Attached files

file filename
EX-32.1 - SECTION 906 CERTIFICATION OF PEO AND PFO AS OF DECEMBER 31, 2016 - Brookfield DTLA Fund Office Trust Investor Inc.dtla2016123110kex321.htm
EX-31.2 - CERTIFICATION OF PFO AS OF DECEMBER 31, 2016 - Brookfield DTLA Fund Office Trust Investor Inc.dtla2016123110kex312.htm
EX-31.1 - CERTIFICATION OF PEO AS OF DECEMBER 31, 2016 - Brookfield DTLA Fund Office Trust Investor Inc.dtla2016123110kex311.htm
EX-21.1 - SIGNIFICANT SUBSIDIARIES AS OF DECEMBER 31. 2016 - Brookfield DTLA Fund Office Trust Investor Inc.dtla2016123110kex211.htm
EX-10.13 - 777 TOWER AMENDED AND RESTATED PROMISSORY NOTE DATED SEPTEMBER 1, 2016 - Brookfield DTLA Fund Office Trust Investor Inc.dtla2016123110kex1013.htm
EX-10.10 - GCT MEZZANINE GUARANTY OF RECOURSE OBLIGATIONS - Brookfield DTLA Fund Office Trust Investor Inc.dtla2016123110kex1010.htm
EX-10.9 - GCT GUARANTY OF RECOURSE OBLIGATIONS - Brookfield DTLA Fund Office Trust Investor Inc.dtla2016123110kex109.htm
EX-10.8 - GCT MEZZANINE LOAN AGREEMENT DATED JULY 11, 2016 - Brookfield DTLA Fund Office Trust Investor Inc.dtla2016123110kex108.htm
EX-10.7 - GCT LOAN AGREEMENT DATED JULY 11, 2016 - Brookfield DTLA Fund Office Trust Investor Inc.dtla2016123110kex107.htm
EX-10.6 - SOUTH TOWER NON-RECOURSE CARVEOUT GUARANTY - Brookfield DTLA Fund Office Trust Investor Inc.dtla2016123110kex106.htm
EX-10.5 - SOUTH TOWER LOAN AGREEMENT DATED DECEMBER 2, 2016 - Brookfield DTLA Fund Office Trust Investor Inc.dtla2016123110kex105.htm



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, 2016
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 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 30, 2016 was $0.
As of March 17, 2017, 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
None.




BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2016

TABLE OF CONTENTS

 
 
 
Page
 

 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
Item 16.
 
 






PART I

Item 1.
Business.

Our Company

As used in this Annual Report on Form 10-K, unless the context requires otherwise, 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 partially-owned subsidiary of Brookfield Office Properties Inc., a corporation incorporated under the Laws of Canada (“BPO”).

Brookfield DTLA owns BOA Plaza, EY Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower and 777 Tower, each of which is a Class A office property located in the Los Angeles Central Business District (the “LACBD”).

Brookfield DTLA has elected 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 period ended December 31, 2013. Brookfield DTLA conducts and intends to conduct its operations so as to continue to qualify as a REIT. Accordingly, Brookfield DTLA is not subject to U.S. federal income tax, provided that it continues to qualify as a REIT and distributions to its stockholders, if any, generally equal or exceed its taxable income. Brookfield DTLA has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to both federal and state income taxes.

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 management’s view of the certainty of receiving rental payments generated by the tenants of those assets.


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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 and operating 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.

A significant portion of Brookfield DTLA’s rental income and tenant reimbursements revenue is generated by a small number of tenants. No tenant accounted for more than 10% of our consolidated rental income and tenant reimbursements revenue during the year ended December 31, 2016.

During the year ended December 31, 2016, EY Plaza, BOA Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower and 777 Tower each contributed more than 10% of Brookfield DTLA’s consolidated revenue. The revenue generated by these six properties totaled 100% of Brookfield DTLA’s consolidated revenue during the year ended December 31, 2016.


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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.

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.


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Insurance

Brookfield DTLA’s properties are covered under insurance policies entered into by BPO that provide, among other things, all risk property and business interruption coverage for BPO’s commercial portfolio with an aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $370.0 million of earthquake, flood and weather catastrophe insurance. In addition, Brookfield DTLA’s properties are covered by a terrorism insurance policy that provides aggregate coverage of $4.0 billion for all of BPO’s U.S. properties.

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 policies. 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, 2016, 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, NY 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 its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements (if any), Information 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”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy details and other information regarding issuers that file electronically with the SEC at 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. Stockholders may also obtain a copy of our Annual Report on Form 10-K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8-K, Proxy Statements (if any), Information Statements and amendments to those reports by sending a written request to that effect to the attention of Michelle L. Campbell, Senior Vice President, Secretary, and Director, Brookfield DTLA Fund Office Trust Investor Inc., 250 Vesey Street, 15th Floor, New York, NY 10281.


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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;


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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;

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

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 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.

The following is a discussion of the risk factors that Brookfield DTLA’s management believes are material to Brookfield DTLA at this time. These risks and uncertainties are not the only ones facing Brookfield DTLA and there may be additional matters that Brookfield DTLA is unaware of or that Brookfield DTLA currently considers immaterial. 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. 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 and stockholders could lose part or all of their investment.


6


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 have issued, and 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 with MPG, 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. Additionally, at the time of the merger with MPG, Brookfield DTLA Holdings made a commitment to contribute up to $260.0 million in cash or property to Brookfield DTLA Fund Properties II LLC (“New OP”), for which it will be entitled to receive a preferred return, if and when called by New OP. As of March 20, 2017, $166.7 million is available to the Company under this commitment for future funding.

