy also includes a new initiative in 2005. After much discussion with retailers and performing significant analysis, we have decided to begin offering our tenants the option to pay a fixed charge or pay their share of common area maintenance (CAM) costs. We believe that this will be positive for tenant relations, as it will allow the retailer to decide whether fixed CAM or traditional net CAM works best for them. Our research suggests this approach is unique in the industry; the retailer can choose greater predictability for a modest premium in the fixed CAM option. From a financial perspective, our analysis shows the premium will balance our additional risk. Assuming tenants sign up for the fixed CAM option, over time there will be significantly less matching of CAM income with CAM expenditures, which can vary considerably from period to period.

Potential For Growth

        Our principal objective is to enhance shareholder value. We seek to maximize the financial results of our core assets, while also pursuing a growth strategy that primarily includes an active new center development program.

Internal Growth

        We expect that the majority of our future growth will come from our existing core portfolio and business. Although we’ve always had a culture of intensively managing our assets and maximizing the rents from tenants, we’re committed to improving the processes that significantly impact the core portfolio in order to drive even better performance.

        Our core business strategy is to maintain a portfolio of properties that deliver above-market profitable growth by providing targeted retailers with the best opportunity to do business in each market and targeted shoppers with the best local shopping experience for their needs.

Development of New Centers

        We are pursuing an active program of regional shopping center development. We believe that we have the expertise to develop economically attractive regional shopping centers through intensive analysis of local retail opportunities. We believe that the development of new centers is an important use of our capital and an area in which we excel. At any time, we have numerous potential development projects in various stages.

        Northlake Mall, a 1.1 million square foot wholly-owned center in Charlotte, North Carolina is currently under construction and is scheduled to open September 15, 2005.

        Our approximately $75 million balance of development pre-construction costs as of December 31, 2004 consists of costs relating to our Oyster Bay project in Town of Oyster Bay, New York. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations-Planned Capital Spending regarding the status of this project.

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        We have signed a conditional letter of intent with regard to a project in Salt Lake City, Utah. This project would be a total reconfiguration of two existing properties and Nordstrom has announced its commitment to the project. While the structure and amount of our investment is not finalized, we are hopeful we will begin construction as early as 2005.

        In addition, in January 2005, we entered into an agreement to invest in The Pier at Caesar’s (The Pier) in Atlantic City, a 0.3 million square foot project in Atlantic City, New Jersey. The project is currently under construction and will open in 2006. Under the agreement, we will have a 30% interest in The Pier. We also entered into a joint development agreement for future projects with our partner in this project.

        Our policies with respect to development activities are designed to reduce the risks associated with development. We generally do not intend to acquire land early in the development process. Instead, we generally acquire options on land or form partnerships with landholders holding potentially attractive development sites. We typically exercise the options only once we are prepared to begin construction. The pre-construction phase for a regional center typically extends over several years and the time to obtain anchor commitments, zoning and regulatory approvals, and public financing arrangements can vary significantly from project to project. In addition, we do not intend to begin construction until a sufficient number of anchor stores have agreed to operate in the shopping center, such that we are confident that the projected sales and rents from Mall GLA are sufficient to earn a return on invested capital in excess of our cost of capital. Having historically followed these principles, our experience indicates that, on average, less than 10% of the costs of the development of a regional shopping center will be incurred prior to the construction period. However, no assurance can be given that we will continue to be able to so limit pre-construction costs. Unexpected costs due to extended zoning and regulatory processes may cause our investment in a project to exceed this historic experience.

        While we will continue to evaluate development projects using criteria, including financial criteria for rates of return, similar to those employed in the past, no assurances can be given that the adherence to these policies will produce comparable results in the future. In addition, the costs of shopping center development opportunities that are explored but ultimately abandoned will, to some extent, diminish the overall return on development projects. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital Spending” for further discussion of our development activities.

Strategic Acquisitions

        Our objective is to acquire existing centers only when they are compatible with the quality of our portfolio (or can be redeveloped to that level) and that satisfy our strategic plans and pricing requirements. Recently we acquired a 30% interest in The Pier at Caesars, a project currently under construction by Gordon Group in Atlantic City, New Jersey. In 2003, we acquired a 25% interest in Waterside Shops at Pelican Bay in Naples, Florida. We also may acquire additional interests in centers currently in our portfolio. In 2004 we acquired the additional 23.6% interest in International Plaza, bringing our ownership in the shopping center to 50.1% and the additional 30% ownership of Beverly Center, bringing our ownership in the shopping center to 100%.

        In addition, we have begun looking at opportunities in Asia to augment our existing development and acquisition activities. We have several key criteria for any international initiative: 1) we would like it to be a sustainable program, not just one project, 2) we would like strong partners who are actively engaged in the region, and 3) we would seek to limit our financial exposure while capitalizing on our expertise and knowledge.

Expansions of the Centers

        Another potential element of growth is the strategic expansion of existing properties to update and enhance their market positions, by replacing or adding new anchor stores or increasing mall tenant space. Most of the centers have been designed to accommodate expansions. Expansion projects can be as significant as new shopping center construction in terms of scope and cost, requiring governmental and existing anchor store approvals, design and engineering activities, including rerouting utilities, providing additional parking areas or decking, acquiring additional land, and relocating anchors and mall tenants (all of which must take place with a minimum of disruption to existing tenants and customers).

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        Construction has begun on an expansion and renovation at Waterside Shops at Pelican Bay. The expansion will increase mall tenant space by approximately 78,000 square feet. The project is scheduled to be completed in October 2005.

        In addition, at Stamford Town Center we purchased the Filene’s store, which closed in January 2005. We are now planning to reposition that center commencing in 2005. We expect to announce the details of the renovation over the next several months.

        The following table includes information regarding recent development, acquisition, and expansion and renovation activities:

Rental Rates

        As leases have expired in the centers, we have generally been able to rent the available space, either to the existing tenant or a new tenant, at rental rates that are higher than those of the expired leases. In a period of increasing sales, rents on new leases will tend to rise as tenants’ expectations of future growth become more optimistic. In periods of slower growth or declining sales, such as we experienced from 2001 to 2003, rents on new leases will grow more slowly or will decline for the opposite reason. However, center revenues nevertheless increase as older leases roll over or are terminated early and replaced with new leases negotiated at current rental rates that are usually higher than the average rates for existing leases.

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        The following tables contain certain information regarding per square foot minimum rent in our consolidated businesses and unconsolidated joint ventures at the comparable centers (centers that had been owned and open for the current and preceding year):

        The spread between opening and closing rents may not be indicative of future periods, as this statistic is not computed on comparable tenant spaces, and can vary significantly from period to period depending on the total amount, location, and average size of tenant space opening and closing in the period. Rents on stores opening in 2004 and 2003 were generally negotiated in a decreasing sales environment. Now that sales have shown positive year-over-year growth for 21 months, and assuming this positive trend continues, we would expect to also see improvement in rent growth.

Lease Expirations

        The following table shows lease expirations based on information available as of December 31, 2004 for the next ten years for all owned centers in operation at that date:

        We believe that the information in the table is not necessarily indicative of what will occur in the future because of several factors, but principally because of early lease terminations at the centers. For example, the average remaining term of the leases that were terminated during the period 1998 to 2004 was approximately two years. The average term of leases signed during 2004 and 2003 was approximately seven years.

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        In addition, mall tenants at the centers may seek the protection of the bankruptcy laws, which could result in the termination of such tenants’ leases and thus cause a reduction in cash flow. In 2004, approximately 1.7% of leases were so affected compared to 2.3% in 2003. This statistic has ranged from 1.2% to 4.5% since we went public in 1992. Since 1991, the annual provision for losses on accounts receivable has been less than 2% of annual revenues.

Occupancy

        Mall tenant leased space, ending occupancy, and average occupancy rates of our centers were 90.7%, 89.6% and 87.4%, respectively, in 2004, and 89.8%, 87.4%, and 86.6%, respectively, in 2003. For comparable centers, leased space, ending occupancy, and average occupancy rates were 90.5%, 89.4%, and 87.1%, respectively, in 2004, and 89.5%, 87.3%, and 86.6%, respectively, in 2003. Occupancy statistics include mall tenants with lease terms greater than one year and value center anchors.

Major Tenants

        No single retail company represents 10% or more of our revenues. The combined operations of The Limited, Inc. accounted for approximately 5.0% of Mall GLA as of December 31, 2004 and 4.7% of 2004 minimum rent. No other single retail company accounted for more than 3% of Mall GLA or 4% of 2004 minimum rent. The following table shows the ten largest tenants and their square footage as of December 31, 2004:

General Risks of the Company

The Economic Performance and Value of our Shopping Centers are Dependent on Many Factors

        The economic performance and value of our shopping centers are dependent on various factors. Additionally, these same factors will influence our decision whether to go forward on the development of new centers and may affect the ultimate economic performance and value of projects under construction. Adverse changes in the economic performance and value of our shopping centers would adversely affect our income and cash available to pay dividends.

Such factors include:

        In addition, the value and performance of our shopping centers may be adversely affected by certain other factors discussed below including competition, uninsured losses, and environmental liabilities. 

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We are in a competitive business.

        There are numerous shopping facilities that compete with our properties in attracting retailers to lease space. In addition, retailers at our properties face continued competition from discount shopping centers, lifestyle centers, outlet malls, wholesale and discount shopping clubs, direct mail, telemarketing, television shopping networks and shopping via the Internet. Competition of this type could adversely affect our revenues and cash available for distribution to stockholders.

        We compete with other major real estate investors with significant capital for attractive investment opportunities. These competitors include other REITs, investment banking firms and private institutional investors. This competition has increased prices for commercial properties and may impair our ability to make suitable property acquisitions on favorable terms in the future.

Some of our potential losses may not be covered by insurance.

        We carry comprehensive liability, fire, flood, earthquake, extended coverage and rental loss insurance on each of our properties. We believe the policy specifications and insured limits of these policies are adequate and appropriate. There are, however, some types of losses, including lease and other contract claims, that generally are not insured. If an uninsured loss or a loss in excess of insured limits occurs, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. If this happens, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.

        In November 2002, Congress passed the “Terrorism Risk Insurance Act of 2002” (TRIA), which required insurance companies to offer terrorism coverage to all existing insured companies for an additional cost. As a result, our standard property insurance policies are currently provided without a sub-limit for terrorism, eliminating the need for separate terrorism insurance policies.

         TRIA has an expiration date of December 31, 2005. While Congress may extend or replace TRIA , the possibility exists that TRIA may be allowed to expire. There are specific provisions in our loans that address terrorism insurance. Simply stated, in most loans, we are obligated to obtain terrorism insurance, but there are limits on the amounts we could be required to spend to obtain such coverage. If Congress fails to extend or replace TRIA or if another terrorist event occurs, we would likely pay higher amounts for terrorism insurance coverage and/or obtain less coverage than we have currently. Our inability to obtain such coverage or to do so only at greatly increased costs may also negatively impact the availability and cost of future financings.

We may be subject to liabilities for environmental matters.

        All of the centers presently owned by us (not including option interests in certain pre-development projects ) have been subject to environmental assessments. No assurances can be given, however, that all environmental liabilities have been identified or that no prior owner, operator, or current occupant has created an environmental condition not known to us. Moreover, no assurances can be given that future laws, ordinances or regulations will not impose any material environmental liability or that the current environmental condition of the centers will not be affected by tenants and occupants of the centers, by the condition of properties in the vicinity of the centers (such as the presence of underground storage tanks) or by third parties unrelated to us.

We hold investments in joint ventures in which we do not control all decisions, and we may have conflicts of interest with our joint venture partners.

        Some of our shopping centers are partially owned by non-affiliated partners through joint venture arrangements. As a result, we do not control all decisions regarding those shopping centers and may be required to take actions that are in the interest of the joint venture partners but not our best interests. Accordingly, we may not be able to favorably resolve any issues which arise with respect to such decisions, or we may have to provide financial or other inducements to our joint venture partners to obtain such resolution.

        Various restrictive provisions and rights govern sales or transfers of interests in our joint ventures. These may work to our disadvantage because, among other things, we may be required to make decisions as to the purchase or sale of interests in our joint ventures at a time that is disadvantageous to us.

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The bankruptcy of our tenants, anchors or joint venture partners could adversely affect us.

        We could be adversely affected by the bankruptcy of third parties. The bankruptcy of a mall tenant could result in the termination of its lease which would lower the amount of cash generated by that mall. In addition, if a department store operating as an anchor at one of our shopping centers were to go into bankruptcy and cease operating, we may experience difficulty and delay in replacing the anchor. In addition, the anchor’s closing may lead to reduced customer traffic and lower mall tenant sales. As a result, we may also experience difficulty or delay in leasing spaces in areas adjacent to the vacant anchor space. The profitability of shopping centers held in a joint venture could also be adversely affected by the bankruptcy of one of the joint venture partners if, because of certain provisions of the bankruptcy laws, we were unable to make important decisions in a timely fashion or became subject to additional liabilities.