The Series B preferred interest in New OP held by Brookfield DTLA Holdings is effectively senior to the interest in New OP held by Brookfield DTLA and has a priority on distributions 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. The Series B preferred interest in New OP may 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.


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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.

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 again 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 except for a one time dividend of $2.25 per share of Series A preferred stock that was paid in connection with the settlement on a class-wide basis of the litigation brought in Maryland State Court and styled as In re MPG Office Trust Inc. Preferred Shareholder Litigation, Case No. 24-C-13-004097, Brookfield DTLA has not, and may not in the future, declare and pay dividends on the Series A preferred stock. See Item 3 “Legal Proceedings—Merger‑Related Litigation.” Furthermore, because of the projected cash needs of the Company, arising in significant part from the funds needed to complete the refinancing of the existing mortgage loan on Wells Fargo Center–North Tower, the Company currently anticipates that it will receive no substantial distributions from New OP for a period of at least five years, unless the Company or DTLA OP changes its current plans and determines to sell one or more of its real property assets prior to such time. The Company’s refinancing and operating plans and this estimate are subject to change based on many factors, including market conditions in applicable debt, equity and leasing markets. See “—Factors That May Affect Future Results” above.


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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, with limited exception, Brookfield DTLA may not make a distribution (including a dividend payment or redemption) 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. Due to the foregoing limitations, there can be no assurance that, if Brookfield DTLA desires to declare and pay dividends in the future, 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.

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

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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 directors to the board of directors of Brookfield DTLA (referred to as preferred 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.


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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 Brookfield DTLA and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of the outstanding voting stock of Brookfield DTLA or any affiliate or associate 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 the then outstanding stock of Brookfield DTLA) 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 the MGCL 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 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. Brookfield DTLA and its subsidiaries and DTLA OP have 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 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 management’s view of the certainty of receiving rental payments generated by the tenants of those assets. However, Brookfield DTLA is 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 its 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.

Brookfield DTLA’s 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 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.


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Competition may adversely affect Brookfield DTLA’s ability to lease available space in its 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.

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 Brookfield DTLA’s 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.

Brookfield DTLA 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.


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There are numerous risks associated with the use of debt to finance our business, including refinancing risk. Brookfield DTLA incurs debt in the ordinary course of its business and therefore is 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.

If we are unable to manage our interest rate risk efficiently, our cash flows and operating results may suffer. Some of our indebtedness bears 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 what 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 $2.1 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.

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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.

Brookfield DTLA is subject to obligations under certain “non-recourse carve out” guarantees that may be triggered in the future. All of Brookfield DTLA’s $2.1 billion of mortgage debt is subject to “non-recourse carve out” guarantees that expire upon elimination of the underlying loan obligations. In connection with all 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 Holdings 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 subsidiary of Brookfield DTLA Holdings or Brookfield DTLA Holdings filing a voluntary petition for bankruptcy; the special purpose property-owning subsidiary of Brookfield DTLA Holdings’ failure to maintain its status as a special purpose entity; subject to certain conditions, the special purpose property-owning subsidiary of Brookfield DTLA Holdings’ 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 of Brookfield DTLA Holdings’ 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 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.

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.


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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 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, the insurance we maintain may not cover all potential losses we might experience. There also are certain types of risks (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.


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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 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 are 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.


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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 of Brookfield DTLA Holdings 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 are 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.

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 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.

Brookfield DTLA has elected to be taxed as a REIT pursuant to Sections 856 through 860 of the Code, commencing with its tax period ended December 31, 2013. Brookfield DTLA conducts and intends to conduct its operations so as to continue to qualify as a REIT.

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 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. 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.


21


We may incur other tax liabilities that could reduce our cash flows. 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.


22


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

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 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 properties:

 
Percentage Leased
 
Annualized Rent (1)
 
Annualized Rent
per Square Foot (2)
 
 
 
 
 
 
December 31, 2016
87.9
%
 
$
160,894,418

 
$
24.31

December 31, 2015
85.6
%
 
153,585,893

 
23.83

December 31, 2014
83.0
%
 
145,156,547

 
23.23

__________
(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, 2016 for the twelve months ending December 31, 2017 are approximately $11.5 million, or $1.73 per leased square foot. Total abatements for leases in effect as of December 31, 2015 for the twelve months ended December 31, 2016 were approximately $14.9 million, or $2.32 per leased square foot. Total abatements for leases in effect as of December 31, 2014 for the twelve months ended December 31, 2015 were approximately $13.3 million, or $2.14 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.


23


Leasing Activity

The following table summarizes leasing activity at Brookfield DTLA for the year ended December 31, 2016:

 
Leasing Activity
 
Percentage Leased
 
 
 
 
Leased square feet as of December 31, 2015
6,443,905

 
85.6
 %
Expirations
(579,225
)
 
(7.7
)%
New leases
422,942

 
5.6
 %
Renewals
331,394

 
4.4
 %
Leased square feet as of December 31, 2016
6,619,016

 
87.9
 %

Property Statistics

The following table presents leasing information for Brookfield DTLA for leases in place as of December 31, 2016:

 
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

 
31

 
2006
 
1,405,428

 
18.67
%
 
94.6
%
 
$
32,291,703

 
$
24.28

Wells Fargo Center–North Tower
 
2

 
45

 
2013
 
1,400,639

 
18.61
%
 
88.5
%
 
31,463,199

 
25.38

Gas Company Tower
 
1

 
24

 
2013
 
1,345,163

 
17.87
%
 
85.6
%
 
26,976,389

 
23.44

EY Plaza
 
1

 
85

 
2006
 
1,224,967

 
16.28
%
 
90.8
%
 
26,527,864

 
23.84

Wells Fargo Center–South Tower
 
1

 
21

 
2013
 
1,124,960

 
14.95
%
 
80.0
%
 
22,493,136

 
25.00

777 Tower
 
1

 
50

 
2013
 
1,024,835

 
13.62
%
 
86.5
%
 
21,142,127

 
23.86

 
 
7

 
256

 
 
 
7,525,992

 
100.00
%
 
87.9
%
 
$
160,894,418

 
$
24.31

__________
(1)
Annualized rent represents the annualized monthly contractual rent under existing leases as of December 31, 2016. This amount reflects total base rent before any rent abatements as of December 31, 2016 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, 2016 for the twelve months ending December 31, 2017 are approximately $11.5 million, or $1.73 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.


24


Tenant Information

As of December 31, 2016, Brookfield DTLA’s properties were leased to 256 tenants. The following table sets forth the annualized rent and leased rentable square feet of our 20 largest tenants as of December 31, 2016:

Tenant
 

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

Southern California Gas Company
 
$
9,918,042

 
6.2
%
 
461,862

 
7.0
%
 
Various
2

The Capital Group Companies
 
8,771,981

 
5.4
%
 
386,454

 
5.8
%
 
Various
3

Latham & Watkins LLP
 
10,996,129

 
6.8
%
 
358,801

 
5.4
%
 
Various
4

Wells Fargo Bank National Association
 
7,333,292

 
4.5
%
 
326,565

 
4.9
%
 
Various
5

Gibson, Dunn & Crutcher LLP
 
6,975,834

 
4.3
%
 
269,173

 
4.1
%
 
2022
6

Oaktree Capital Management, L.P.
 
5,542,727

 
3.4
%
 
231,047

 
3.5
%
 
Various
7

Shepard, Mullin, Richter
 
4,447,467

 
2.8
%
 
173,959

 
2.6
%
 
2025
8

Sidley Austin (CA) LLP
 
3,809,806

 
2.4
%
 
163,038

 
2.5
%
 
2024
9

Munger, Tolles & Olsen LLP
 
4,017,050

 
2.5
%
 
160,682

 
2.4
%
 
2017
10

Bank of America N.A.
 
4,293,099

 
2.7
%
 
155,269

 
2.4
%
 
2022
11

Marsh USA, Inc.
 
3,484,580

 
2.2
%
 
150,803

 
2.3
%
 
2018
12

Ernst & Young U.S. LLP
 
3,057,441

 
1.9
%
 
120,822

 
1.8
%
 
2022
13

Deloitte LLP
 
2,632,658

 
1.6
%
 
112,028

 
1.7
%
 
2031
14

Kirkland & Ellis
 
2,479,162

 
1.5
%
 
100,665

 
1.5
%
 
2020
15

Target Corporation
 
604,008

 
0.4
%
 
97,465

 
1.5
%
 
2033
16

WeWork
 
2,497,311

 
1.6
%
 
92,493

 
1.4
%
 
2033
17

Winston & Strawn LLP
 
2,656,513

 
1.7
%
 
91,170

 
1.4
%
 
Various
18

United States of America
 
2,004,950

 
1.2
%
 
89,800

 
1.4
%
 
2025
19

Bingham McCutchen, LLP
 
2,195,748

 
1.4
%
 
81,324

 
1.2
%
 
2023
20

Alston & Bird LLP
 
1,917,668

 
1.2
%
 
80,190

 
1.2
%
 
2024
 
 
 
$
89,635,466

 
55.7
%
 
3,703,610

 
56.0
%
 
 
__________
(1)
Annualized rent is calculated as contractual base rent under existing leases as of December 31, 2016. 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.


25


The following table sets forth information regarding the lease expirations of our 20 largest tenants as of December 31, 2016 (in thousands):

 
 
 
Rentable Leased Square Feet as of December 31, 2016
 
 
Tenant
 
2017
 
2018
 
2019
 
2020
 
2021
 
2022
 
Beyond
 
Year of
Final
Expiry
 
 
 
 
 
1

Southern California Gas Company
 

 
28

 
56

 

 

 

 
378

 
2026
2

The Capital Group Companies
 
9

 

 

 

 

 
53

 
324

 
2033
3

Latham & Watkins LLP
 

 

 

 

 
93

 

 
266

 
2025
4

Wells Fargo Bank National Association
 

 
57

 

 

 

 

 
270

 
2023
5

Gibson, Dunn & Crutcher LLP
 

 

 

 

 

 
269

 

 
2022
6

Oaktree Capital Management, L.P.
 

 
23

 

 

 

 

 
208

 
2030
7

Shepard, Mullin, Richter
 

 

 

 

 

 

 
174

 
2025
8

Sidley Austin (CA) LLP
 

 

 

 

 

 

 
163

 
2024
9

Munger, Tolles & Olsen LLP
 
161

 

 

 

 

 

 

 
2017
10

Bank of America N.A.
 

 

 

 

 

 
155

 

 
2022
11

Marsh USA, Inc.
 