Our investments are subject to credit and market risk.

        We occasionally extend credit to third parties in connection with the sale of land or other transactions. We have occasionally made investments in marketable and other equity securities. We are exposed to risk in the event the values of our investments and/ or our loans decrease due to overall market conditions, business failure, and/ or other nonperformance by the investees or counterparties.

Our real estate investments are relatively illiquid.

        We may be limited in our ability to vary our portfolio in response to changes in economic or other conditions by restriction on transfer imposed by our partners or lenders. In addition, under TRG’s partnership agreement, upon the sale of a center or TRG’s interest in a center, TRG may be required to distribute to its partners all of the cash proceeds received by TRG from such sale. If TRG made such a distribution, the sale proceeds would not be available to finance TRG’s activities, and the sale of a center may result in a decrease in funds generated by continuing operations and in distributions to TRG’s partners, including us.

We may acquire or develop new properties, and these activities are subject to various risks.

        We actively pursue development and acquisition activities as opportunities arise, and these activities are subject to the following risks:

        We intend to explore development and acquisition opportunities in international markets. In addition to the risks noted above we may have additional currency, funds repatriation, tax and other political and regulatory considerations associated with such projects that may reduce our financial return.

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We may not be able to maintain our status as a REIT.

        We may not be able to maintain our status as a REIT for Federal income tax purposes with the result that the income distributed to shareholders will not be deductible in computing taxable income and instead would be subject to tax at regular corporate rates. We may also be subject to the alternative minimum tax if we fail to maintain our status as a REIT. Any such corporate tax liability would be substantial and would reduce the amount of cash available for distribution to our shareholders which, in turn, could have a material adverse impact on the value of, or trading price for, our shares. Although we believe we are organized and operate in a manner to maintain our REIT qualification, many of the REIT requirements of the Internal Revenue Code of 1986, as amended, or the Code, are very complex and have limited judicial or administrative interpretations. Changes in tax laws or regulations or new administrative interpretations and court decisions may also affect our ability to maintain REIT status in the future. If we do not maintain our REIT status in any year, we may be unable to elect to be treated as a REIT for the next four taxable years.

        Although we currently intend to maintain our status as a REIT, future economic, market, legal, tax, or other considerations may cause us to determine that it would be in our and our shareholders’ best interests to revoke our REIT election. If we revoke our REIT election, we will not be able to elect REIT status for the next four taxable years.

We may be subject to taxes even if we qualify as a REIT.

        Even if we qualify as a REIT for federal income tax purposes, we will be required to pay certain federal, state and local taxes on our income and property. For example, we will be subject to income tax to the extent we distribute less than 100% of our REIT taxable income, including capital gains. Moreover, if we have net income from “prohibited transactions,” that income will be subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business. The determination as to whether a particular sale is a prohibited transaction depends on the facts and circumstances related to that sale. We cannot guarantee that sales of our properties would not be prohibited transactions unless we comply with certain statutory safe-harbor provisions. The need to avoid prohibited transactions could cause us to forego or defer sales of facilities that our predecessors otherwise would have sold or that might otherwise be in our best interest to sell.

        In addition, any net taxable income earned directly by our taxable REIT subsidiaries will be subject to federal and state corporate income tax. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct certain interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some payments that it receives or on some deductions taken by the taxable REIT subsidiaries if the economic arrangements between the REIT, the REIT’s tenants, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. Finally, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax on that income, because not all states and localities follow the federal income tax treatment of REITs. To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our shareholders.

The lower tax rate on certain dividends from non-REIT “C” corporations may cause investors to prefer to hold stock in non-REIT “C” corporations.

        While corporate dividends have traditionally been taxed at ordinary income rates, the maximum tax rate on certain corporate dividends received by individuals through December 31, 2008, has been reduced from 35% to 15%. This change has reduced substantially the so-called “double taxation” (that is, taxation at both the corporate and shareholder levels) that had generally applied to non-REIT “C” corporations but did not apply to REITs. Generally, dividends from REITs do not qualify for the dividend tax reduction because REITs generally do not pay corporate-level tax on income that they distribute currently to shareholders. REIT dividends are only eligible for the lower capital gains rates in limited circumstances where the dividends are attributable to income, such as dividends from a taxable REIT subsidiary, that has been subject to corporate-level tax. The application of capital gains rates to non-REIT “C” corporation dividends could cause individual investors to view stock in non-REIT “C” corporations as more attractive than shares in REITs, which may negatively affect the value of our shares.

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Our ownership limitations and other provisions of our articles of incorporation and bylaws may hinder any attempt to acquire us.

        The general limitations on ownership of our capital stock and other provisions of our articles of incorporation and bylaws could have the effect of discouraging offers to acquire us and of inhibiting a change in control, which could adversely affect our shareholders’ ability to receive a premium for their shares in connection with such a transaction.

Members of the Taubman family have the power to vote a significant number of the shares of our capital stock entitled to vote.

        Based on information contained in filings made with the SEC, as of December 31, 2004, A. Alfred Taubman and the members of his family have the power to vote approximately 33% of the outstanding shares of our common stock and our Series B preferred stock, considered together as a single class, and approximately 85% of our outstanding Series B preferred stock. Our shares of common stock and our Series B preferred stock vote together as a single class on all matters generally submitted to a vote of our shareholders, and the holders of the Series B preferred stock have certain rights to nominate up to four individuals for election to our board of directors and other class voting rights. Mr. Taubman’s sons, Robert S. Taubman and William S. Taubman, serve as our Chairman of the Board, President and Chief Executive Officer, and our Executive Vice President, respectively. These individuals occupy the same positions with The Taubman Company, LLC, which manages all of our properties. As a result, Mr. A. Alfred Taubman and the members of his family may exercise significant influence with respect to the election of our board of directors, the outcome of any corporate transaction or other matter submitted to our shareholders for approval, including any merger, consolidation or sale of all or substantially all of our assets. In addition, because our articles of incorporation impose a limitation on the ownership of our outstanding capital stock by any person and such ownership limitation may not be changed without the affirmative vote of holders owning not less than two-thirds of the outstanding shares of capital stock entitled to vote on such matter, Mr. A. Alfred Taubman and the members of his family have the power to prevent a change in control of our company.

Our ability to pay dividends on our stock may be limited.

        Because we conduct all of our operations through TRG, our ability to pay dividends on our stock will depend almost entirely on payments and dividends received on our interests in TRG. Additionally, the terms of some of the debt to which TRG is a party limits its ability to make some types of payments and other dividends to us. This in turn limits our ability to make some types of payments, including payment of dividends on our stock, unless we meet certain financial tests or such payments or dividends are required to maintain our qualification as a REIT. As a result, if we are unable to meet the applicable financial tests, we may not be able to pay dividends on our stock in one or more periods.

Our ability to pay dividends is further limited by the requirements of Michigan law.

        Our ability to pay dividends on our stock is further limited by the laws of Michigan. Under the Michigan Business Corporation Act, a Michigan corporation 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 the amount that would be needed, if the corporation were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. Accordingly, we may not make a distribution on our stock if, after giving effect to the distribution, we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of any shares of our preferred stock then outstanding.

We may incur additional indebtedness, which may harm our financial position and cash flow and potentially impact our ability to pay dividends on our stock.

        Our governing documents do not limit us from incurring additional indebtedness and other liabilities. As of December 31, 2004, we had approximately $1.9 billion of consolidated indebtedness outstanding, and our beneficial interest in both our consolidated debt and the debt of our unconsolidated joint ventures was $2.4 billion. We may incur additional indebtedness and become more highly leveraged, which could harm our financial position and potentially limit our cash available to pay dividends.

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We cannot assure you that we will be able to pay dividends regularly although we have done so in the past.

        Our ability to pay dividends in the future is dependent on our ability to operate profitably and to generate cash from our operations. Although we have done so in the past, we cannot guarantee that we will be able to pay dividends on a regular quarterly basis in the future. Furthermore, any new shares of common stock issued will substantially increase the cash required to continue to pay cash dividends at current levels. Any common stock or preferred stock that may in the future be issued to finance acquisitions, upon exercise of stock options or otherwise, would have a similar effect.

Environmental Matters

        All of the centers presently owned by us (not including option interests in certain pre- development projects) have been subject to environmental assessments. We are not aware of any environmental liability relating to the centers or any other property, in which we have or had an interest (whether as an owner or operator) that we believe, would have a material adverse effect on our business, assets, or results of operations. No assurances can be given, however, that all environmental liabilities have been identified or that no prior owner, operator, or current occupant has created an environmental condition not known to us. Moreover, no assurances can be given that (1) future laws, ordinances, or regulations will not impose any material environmental liability or that (2) the current environmental condition of the centers will not be affected by tenants and occupants of the centers, by the condition of properties in the vicinity of the centers (such as the presence of underground storage tanks), or by third parties unrelated to us.

Personnel

        We have engaged the Manager to provide real estate management, acquisition, development, and administrative services required by us and our properties.

        As of December 31, 2004, the Manager had 509 full-time employees. The following table provides a breakdown of employees by operational areas as of December 31, 2004:

Available Information

        The Company makes available free of charge through its website at www.taubman.com all reports it electronically files with, or furnishes to, the Securities Exchange Commission (the “SEC”), including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any amendments to those reports, as soon as reasonably practicable after those documents are filed with, or furnished to, the SEC. These filings are also accessible on the SEC’s website at www.sec.gov.

Item 2. PROPERTIES.

Ownership

        The following table sets forth certain information about each of the centers. The table includes only centers in operation at December 31, 2004. Excluded from this table is Northlake Mall which will open in 2005. Centers are owned in fee other than Beverly Center, Cherry Creek, International Plaza, MacArthur Center, and Sunvalley, which are held under ground leases expiring between 2049 and 2083.

        Certain of the centers are partially owned through joint ventures. Generally, the Operating Partnership’s joint venture partners have ongoing rights with regard to the disposition of the Operating Partnership’s interest in the joint ventures, as well as the approval of certain major matters.

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Anchors

        The following table summarizes certain information regarding the anchors at the operating centers (excluding the value centers) as of December 31, 2004:

Mortgage Debt

        The following table sets forth certain information regarding the mortgages encumbering the centers as of December 31, 2004. All mortgage debt in the table below is nonrecourse to the Operating Partnership, except for debt encumbering Dolphin Mall, Northlake Mall, The Mall at Wellington Green, and The Shops at Willow Bend. The Operating Partnership has guaranteed the payment of all or a portion of the principal and interest on the mortgage debt of these centers. (” Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources – Loan Commitments and Guarantees”). A $1.7 million note secured by certain equipment of The Mall at Millenia is excluded.

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        For additional information regarding the centers and their operations, see the responses to Item 1 of this report.

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Item 3. LEGAL PROCEEDINGS.

         As a result of the termination of the Unsolicited Tender Offer, the Simon Property Group litigation has been dismissed with prejudice (“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Unsolicited Tender Offer”). There remain two shareholder class and derivative actions. Counsel for the plaintiffs in those cases and counsel for defendants have agreed to present to the Court for its approval a settlement of both cases, the terms of which are not material to the Company.

        Neither we, our subsidiaries, nor any of the joint ventures is presently involved in any material litigation, nor, to our knowledge, is any material litigation threatened against us, our subsidiaries, or any of the properties. Except for routine litigation involving present or former tenants (generally eviction or collection proceedings), substantially all litigation is covered by liability insurance.

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.

         The common stock of Taubman Centers, Inc. is listed and traded on the New York Stock Exchange (Symbol: TCO). As of March 3, 2005, the 49,976,870 outstanding shares of Common Stock were held by 642 holders of record. The closing price per share of the Common Stock on the New York Stock Exchange on March 3, 2005 was $28.70.

        The following table presents the dividends declared and range of share prices for each quarter of 2004 and 2003:

        Other information required by this item is hereby incorporated by reference to the table and footnote appearing in our definitive proxy statement for the annual meeting of shareholders to be held in 2005 (the “Proxy Statement”) under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters – Securities Authorized for Issuance Under Equity Compensation Plans.”

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Item 6. SELECTED FINANCIAL DATA.

        The following table sets forth selected financial data and should be read in conjunction with the financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report:

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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

        The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our expectations or beliefs concerning future events, including the following: statements regarding future developments and joint ventures, rents and returns, statements regarding the continuation of trends, and any statements regarding the sufficiency of our cash balances and cash generated from operating and financing activities for our future liquidity and capital resource needs. We caution that although forward-looking statements reflect our good faith beliefs and best judgment based upon current information, these statements are qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including those risks, uncertainties, and factors detailed from time to time in reports filed with the SEC, and in particular those set forth under the headings “General Risks of the Company” and “Environmental Matters” in this Annual Report on Form 10-K. The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements of Taubman Centers, Inc. and the Notes thereto.