 
151

 

 

 

 

 

 
2018
12

Ernst & Young U.S. LLP
 

 

 

 

 

 
121

 

 
2022
13

Deloitte LLP
 

 

 

 

 

 

 
112

 
2031
14

Kirkland & Ellis
 

 

 

 
101

 

 

 

 
2020
15

Target Corporation
 

 

 

 

 

 

 
97

 
2033
16

WeWork
 

 

 

 

 

 

 
93

 
2033
17

Winston & Strawn LLP
 
38

 

 

 

 

 

 
53

 
2034
18

United States of America
 

 

 

 

 

 

 
90

 
2025
19

Bingham McCutchen, LLP
 

 

 

 

 

 

 
81

 
2023
20

Alston & Bird LLP
 

 

 

 

 

 

 
80

 
2024
 
Leased square feet expiring by year
 
208

 
259

 
56

 
101

 
93

 
598

 
2,389

 
 
 
Percentage of leased square feet expiring by year
 
3.1
%
 
3.9
%
 
0.9
%
 
1.5
%
 
1.4
%
 
9.1
%
 
36.1
%
 
 


26


Lease Expirations

The following table presents a summary of lease expirations at Brookfield DTLA for leases in place at December 31, 2016, plus currently available space, for each of the ten calendar years beginning January 1, 2017 and thereafter. This table assumes that none of our tenants will 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)
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
433,870

 
6.6
%
 
$
10,698,818

 
6.6
%
 
$
24.66

 
$
24.80

2018
 
658,479

 
9.9
%
 
12,395,091

 
7.7
%
 
18.82

 
19.40

2019
 
474,463

 
7.2
%
 
13,206,527

 
8.2
%
 
27.83

 
30.55

2020
 
295,002

 
4.5
%
 
7,440,671

 
4.6
%
 
25.22

 
28.41

2021
 
456,392

 
6.9
%
 
11,525,158

 
7.2
%
 
25.25

 
29.04

2022
 
861,855

 
13.0
%
 
21,737,968

 
13.5
%
 
25.22

 
30.00

2023
 
729,154

 
11.0
%
 
17,820,513

 
11.1
%
 
24.44

 
29.80

2024
 
407,786

 
6.2
%
 
10,133,393

 
6.3
%
 
24.85

 
31.00

2025
 
696,051

 
10.5
%
 
18,798,967

 
11.7
%
 
27.01

 
33.07

2026
 
464,992

 
7.0
%
 
9,857,789

 
6.1
%
 
21.20

 
27.64

Thereafter
 
1,140,972

 
17.2
%
 
27,279,523

 
17.0
%
 
23.91

 
37.31

Total expiring leases
 
6,619,016

 
100.0
%
 
$
160,894,418

 
100.0
%
 
$
24.31

 
$
29.96

Currently available
 
906,976

 
 
 
 
 
 
 
 
 
 
Total rentable square feet
7,525,992

 
 
 
 
 
 
 
 
 
 
__________
(1)
Annualized rent represents the annualized monthly contractual rent under existing leases as of December 31, 2016. This amount reflects total base rent before any rent abatements as of December 31, 2016 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, 2016 for the twelve months ending December 31, 2017 are approximately $11.5 million, or $1.73 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.


27


Indebtedness

As of December 31, 2016, Brookfield DTLA’s debt was comprised of mortgage loans secured by seven properties. A summary of our debt as of December 31, 2016 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
$
1,400.0

 
67.12
%
 
4.79
%
 
4 years
Variable-rate swapped to fixed-rate
180.9

 
8.67
%
 
3.93
%
 
4 years
Variable-rate
505.0

 
24.21
%
 
3.57
%
 
2 years
 
$
2,085.9

 
100.00
%
 
4.42
%
 
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 4 to Consolidated 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 the Company’s 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”).


28


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 was 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, 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 the defendants, of an award of attorneys’ fees and expenses in an amount not to exceed $475,000. After a hearing on June 4, 2014, the California State Court granted plaintiffs’ motion for final approval of the settlement, and entered a Final Order and Judgment, awarding the plaintiffs’ counsel’s attorneys’ fees and expenses in the amount of $475,000, which was paid by MPG Office LLC on June 18, 2014.


29


In the Preferred Stock Actions, at a hearing on July 24, 2013, the Maryland State Court denied the 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. At a hearing on June 18, 2014, the Maryland State Court heard oral arguments on the defendants’ motion to dismiss and reserved judgment on the decision. On October 21, 2014, the parties sent a joint letter to the Maryland State Court stating that since the June 18 meeting the parties have commenced discussions towards a possible resolution of the lawsuit, requesting that the court temporarily refrain from deciding the pending motion to dismiss to facilitate the discussions.

On March 30, 2015, the plaintiff in the Cohen Action and the defendants entered into a memorandum of understanding setting forth an agreement in principle to settle the Preferred Stock Actions on a class-wide basis and dismiss the case with prejudice in exchange for the payment of $2.25 per share of Series A preferred stock of accumulated and unpaid dividends (the “Dividend Payment”) to holders of record on a record date to be set after final approval of the settlement by the Maryland State Court, plus any attorneys’ fees awarded by the Maryland State Court to the plaintiff’s counsel. The dividend would reduce the amount of accumulated and unpaid dividends on the Series A preferred stock, and the terms of the Series A preferred stock would otherwise remain unchanged.

On August 18, 2015, the Maryland State Court entered an order preliminarily approving the settlement and scheduling a final fairness hearing for October 27, 2015. On September 28, 2015, the plaintiff filed a motion for final certification of the settlement class, final approval of the class action settlement and approval of attorneys’ fees and reimbursement of expenses, seeking a total fee and expense award of $5,250,000. The defendants submitted their opposition to the plaintiff’s fee application on October 13, 2015.