General Background and Performance Measurement

        Taubman Centers, Inc. (“we”, “us”, “our” or “TCO”) owns a managing general partner’s interest in The Taubman Realty Group Limited Partnership (the “Operating Partnership” or “TRG”), through which we conduct all of our operations. The Operating Partnership owns, develops, acquires, and operates regional shopping centers nationally. The Consolidated Businesses consist of shopping centers that are controlled by ownership or contractual agreement, development projects for future regional shopping centers, variable interest entities for which we are the primary beneficiary, and The Taubman Company LLC (“Manager”). Shopping centers owned through joint ventures that are not controlled but over which we have significant influence (“Unconsolidated Joint Ventures”) are accounted for under the equity method.

        References in this discussion to “beneficial interest” refer to our ownership or pro-rata share of the item being discussed. Also, the operations of the shopping centers are often best understood by measuring their performance as a whole, without regard to our ownership interest. Consequently, in addition to the discussion of the operations of the Consolidated Businesses, the operations of the Unconsolidated Joint Ventures are presented and discussed as a whole.

        There are a number of items that affect the comparability of information used in measuring performance. During 2003, we opened Stony Point Fashion Park, acquired an interest in Waterside Shops at Pelican Bay, and sold our interest in Biltmore Fashion Park. During 2002, we opened The Mall at Millenia, acquired an interest in Sunvalley, and sold our interests in La Cumbre Plaza and Paseo Nuevo (“Results of Operations – Openings, Acquisitions, and Dispositions”). Additional “comparable center” statistics that include centers owned and open for two years are provided to present the performance of comparable centers in our continuing operations.

Overall Summary of Management's Discussion and Analysis of Financial Condition and Results of Operations

        Our business is to lease space in our shopping centers. Generally these leases are long term (7 to 10 years). Therefore general economic trends most directly impact our tenants’ sales and consequently their ability to perform under their existing lease agreements and expand into new locations as well as our ability to find new tenants for our shopping centers. Occupancy trends showed significant improvement during 2004, with ending occupancy increasing to 89.6%, a 2.2% increase from 87.4% in 2003. Including temporary in-line stores, which have become an integral part of our business, ending occupancy was 92.8% in 2004, compared to 90.4% in 2003. Tenant sales trends also demonstrated strong growth in 2004, increasing 8.2% and reaching a record level of $477 per square foot (“Mall Tenant Sales and Center Revenues” and “Rental Rates and Occupancy”).

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        The rents we are able to achieve are similarly affected by economic trends and tenants’ expectations thereof, as described under “Rental Rates and Occupancy”. The spread between rents on openings and closings may not be indicative of future periods, as this statistic is not computed on comparable tenant spaces, and can vary significantly from quarter to quarter depending on the total amount, location, and average size of tenant space opening and closing in the period. Mall tenant sales, occupancy levels and our resulting revenues are seasonal in nature. Refer to “Seasonality” for these relationships, as well as descriptions of revenues that historically are not as predictable.

        Our analysis of our financial results begins under “Results of Operations”. We have been active in developing and expanding our shopping center portfolio, and we describe the most recent center openings, including Stony Point Fashion Park and The Mall at Millenia under “Openings, Acquisitions, and Dispositions”. Also, over the last three years, we acquired additional interests in eight centers and disposed of interests in three. Additional efforts to broaden our growth include a new project and development agreement with the Gordon Group (“Subsequent Events”) and efforts in development in Asia.

        We similarly have been very active in managing our balance sheet, completing a series of new financings and refinancings of existing debt, as well as a series of stock buybacks, issuances of partnership and preferred equity, and redemptions of partners’ interests in TRG, as outlined under “Debt Transactions” and “Equity Transactions”. As a result of our most recent financings, we believe we are better positioned for a rise in interest rates.

        We have provided property management, leasing, development, and other administrative services to centers owned by General Motors pension trusts (GMPT), other third parties, and certain Taubman affiliates. Services provided to Taubman affiliates and other related party transactions are described in Notes 13 through 16 of our financial statements. In October 2004, the Mills Corporation finalized its acquisition of 50% interests in nine of the ten GMPT shopping centers that we managed. During the fourth quarter of 2004, we ceased management of those nine centers and underwent a personnel restructuring as discussed in “GMPT Portfolio and Restructuring.”

        We have certain additional sources of income beyond our rental revenues and recoveries from tenants. We disclose the Operating Partnership’s share of these sources of income under “Other Income”. Included in this income are lease cancellation income and gains on peripheral land sales, as well as other sources of revenue derived from our shopping centers, such as parking garage and sponsorship income.

        In the fall of 2002, we received an unsolicited proposal from Simon Property Group, which sought to acquire control of the company. A tender offer and litigation were commenced but ultimately ended in 2003 as described under “Unsolicited Tender Offer”.

        The preparation of our financial statements requires management to make significant estimates when applying certain accounting policies. Background and discussion of these policies, including those related to the valuation of our shopping centers, capitalization of development costs, valuation of accounts receivable, and valuations for acquired property and intangibles, are contained under “Application of Critical Accounting Policies”.

        With all the preceding information as background, we have then provided insight and explanations for variances in our financial results from 2002 through 2004 under “Comparison of 2004 to 2003” and “Comparison of 2003 to 2002". As information useful to understanding our results, we have described the presentation of our minority interest, the recent dispositions of interests in centers, and the reasons for our use of non-GAAP statistics such as EBITDA and Funds from Operations (FFO) under “Presentation of Operating Results”. Reconciliations from net income allocable to common shareowners to these statistics follow the annual comparisons.

        Our calculation of FFO and EBITDA now includes the add-back of depreciation of center replacement assets. We did this both to be consistent with industry practice and because we have begun offering our tenants the option to pay a fixed charge or pay their share of common area maintenance (CAM) costs. Assuming tenants sign up for the fixed CAM option, over time there will be significantly less matching of CAM income with CAM capital-related expenses, which was the basis for our prior reporting practice.

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        Our discussion of sources and uses of capital resources under “Liquidity and Capital Resources” begins with a brief overview of capital activities and transactions occurring in 2004. Analysis of specific operating, investing, and financing activities is then provided in more detail. Cash flows from rents and recoveries provide the resources for payments of interest and other operating expenses, leasing costs, and generally for required distributions and dividends. Recent positive operating cash flow generated by new center openings, increases in rents, and other positive events offset the cash used in connection with the unsolicited tender offer and restructuring. Similarly, significant capital outflows continue in connection with the construction of new centers and acquisitions, financed through sales of centers, debt, and certain equity issuances.

        Funding for new developments, acquisitions, and other capital spending typically is provided by new borrowings. As new developments reach their expected stabilized occupancy, we may be able to refinance the assets for more than the original financings, providing additional resources for growth. Specific analysis of our fixed and floating rates and periods of interest rate risk exposure is provided under “Beneficial Interest in Debt”. Completing our analysis of our exposure to rates are the effects of changes in interest rates on our cash flows and fair values of debt contained under “Sensitivity Analysis”.

        In conducting our business, we enter into various contractual obligations, including those for debt, capital leases for property improvements, operating leases for office space and land, purchase obligations, and other long-term commitments. Detail of these obligations, including expected settlement periods, is contained under “Contractual Obligations”. Property-level debt represents the largest single class of obligations. Described under “Loan Commitments and Guarantees” and “Cash Tender Agreement” are our significant guarantees and commitments.

        Development, renovation, and expansion of new and existing malls continues to be a significant use of our capital, as described in “Capital Spending” and “Planned Capital Spending”. Recent spending includes that related to the currently under construction Northlake Mall, and our planned Oyster Bay project in Town of Oyster Bay, New York. We are still waiting to receive the necessary entitlement approvals to begin construction. Given the court delays, we are now expecting the center to open in 2007. Future capital spending will include an expansion and renovation at Waterside Shops at Pelican Bay and a renovation of Stamford Town Center. We are making progress on development projects as well, and have signed a letter of intent in connection with a project in Salt Lake City, Utah.

        Dividends are also significant uses of our capital resources. The tax status of our dividends and the factors considered when determining the amount of our dividends, including requirements arising because of our status as a REIT, are described under “Dividends”. We again increased our quarterly dividend in the fourth quarter of 2004.

Mall Tenant Sales and Center Revenues

        Over the long term, the level of mall tenant sales is the single most important determinant of revenues of the shopping centers because mall tenants provide approximately 90% of these revenues and because mall tenant sales determine the amount of rent, percentage rent, and recoverable expenses (together, total occupancy costs) that mall tenants can afford to pay. However, levels of mall tenant sales can be considerably more volatile in the short run than total occupancy costs.

        We believe that the ability of tenants to pay occupancy costs and earn profits over long periods of time increases as sales per square foot increase, whether through inflation or real growth in customer spending. Because most mall tenants have certain fixed expenses, the occupancy costs that they can afford to pay and still be profitable are a higher percentage of sales at higher sales per square foot.

        Sales directly impact the amount of percentage rents certain tenants and anchors pay. The effects of increases or declines in sales on our operations are moderated by the relatively minor share of total rents (approximately three percent) percentage rents represent. However, a sustained trend in sales does impact, either negatively or positively, our ability to lease vacancies and negotiate rents at advantageous rates.

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        The following table summarizes occupancy costs, excluding utilities, for mall tenants as a percentage of mall tenant sales:

Rental Rates and Occupancy

        As leases have expired in the shopping centers, we have generally been able to rent the available space, either to the existing tenant or a new tenant, at rental rates that are higher than those of the expired leases. In a period of increasing sales, rents on new leases will tend to rise as tenants’ expectations of future growth become more optimistic. In periods of slower growth or declining sales, rents on new leases will grow more slowly or will decline for the opposite reason. However, center revenues nevertheless increase as older leases roll over or are terminated early and replaced with new leases negotiated at current rental rates that are usually higher than the average rates for existing leases. The following table contains certain information regarding rentals at the comparable shopping centers:

        The spread between opening and closing rents may not be indicative of future periods, as this statistic is not computed on comparable tenant spaces, and can vary significantly from period to period depending on the total amount, location, and average size of tenant space opening and closing in the period. Rents on stores opening in 2004 and 2003 were generally negotiated in a decreasing sales environment. Now that sales have shown positive year over year growth for 21 months, and assuming this positive trend continues, we would expect to also see improvement in rent growth.

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        Mall tenant leased space, ending occupancy, and average occupancy rates are as follows:

        In 2004, we experienced a significant increase in occupancy from 2003. We expect occupancy to continue to improve in 2005. Income from temporary in-line tenants, which has become an integral part of our business, continues to contribute to growth. Temporary tenants, defined as those with lease terms less than 12 months, are not included in occupancy or leased space statistics. As of December 31, 2004, approximately 3.2% of space was occupied by temporary tenants. Tenant bankruptcy filings as a percentage of the total number of tenant leases was 1.7% in 2004, compared to 2.3% in 2003, and 1.7% in 2002.

Seasonality

        The regional shopping center industry is seasonal in nature, with mall tenant sales highest in the fourth quarter due to the Christmas season, and with lesser, though still significant, sales fluctuations associated with the Easter holiday and back-to-school events. While minimum rents and recoveries are generally not subject to seasonal factors, most leases are scheduled to expire in the first quarter, and the majority of new stores open in the second half of the year in anticipation of the Christmas selling season. Additionally, most percentage rents are recorded in the fourth quarter. Accordingly, revenues and occupancy levels are generally highest in the fourth quarter. Included in revenues are gains on sales of peripheral land and lease cancellation income that may vary significantly from quarter to quarter.

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        Because the seasonality of sales contrasts with the generally fixed nature of minimum rents and recoveries, mall tenant occupancy costs (the sum of minimum rents, percentage rents, and expense recoveries) relative to sales are considerably higher in the first three quarters than they are in the fourth quarter.

Results of Operations

Openings, Acquisitions, and Dispositions

        During the three year period ended December 31, 2004, we completed the following shopping center openings, acquisitions, and dispositions:

Openings

Acquisitions

Dispositions

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        The additional interest in International Plaza was acquired for $60.2 million in cash. The center is encumbered by a mortgage, which had a balance of $187.5 million at the acquisition date; the beneficial interest in the debt attributable to the additional interest acquired was $44.3 million. In conjunction with the purchase, we also repaid our $20 million note to the former investor, which carried an interest rate of 13%. As a result of the acquisition, we have a controlling interest in the center and began consolidating its results as of the purchase date. Prior to the acquisition date, we accounted for International Plaza under the equity method of accounting. As of December 31, 2004, the Operating Partnership has a preferred investment in International Plaza of $30 million, on which an annual preferential return of 8.25% will accrue. In addition to the preferred return on our investment, the Operating Partnership is entitled to receive the balance of our preferred investment before any available cash will be utilized for distribution to the non-preferred partner.

        The consideration for the additional 30% ownership of Beverly Center of approximately $11 million consisted of $3.3 million in cash and 276,724 of newly issued partnership units valued at $27.50 per unit. The price of the acquisition was determined pursuant to a 1988 option agreement. We have carried the $11 million net exercise price as a liability on our balance sheet. We already recognized 100% of the financial results of the center in our financial statements.