On October 16, 2015, the plaintiff filed a motion seeking discovery related to the valuation of the Dividend Payment in connection with its fee application and served related discovery requests on the defendants. On October 23, 2015, the defendants filed their opposition to that motion, as well as a motion for a protective order precluding discovery. On October 27, 2015, the Maryland State Court held a hearing to decide whether to grant final approval of the settlement and to rule on the parties’ discovery motions. At the hearing, the Court ordered limited discovery to occur prior to ruling on the fee application.

On October 28, 2015, the Maryland State Court issued an order granting final approval of the settlement. The time to appeal the order expired on November 30, 2015 without any appeals having been filed. On December 4, 2015, in accordance with the final approval order and the terms of the parties’ settlement agreement, the board of directors declared a cash dividend of $2.25 per share to holders of record of its Series A preferred stock at the close of business on December 15, 2015. On January 4, 2016, Brookfield DTLA paid the Dividend Payment totaling $21.9 million using cash on hand.


30


On December 16, 2015, after taking certain limited discovery permitted by the Maryland State Court during the October 27 hearing, the plaintiff served the defendants with its reply memorandum of law in support of its motion for attorneys’ fees and expenses. That same day, the plaintiff requested that the Court permit it to file the reply memorandum and an exhibit thereto under seal given the confidential nature of the information contained therein. On December 17, 2015, the plaintiff provided the Court with plaintiff’s counsel’s time records for the Court’s in camera review. On January 15, 2016, the defendants filed a surreply to the plaintiff’s reply memorandum after obtaining the Court’s permission to do so. After a hearing on April 6, 2016, the Maryland State Court issued an order on April 18, 2016 granting an award of attorneys’ fees and expenses to the plaintiffs totaling $2,212,688. On April 21, 2016, the Company paid the awarded amount to the plaintiffs’ counsel.

On July 13, 2016, BPO and the Company entered into a settlement agreement with the insurance carrier under the MPG directors and officers liability insurance policy that was in effect at the time of the merger. On August 17, 2016, the Company received a settlement payment from the insurance carrier totaling $1,106,344, which partially reimbursed the Company for amounts paid to settle both the Common Stock Actions and the Preferred Stock Actions.

Item 4.
Mine Safety Disclosures.

Not applicable.

31


PART II

Item 5.
Market for Registrants 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 on its common stock 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.


32


Item 6.
Selected Financial Data.

The following tables set forth selected consolidated operating and financial data for Brookfield DTLA (for the years ended December 31, 2016, 2015 and 2014) and selected combined operating and financial data for BOA Plaza and EY Plaza (for the years ended December 31, 2013 and 2012):

 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
2013 (1)
 
2012
 
(In thousands)
Operating Results
 
 
 
 
 
 
 
 
 
Total revenue
$
310,692

 
$
299,090

 
$
294,161

 
$
138,722

 
$
92,917

Total expenses
348,859

 
339,444

 
347,153

 
153,996

 
92,669

Net (loss) income
(38,167
)
 
(40,354
)
 
(52,992
)
 
(15,274
)
 
248

Net income attributable to
    TRZ Holdings IV LLC

 

 

 
2,335

 
248

Net loss attributable to noncontrolling interests:
 
 
 
 
 
 
 
 
 
Series A-1 preferred interest –
    current dividends
17,213

 
17,213

 
17,213

 

 

Series A-1 preferred interest –
    cumulative dividends

 

 

 
3,586

 

Series A-1 preferred interest –
    redemption measurement adjustment

 

 

 
76,305

 

Senior participating preferred interest –
    current dividends

 
2,321

 
10,044

 

 

Senior participating preferred interest  
    cumulative dividends

 

 

 
3,500

 

Senior participating preferred interest  
    redemption measurement adjustment
2,428

 
6,625

 
2,256

 

 

Series B preferred interest –
    current dividends
2,084

 

 

 

 

Series B common interest –
    allocation of net loss
(41,055
)
 
(44,521
)
 
(52,891
)
 
(97,934
)
 

Net loss attributable to Brookfield DTLA
(18,837
)
 
(21,992
)
 
(29,614
)
 
(3,066
)
 

Series A preferred stock – current dividends
18,548

 
18,548

 
18,548

 

 

Series A preferred stock – cumulative dividends

 

 

 
3,864

 

Series A preferred stock –
    redemption measurement adjustment

 

 

 
82,247

 

Net loss available to common interest
    holders of Brookfield DTLA
$
(37,385
)
 
$
(40,540
)
 
$
(48,162
)
 
$
(89,177
)
 
$

 
 
 
 
 
 
 
 
 
 
Other Information
 
 
 
 
 
 
 
 
 
Cash flows provided by (used in)
     operating activities
$
35,828

 
$
29,991

 
$
22,962

 
$
(2,208
)
 
$
15,159

Cash flows used in
     investing activities
(63,604
)
 
(64,773
)
 
(68,050
)
 
(39,868
)
 
(40,989
)
Cash flows provided by (used in)
     financing activities
4,341

 
(36,486
)
 
(25,979
)
 
232,440

 
24,025

__________
(1)
On October 15, 2013, Brookfield DTLA completed the acquisition of MPG Office Trust, Inc. and MPG Office, L.P. pursuant to the terms of the Agreement and Plan of Merger dated as of April 24, 2013, as amended.


33


 
As of December 31,
 
2016
 
2015
 
2014 (1)
 
2013 (1)
 
2012
 
(In thousands)
Financial Position
 
 
 
 
 
 
 
 
 
Investments in real estate, net
$
2,411,624

 
$
2,419,119

 
$
2,430,314

 
$
2,436,253

 
$
756,072

Total assets
2,769,959

 
2,798,010

 
2,873,808

 
2,941,930

 
859,766

Mortgage loans, net
2,076,804

 
2,111,405

 
2,107,007

 
1,881,339

 
319,678

Total liabilities
2,198,862

 
2,255,952

 
2,232,606

 
2,022,392

 
351,063

Mezzanine equity
829,532

 
726,595

 
739,600

 
911,539

 

Stockholders’ (deficit) equity
(258,435
)
 
(184,537
)
 
(98,398
)
 
7,999

 

TRZ Holdings IV LLC’s interest

 

 

 

 
508,703

__________
(1)
In December 2015, Brookfield DTLA adopted the guidance in Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. We have retroactively restated the 2014 and 2013 consolidated balance sheets by reclassifying unamortized debt issuance costs of $4,128 and $4,266, respectively, from total assets to mortgage loans, net in accordance with this guidance. We have also reduced total liabilities by $4,128 and $4,266 in the 2014 and 2013 consolidated balance sheets, respectively. There were no unamortized debt issuance costs to reclassify in the 2012 combined balance sheet.



34


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 financial statements and 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 partially-owned subsidiary of Brookfield Office Properties Inc., a corporation incorporated under the Laws of Canada (“BPO”).

Brookfield DTLA owns BOA Plaza, EY Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower and 777 Tower, each of which is a Class A office property located in the Los Angeles Central Business District (the “LACBD”).

Brookfield DTLA has elected 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 period ended December 31, 2013. Brookfield DTLA conducts and intends to conduct its operations so as to continue to qualify as a REIT. Accordingly, Brookfield DTLA is not subject to U.S. federal income tax, provided that it continues to qualify as a REIT and distributions to its stockholders, if any, generally equal or exceed its taxable income. Brookfield DTLA has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to both federal and state income taxes.

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.


35


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Liquidity and Capital Resources

General

Brookfield DTLA’s business requires continued access to adequate cash to fund its liquidity needs. 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 “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 its operating costs or to repay its 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 the board of directors of Brookfield DTLA without the approval of holders of the Series A preferred stock. See “—Potential Uses of Liquidity—Property Operations” below.

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;
 
Capital expenditures;
 
Contributions from Brookfield
  DTLA Holdings; and
 
Payments in connection with loans;
 
Proceeds from additional secured or 
  unsecured debt financings.
 
Distributions to Brookfield
  DTLA Holdings; and
 
 
 
 
Dividend payment in connection
  with legal settlement.

Potential Sources of Liquidity

Cash on Hand

As of December 31, 2016 and 2015, Brookfield DTLA had cash and cash equivalents totaling $30.3 million and $53.7 million, respectively.


36


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

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.”

Occupancy levels. The following table presents leasing information for Brookfield DTLA for leases in place as of December 31, 2016:

 
 
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

 
18.67
%
 
94.6
%
 
$
32,291,703

 
$
24.28

Wells Fargo Center–North Tower
 
1,400,639

 
18.61
%
 
88.5
%
 
31,463,199

 
25.38

Gas Company Tower
 
1,345,163

 
17.87
%
 
85.6
%
 
26,976,389

 
23.44

EY Plaza
 
1,224,967

 
16.28
%
 
90.8
%
 
26,527,864

 
23.84

Wells Fargo Center–South Tower
 
1,124,960

 
14.95
%
 
80.0
%
 
22,493,136

 
25.00

777 Tower
 
1,024,835

 
13.62
%
 
86.5
%
 
21,142,127

 
23.86

 
 
7,525,992

 
100.00
%
 
87.9
%
 
$
160,894,418

 
$
24.31

__________
(1)
Annualized rent represents the annualized monthly contractual rent under existing leases as of December 31, 2016. This amount reflects total base rent before any rent abatements as of December 31, 2016 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, 2016 for the twelve months ending December 31, 2017 are approximately $11.5 million, or $1.73 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.


37


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

The following table presents a summary of lease expirations at Brookfield DTLA for leases in place at December 31, 2016, plus currently available space, for each of the ten calendar years beginning January 1, 2017 and thereafter. This table assumes that none of our tenants will 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)
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
433,870

 
6.6
%
 
$
10,698,818

 
6.6
%
 
$
24.66

 
$
24.80

2018
 
658,479

 
9.9
%
 
12,395,091

 
7.7
%
 
18.82

 
19.40

2019
 
474,463

 
7.2
%
 
13,206,527

 
8.2
%
 
27.83

 
30.55

2020
 
295,002

 
4.5
%
 
7,440,671

 
4.6
%
 
25.22

 
28.41

2021
 
456,392

 
6.9
%
 
11,525,158

 
7.2
%
 
25.25

 
29.04

2022
 
861,855

 
13.0
%
 
21,737,968

 
13.5
%
 
25.22

 
30.00

2023
 
729,154

 
11.0
%
 
17,820,513

 
11.1
%
 
24.44

 
29.80

2024
 
407,786

 
6.2
%
 
10,133,393

 
6.3
%
 
24.85

 
31.00

2025
 
696,051

 
10.5
%
 
18,798,967

 
11.7
%
 
27.01

 
33.07

2026
 
464,992

 
7.0
%
 
9,857,789

 
6.1
%
 
21.20

 
27.64

Thereafter
 
1,140,972

 
17.2
%
 
27,279,523

 
17.0
%
 
23.91

 
37.31

Total expiring leases
 
6,619,016

 
100.0
%
 
$
160,894,418

 
100.0
%
 
$
24.31

 
$
29.96

Currently available
 
906,976

 
 
 
 
 
 
 
 
 
 
Total rentable square feet
7,525,992

 
 
 
 
 
 
 
 
 
 
__________
(1)
Annualized rent represents the annualized monthly contractual rent under existing leases as of December 31, 2016. This amount reflects total base rent before any rent abatements as of December 31, 2016 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, 2016 for the twelve months ending December 31, 2017 are approximately $11.5 million, or $1.73 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 net effective rents in the LACBD were essentially flat during the year ended December 31, 2016. Management believes that on average our current in‑place rents are generally close to market in the LACBD.