Debt Transactions

        We completed a series of debt transactions in the three year period ended December 31, 2004, as follows:

        In October 2004, the maturity date of the Operating Partnership’s existing secured $40 million line of credit was extended to February 2008.

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Equity Transactions

        We also completed a series of equity transactions in the three year period ended December 31, 2004, as follows:

        The December 2003 repurchase transaction, which occurred immediately following the sale of Biltmore Fashion Park, included the transfer of the Macerich units received from the sale to several Operating Partnership unitholders in redemption and retirement of their Operating Partnership units. These unitholders were the original owners of Biltmore Fashion Park.

        The May 2003 investment was made by an affiliate of a former owner of an interest in Beverly Center.

        In March 2000, our Board of Directors authorized the purchase of up to $50 million of our common stock in the open market. For each share of our stock repurchased, an equal number of our Operating Partnership units are redeemed. In February 2003, our Board of Directors authorized the expansion of the existing buyback program to repurchase up to an additional $100 million of our common shares. Cumulatively, since the program’s inception in March 2000, we have repurchased, and the Operating Partnership has redeemed, approximately 9.6 million shares and units for a total of $150 million, the maximum amount permitted under our program. Repurchases of common stock were financed through general corporate funds, including equity issuances, and through borrowings under existing lines of credit.

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GMPT Portfolio and Restructuring

        In October 2004, The Mills Corporation finalized its acquisition of 50 percent interests in nine of General Motors Pension Trusts’ (GMPT) shopping centers, completing a recapitalization of GMPT’s mall portfolio. We reached an agreement with GMPT to cease management of these centers, effective November 1, 2004. We recognized a restructuring charge of $5.7 million during the fourth quarter of 2004 relating to the termination of these contracts. Substantially all of this charge represents employee severance payments. Excluding the restructuring charge, the impact on our results of operations was not material in 2004, while we expect an approximately $4 million unfavorable impact to our results of operations in 2005.

Other Income

        We have certain additional sources of income beyond our rental revenues, recoveries from tenants, and revenues from management, leasing, and development services, as summarized in the following table. Gains on peripheral land sales can vary significantly from year-to-year, dependent on the results of negotiations with tenants, counterparties, and potential purchasers of land, as well as the timing of the transactions. Similarly, lease cancellation income is dependent on the overall economy and performance of particular retailers in specific locations and can also vary significantly. We expect that in 2005, lease cancellation income and gains on land sales will be lower than in 2004.

Unsolicited Tender Offer

        In the fall of 2002, we received an unsolicited proposal from Simon Property Group, Inc. (SPG) seeking to acquire control of TCO. Our Board of Directors rejected the proposal and recommended that the shareholders not tender their shares pursuant to the tender offer. In October 2003, the tender offer was withdrawn, and TCO and SPG mutually agreed to end the related litigation. During 2004 we recovered through our insurance $1.0 million of costs incurred in connection with the unsolicited tender offer and related litigation. During 2003 we incurred approximately $30.4 million in costs, offset by insurance recoveries of $5.6 million.

Other

        In July 2003, May Company (May) announced that it intends to divest 32 of its 86 Lord & Taylor stores, including four at our centers. May had also announced in its press release that it will continue to fulfill its obligations under existing documents to operate each store until satisfactory arrangements can be negotiated to divest each location. Lord & Taylor has closed at International Plaza and The Mall at Wellington Green and we have purchased the spaces. We have announced that a 120,000 square foot Robb & Stucky furniture and design studio showroom will open at International Plaza in early 2005. The new store will occupy the entire first level and part of the second level of the former Lord & Taylor space. Plans also include an additional 20,000 square feet of specialty shop space on the second level with retailers to be announced at a future date. We are in discussions with potential tenants for the former Lord & Taylor space at Wellington Green and are optimistic that the center will benefit from a new use of the building. May is continuing to operate the Lord & Taylor stores at the remaining two centers although we are continuing discussions with May about the future of these stores.

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Subsequent Events

        In January 2005, we entered into an agreement to invest in The Pier at Caesars (The Pier), located in Atlantic City, New Jersey, from Gordon Group Holdings LLC (“Gordon”), who is developing the center. The Pier is currently under construction, and is expected to open in 2006. Under the agreement, we will have a 30% interest in The Pier. Our capital contribution in The Pier will be made in three steps, with the initial investment of $4 million made at closing. A second payment equal to 70% of our projected required total investment (less the initial $4 million payment) is expected to be made within six months after the project opens. The third and final payment will be made shortly after the completion of the project’s stabilization year (2007) based on its actual net operating income (NOI) and debt levels. Our total capital contribution will be computed at a price to be calculated at a seven percent capitalization rate. Depending on the performance of the project, we expect our total cash investment to be in the range of $30 million to $35 million.

Application of Critical Accounting Policies

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the financial statements and disclosures. Some of these estimates and assumptions require application of difficult, subjective, and/or complex judgment, often about the effect of matters that are inherently uncertain and that may change in subsequent periods. We are required to make such estimates and assumptions when applying the following accounting policies.

Valuation of Shopping Centers

        All properties, including those under construction and/or owned by joint ventures, are reviewed for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. Impairment of a shopping center owned by consolidated entities would be recognized when the sum of expected cash flows (undiscounted and without interest charges) is less than the carrying value of the property. Other than temporary impairment of a shopping center owned by an Unconsolidated Joint Venture is recognized when the carrying value is not considered recoverable based on evaluation of the severity and duration of the decline in value, including the results of discontinued cash flow and other valuation techniques. The expected cash flows of a shopping center are dependent on estimates and other factors subject to change, including (1) changes in the national, regional, and/or local economic climates, (2) competition from other shopping centers, stores, clubs, mailings, and the internet, (3) increases in operating costs, (4) bankruptcy and/or other changes in the condition of third parties, including anchors and tenants, and (5) expected holding period. These factors could cause our expected future cash flows from a shopping center to change, and, as a result, an impairment could be considered to have occurred. To the extent an impairment has occurred, the excess carrying value of the property over its estimated fair value is charged against operations. There were no impairment charges recognized in the periods covered within this Annual Report. As of December 31, 2004, the consolidated net book value of our properties was $2.4 billion, representing over 90% of our consolidated assets. We also have varying ownership percentages in the properties of Unconsolidated Joint Ventures with a total combined net book value of $0.7 billion. These amounts include certain development costs that are described in the policy that follows.

Capitalization of Development Costs

        In developing shopping centers, we typically obtain land or land options, zoning and regulatory approvals, anchor commitments, and financing arrangements during a process that may take several years and during which we may incur significant costs. We capitalize all development costs once it is considered probable that a project will reach a successful conclusion. Prior to this time, we expense all costs relating to a potential development, including payroll, and include these costs in Funds from Operations (refer to Presentation of Operating Results).