38


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

The following table summarizes leasing activity at Brookfield DTLA for the year ended December 31, 2016:

 
Leasing Activity
 
Percentage Leased
 
 
 
 
Leased square feet as of December 31, 2015
6,443,905

 
85.6
 %
Expirations
(579,225
)
 
(7.7
)%
New leases
422,942

 
5.6
 %
Renewals
331,394

 
4.4
 %
Leased square feet as of December 31, 2016
6,619,016

 
87.9
 %

Collectability of rent from our tenants. Brookfield DTLA’s rental income depends on collecting rent from its 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

Drawdowns under Capital Commitment—

At the time of the merger with MPG, Brookfield DTLA Holdings made a commitment to contribute up to $260.0 million in cash or property to Brookfield DTLA Fund Properties II LLC (“New OP”), which directly or indirectly owns the Brookfield DTLA properties, for which it will be entitled to receive a preferred return, if and when called by New OP. During the years ended December 31, 2015 and 2014, Brookfield DTLA received no contributions from Brookfield DTLA Holdings under this commitment.

During the year ended December 31, 2016, the Company received cash contributions totaling $63.3 million from Brookfield DTLA Holdings under this commitment, which is entitled to a preferred return of 9.0%. The Company used these funds to pay for costs associated with refinancing the Wells Fargo Center–South Tower and Gas Company Tower mortgage loans, and for general corporate purposes. As of December 31, 2016, $196.7 million was available to the Company under this commitment for future funding.

Subsequent to December 31, 2016, the Company received $30.0 million in cash contributions from Brookfield DTLA Holdings under this commitment, which is entitled to a preferred return of 9.0%. The Company intends to use these funds for general corporate purposes. As of March 20, 2017, $166.7 million is available to the Company under this commitment for future funding. See “Subsequent Event.”


39


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Other Contribution—

In addition to amounts received under the commitment described above, on April 21, 2016, Brookfield DTLA received a $2.5 million capital contribution from Brookfield DTLA Holdings, which was used for general corporate purposes.

Proceeds from Additional Secured or Unsecured Debt Financings—

On September 1, 2016, Brookfield DTLA modified the mortgage loan secured by 777 Tower, which increased the loan amount from $200.0 million to $220.0 million. As a result of the modification, the Company received net proceeds of $19.7 million, which was used for general corporate purposes.

Potential Uses of Liquidity

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

Property Operations

BOA Plaza and EY Plaza have historically 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 or another source of funds available to the Company or, if such cash were not made available, the Company might not have sufficient cash to fund its operations.

At the time of the merger with MPG, Brookfield DTLA Holdings made a commitment to make capital contributions in cash or property to New OP, which directly or indirectly owns the Brookfield DTLA properties, for up to $260.0 million of its future cash needs, for which it will be entitled to receive a preferred return, if and when called by New OP. As of March 20, 2017, $166.7 million is available to the Company under this commitment for future funding. See “Subsequent Event.”

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.


40


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

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 approximately $135 million over the next ten years, with the majority (approximately $116 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 lobby renovations, upgrades to fire alarm, security and HVAC systems, and roof replacements.

Payments in Connection with Loans

Debt Refinanced—

On July 11, 2016, Brookfield DTLA refinanced the $458.0 million mortgage loan secured by Gas Company Tower. In connection with the refinancing, the Company repaid $8.0 million of principal and was required to fund various loan reserves, including a $20.7 million tenant improvement and leasing commission reserve, a $4.5 million rent concession reserve, and a $3.0 million tax reserve at closing. During July 2016, the Company received $37.0 million in cash contributions from Brookfield DTLA Holdings, of which $19.7 million was used to pay for costs associated with the refinancing of Gas Company Tower.

On December 2, 2016, Brookfield DLTA refinanced the $290.0 million mortgage loan secured by Wells Fargo Center–South Tower. In connection with the refinancing, the Company repaid $40.0 million of principal and was required to fund various loan reserves, including a $6.1 million tenant improvement and leasing commission reserve and a $1.1 million tax reserve at closing. During November 2016, the Company received $20.3 million in cash contributions from Brookfield DTLA Holdings that, along with cash on hand, was used to pay for costs associated with the refinancing of Wells Fargo Center–South Tower.

Debt Maturities—

As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. Brookfield DTLA currently intends to refinance the existing mortgage loan on Wells Fargo Center–North Tower on or about its scheduled maturity (April 2017) with new debt with a lower leverage ratio. As of December 31, 2016, Brookfield DTLA anticipates the need for additional cash of approximately $90 million to complete the refinancing of the Wells Fargo Center–North Tower mortgage loan. There can be no assurance that this refinancing can be accomplished or what terms will be available in the market for this type of financing at the time of any refinancing.


41


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Distributions to Brookfield DTLA Holdings

During the year ended December 31, 2016, the Company made distributions totaling $0.6 million to Brookfield DTLA Holdings as returns of investment related to the senior participating preferred interest held by Brookfield DTLA Holdings using cash on hand.

During the year ended December 31, 2015, the Company made a distribution totaling $35.8 million to Brookfield DTLA Holdings comprised of $3.0 million of dividends and a return of investment of $32.8 million related to the senior participating preferred interest held by Brookfield DTLA Holdings using cash on hand.

During the year ended December 31, 2014, the Company made distributions totaling $220.0 million to Brookfield DTLA Holdings comprised of dividends totaling $12.8 million and returns of investment totaling $207.2 million related to the senior participating preferred interest using proceeds from the refinancing of EY Plaza and BOA Plaza.

Dividend Payment in Connection with Legal Settlement—

On January 4, 2016, Brookfield DTLA paid a cash dividend of $2.25 per share to holders of record of its Series A preferred stock at the close of business on December 15, 2015 using cash on hand. This dividend payment reduced the accumulated and unpaid dividends owed on the Series A preferred stock by $21.9 million. The dividend was declared on December 4, 2015 by the board of directors in connection with the settlement on a class-wide basis of the litigation brought in Maryland State Court and styled as In re MPG Office Trust Inc. Preferred Shareholder Litigation, Case No. 24-C-13-004097. See Part I, Item 3. “Legal Proceedings—Merger‑Related Litigation” for additional information regarding the dividend payment.

Indebtedness

As of December 31, 2016, Brookfield DTLA’s debt was comprised of mortgage loans secured by seven properties. A summary of our debt as of December 31, 2016 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
$
1,400.0

 
67.12
%
 
4.79
%
 
4 years
Variable-rate swapped to fixed-rate
180.9

 
8.67
%
 
3.93
%
 
4 years
Variable-rate
505.0

 
24.21
%
 
3.57
%
 
2 years
 
$
2,085.9

 
100.00
%
 
4.42
%
 
3 years


42


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, 2016 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)
4.34
%
 
12/6/2018
 
$
250,000

 
$
11,001

777 Tower (3)
2.80
%
 
11/1/2018
 
220,000

 
6,246

Figueroa at 7th (4)
2.91
%
 
9/10/2017
 
35,000

 
1,034

Total variable-rate loans
 
 
 
 
505,000

 
18,281

 
 
 
 
 
 
 
 
Variable-Rate Swapped to Fixed-Rate Loan:
 
 
 
 
 
 
 
EY Plaza (5)
3.93
%
 
11/27/2020
 
180,859

 
7,203

Total floating-rate debt
 
 
 
 
685,859

 
25,484

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

 
31,769

BOA Plaza
4.05
%
 
9/1/2024
 
400,000

 
16,425

Gas Company Tower
3.47
%
 
8/6/2021
 
319,000

 
11,232

Gas Company Tower
6.50
%
 
8/6/2021
 
131,000

 
8,633

Total fixed-rate rate debt
 
 
 
 
1,400,000

 
68,059

Total debt
 
 
 
 
2,085,859

 
$
93,543

Less: unamortized discounts and debt
         issuance costs
 
 
 
 
9,055

 
 
Total debt, net
 
 
 
 
$
2,076,804

 
 
__________
(1)
Assuming no payment has been made in advance of its due date.
(2)
This loan bears interest at LIBOR plus 3.69%. 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 3.00%. Brookfield DTLA has three 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).
(3)
This loan bears interest at LIBOR plus 2.18%. 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%. 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).
(4)
This loan bears interest at LIBOR plus 2.25%. Brookfield DTLA has two options to extend the maturity date of this loan, each for a period of 12 months, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).
(5)
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.


43


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Debt Refinanced

Gas Company Tower—

On July 11, 2016, Brookfield DTLA refinanced the $458.0 million mortgage loan secured by Gas Company Tower. In connection with the refinancing, the Company repaid $8.0 million of principal and was required to fund various loan reserves, including a $20.7 million tenant improvement and leasing commission reserve, a $4.5 million rent concession reserve, and a $3.0 million property tax reserve at closing. During July 2016, the Company received $37.0 million in cash contributions from Brookfield DTLA Holdings, of which $19.7 million was used to pay for costs associated with the refinancing of Gas Company Tower.

The new $450.0 million mortgage loan is comprised of a $319.0 million senior loan and a $131.0 million mezzanine loan, which bear interest at fixed rates equal to 3.4727% and 6.50%, respectively, mature on August 6, 2021, and require the payment of interest-only until maturity. The senior loan is locked out from prepayment until September 6, 2017, after which it can be prepaid, in whole or in part, with prepayment penalties (as defined in the underlying loan agreement) until April 6, 2021 after which the loan can be repaid without penalty. The mezzanine loan is locked out from prepayment until September 6, 2017, after which the loan can be repaid, in whole or in part, without penalty.

Wells Fargo Center–South Tower—

On December 2, 2016, Brookfield DLTA refinanced the $290.0 million mortgage loan secured by Wells Fargo Center–South Tower. In connection with the refinancing, the Company repaid $40.0 million of principal and was required to fund various loan reserves, including a $6.1 million tenant improvement and leasing commission reserve and a $1.1 million property tax reserve at closing. During November 2016, the Company received $20.3 million in cash contributions from Brookfield DTLA Holdings that, along with cash on hand, was used to pay for costs associated with the refinancing of Wells Fargo Center–South Tower.

The new $270.0 million mortgage loan is comprised of an initial advance amount of $250.0 million and a remaining maximum future advance amount of $20.0 million that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures. The loan bears interest at a variable rate of LIBOR plus 3.69%, matures on December 6, 2018, and requires the payment of interest-