        Many factors in the development of a shopping center are beyond our control, including (1) changes in the national, regional, and/or local economic climates, (2) competition from other shopping centers, stores, clubs, mailings, and the internet, (3) availability and cost of financing, (4) changes in regulations, laws, and zoning, and (5) decisions made by third parties, including anchors. These factors could cause our assessment of the probability of a development project reaching a successful conclusion to change. If a project subsequently was considered less than probable of reaching a successful conclusion, a charge against operations for previously capitalized development costs would occur.

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        Our approximately $75 million balance of development pre-construction costs as of December 31, 2004 consists of costs relating to our Oyster Bay project in Town of Oyster Bay, New York. Refer to “Liquidity and Capital Resources - Planned Capital Spending” regarding the status of this project.

Valuation of Accounts Receivable

        Rents and expense recoveries from tenants are our principal source of income; they represent over 90% of our revenues. In generating this income, we will routinely have accounts receivable due from tenants. The collectibility of tenant receivables is affected by bankruptcies, changes in the economy, and the ability of the tenants to perform under the terms of their lease agreements. While we estimate potentially uncollectible receivables and provide for them through charges against income, actual experience may differ from those estimates. Also, if a tenant were not able to perform under the terms of its lease agreement, receivable balances not previously provided for may be required to be charged against operations. Bad debt expense was approximately 1% of total revenues in 2004, while bankruptcy filings affected 1.7% of tenant leases during the year. Since 1991, the annual provision for losses on accounts receivable has been less than 2% of annual revenues.

Valuations for Acquired Property and Intangibles

        Upon acquisition of an investment property, including that of an additional interest in an asset already partially owned, we make an assessment of the valuation and composition of assets and liabilities acquired. These assessments consider fair values of the respective assets and liabilities and are determined based on estimated future cash flows using appropriate discount and capitalization rates and other commonly accepted valuation techniques. The estimated future cash flows that are used for this analysis reflect the historical operations of the property, known trends and changes expected in current market and economic conditions which would impact the property’s operations, and our plans for such property. These estimates of cash flows and valuations are particularly important given the application of FASB Statement Nos. 141 and 142 for the allocation of purchase price between land, building and improvements, and other identifiable intangibles.

New Accounting Pronouncements

        In December 2004, the FASB Issued Statement No. 153, “Exchange of Nonmonetary Assets”. This Statement amends APB Opinion No. 29 “Accounting for Nonmonetary Transactions” which established the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Statement No. 153 is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. We do not believe that this Statement will have a material effect on our future results of operations.

        In December 2004, the FASB also issued Statement No. 123 (Revised) “Share-Based Payment”. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. A public entity will initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. Statement No. 123 is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. We are in the process of evaluating the impact of this Statement on our future results of operations. All current options outstanding are vested and therefore no compensation expense will be attributed to them in future periods. Under our current option plan, we may issue additional options for 2.2 million of Operating Partnership Units.

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Presentation of Operating Results

        The following tables contain the operating results of our Consolidated Businesses and the Unconsolidated Joint Ventures. Income allocated to the minority partners in the Operating Partnership and preferred interests is deducted to arrive at the results allocable to our common shareowners. Because the net equity of the Operating Partnership is less than zero, the income allocated to the minority partners is equal to their share of distributions. The net equity of these minority partners is less than zero due to accumulated distributions in excess of net income and not as a result of operating losses. Distributions to partners are usually greater than net income because net income includes non-cash charges for depreciation and amortization. Amounts allocable to minority partners in certain consolidated joint ventures are added back or deducted to arrive at our net results. Our average ownership percentage of the Operating Partnership was 61% in 2004, 60% in 2003, and 62% in 2002.

        The results of International Plaza are presented within the Consolidated Businesses for periods beginning July 1, 2004, as a result of our acquisition of a controlling interest in the center. The results of Dolphin Mall are presented within the Consolidated Businesses subsequent to its October 2002 acquisition. Prior to those acquisition dates, these centers are included within the Unconsolidated Joint Ventures.

        In December 2003, we sold our interest in Biltmore Fashion Park. In 2004, we recognized a $0.3 million adjustment to the gain on the disposition of the center. The results of Biltmore Fashion Park and the results of La Cumbre Plaza and Paseo Nuevo, including the gains on their disposition in 2002, are presented as discontinued operations.

        The operating results in the following tables include the supplemental earnings measures of Beneficial Interest in EBITDA and Funds from Operations (FFO). Beneficial Interest in EBITDA represents the Operating Partnership’s share of the earnings before interest and depreciation and amortization, excluding gains on sales of depreciated operating properties of its consolidated and unconsolidated businesses. We believe Beneficial Interest in EBITDA provides a useful indicator of operating performance, as it is customary in the real estate and shopping center business to evaluate the performance of properties on a basis unaffected by capital structure.

        The National Association of Real Estate Investment Trusts (NAREIT) defines FFO as net income (loss) (computed in accordance with Generally Accepted Accounting Principles (GAAP)), excluding gains (or losses) from extraordinary items and sales of properties, plus real estate related depreciation and after adjustments for unconsolidated partnerships and joint ventures. We believe that FFO is a useful supplemental measure of operating performance for REITs. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, we and most industry investors and analysts have considered presentations of operating results that exclude historical cost depreciation to be useful in evaluating the operating performance of REITs. We primarily use FFO in measuring performance and in formulating corporate goals and compensation. Our presentation of FFO is not necessarily comparable to the FFO of other REITs due to the fact that not all REITs use the NAREIT definition. FFO should not be considered an alternative to net income as an indicator of our operating performance. Additionally, FFO does not represent cash flows from operating, investing or financing activities as defined by GAAP.

        Prior to the fourth quarter of 2004, we did not include an add-back for depreciation of center replacement assets when computing our Beneficial Interest in EBITDA or FFO. As of the fourth quarter of 2004, we began to include such an add-back and restated previously reported EBITDA and FFO amounts. We did this both to be consistent with industry practice and because we have begun offering our tenants the option to pay a fixed charge or pay their share of common area maintenance (CAM) costs. Assuming tenants sign up for the fixed CAM option, over time there will be significantly less matching of CAM income with CAM capital-related expenses, which was the basis for our prior reporting practice.

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Comparison of 2004 to 2003

        The following table sets forth operating results for 2004 and 2003, showing the results of the Consolidated Businesses and Unconsolidated Joint Ventures: