DTLAP 10-K Annual Report Dec. 31, 2018 | Alphaminr
Brookfield DTLA Fund Office Trust Investor Inc.
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DTLAP 10-K Fiscal year ended Dec. 31, 2018

Balance Sheet
Cash Flow
Income Statement
Debt
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
10-K 1 dtla2018123110k.htm ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2018 Document


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, 2018
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 every Interactive Data File required to be submitted 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 such files).  Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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, 2018 was $0.
As of March 29, 2019 , 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, 2018

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, a Delaware limited liability company (“DTLA Holdings”, and together with its affiliates excluding the Company and its subsidiaries, the “Manager”). DTLA Holdings is an indirect partially-owned subsidiary of Brookfield Property Partners L.P., a limited partnership under the Laws of Bermuda (“BPY”), which in turn is the flagship listed real estate company of Brookfield Asset Management Inc., a corporation under the Laws of Canada (“BAM”).

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”) and other investments.

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.


1

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 currently 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, 2018 .

During the year ended December 31, 2018 , 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 98% of Brookfield DTLA’s consolidated revenue during the year ended December 31, 2018 .


2

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 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.


3

Insurance

Properties held by certain Brookfield DTLA subsidiaries and affiliates are covered under insurance policies entered into by the Manager that provide, among other things, all risk property and business interruption coverage for BPY’s commercial portfolio with an aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $437.5 million of earthquake insurance, and $372.5 million of flood and weather catastrophe insurance. In addition, Brookfield DTLA’s properties are covered by a terrorism insurance policy that provides a maximum of $4.0 billion per occurrence for all of BPY’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, 2018 , Brookfield DTLA had no employees. The operations and activities of Brookfield DTLA are managed by employees of the Manager.

Corporate Offices

BPY 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 BPY’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”). Such filings are available free of charge through our website, www.dtlaofficefund.com , under “Reports & Filings”, as soon as reasonably practicable after the electronic filing of these reports is made with the SEC. The public may obtain information on the operation of the Office of Investor Education and Advocacy by calling the SEC at 1-800-SEC-0330. The SEC maintains 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 addresses of Brookfield DTLA and the SEC as inactive textual references only. Except as specifically incorporated by reference into this document, information on these websites is not part of this document. Stockholders may also obtain a copy of Brookfield DTLA’s 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.


4

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;


5

•
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 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.

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 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, 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. As of December 31, 2018 and the date of this report, $85.2 million is available to the Company under this commitment for future funding.

The Series B preferred interest in New OP held by 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.


7

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 “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 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.

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.


8

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, 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 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 the Company’s 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.


9

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 . 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.

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

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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.

The Manager controls the management and operation of Brookfield DTLA . Brookfield DTLA is managed by the Manager. The Manager 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 its control of and substantial ownership in Brookfield DTLA, the Manager 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).

There may be conflicts of interest in Brookfield DTLA’s relationship with the Manager . Certain subsidiaries of Brookfield DTLA have entered into arrangements with the Manager, pursuant to which the Manager serves as a service provider 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, the Manager is paid fees by Brookfield DTLA and its subsidiaries. In addition, the Manager may enter into additional agreements, including additional service agreements, with Brookfield DTLA and its subsidiaries. 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 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 the Manager, on the one hand, and Brookfield DTLA and its subsidiaries, on the other hand.

Members of Brookfield DTLA’s management team have competing duties to other entities . Brookfield DTLA’s executive officers are employees of the Manager and therefore do not spend all of their time managing the Company’s activities and real estate portfolio. Many of Brookfield DTLA’s executive officers allocate most of their time to other businesses and activities. None of these individuals is required to devote a specific amount of time to Brookfield DTLA’s affairs. Accordingly, Brookfield DTLA competes with BAM, its affiliates and possibly other entities for the time and attention of these officers.


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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 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

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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.

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.


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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.

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.


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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 $2.2 billion . After payments of principal and interest on our indebtedness, we may not have sufficient cash resources to operate our properties or meet all of our other obligations. Certain of our indebtedness include lockbox and other cash management provisions, which, under certain circumstances, could limit our ability to utilize available cash flow from the relevant properties. There can be no assurance that terms of debt we incur in the future or modifications to existing debt will not significantly limit our operating and financial flexibility, which may in turn limit our ability to efficiently respond and adapt to changes or competition in our business.

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

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

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 $2.2 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 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 DTLA Holdings or DTLA Holdings filing a voluntary petition for bankruptcy; the special purpose property ‑ owning subsidiary of DTLA Holdings’ failure to maintain its status as a special purpose entity; subject to certain conditions, the special purpose property-owning subsidiary of 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 DTLA Holdings’ failure to obtain the lender’s written consent prior to a transfer or conveyance of the associated property, including, in some cases, indirect transfers in connection with a change in control of DTLA Holdings

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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 and natural gas 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 during 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.

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 . The Manager maintains insurance on Brookfield DTLA’s properties in amounts and with deductibles that it believes are in line with coverage maintained by owners of similar types of properties; however, the insurance maintained by the Manager may not cover all potential losses Brookfield DTLA might experience. There also are certain types of risks (such as war or acts of terrorism, or environmental contamination, such as toxic mold) that are either uninsurable or not economically insurable. Should any uninsured or underinsured loss occur, the Company could lose its investment in, and anticipated profits and cash flows from, one or more of its properties, and would continue to be obligated to repay any recourse mortgage indebtedness on such properties. Any of these events could adversely impact the Company’s 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.


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

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

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

In addition, some of 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. 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.


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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 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, 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, initial environmental tests were conducted at certain of MPG’s Downtown Los Angeles properties and a widely used commercial building material used in certain of MPG’s Downtown Los Angeles properties was found to contain 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.

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 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.


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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.

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. Four 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.


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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.

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. 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. 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 ability to continue to qualify as a REIT depends on the ability of certain of our subsidiaries that own our commercial property assets to individually satisfy the asset, income, organizational, distribution, stock 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 continue to qualify, is a question of fact. 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 continue to qualify as a REIT.


20

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 continue 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.

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.


21

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.

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.


22

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 license 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 executed leases at Brookfield DTLA’s properties:

Percentage
Leased
Annualized
Rent (1)
Annualized
Rent
$/RSF (2)
December 31, 2018
86.3
%
$
167,124,493

$
25.74

December 31, 2017
86.8
%
163,123,792

24.98

December 31, 2016
87.9
%
160,894,418

24.31

__________
(1)
Annualized rent represents the annualized monthly contractual rent under executed 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 executed leases as of December 31, 2018 for the twelve months ending December 31, 2019 are approximately $12.3 million , or $1.89 per leased square foot. Total abatements for executed leases as of December 31, 2017 for the twelve months ended December 31, 2018 were approximately $13.2 million , or $2.03 per leased square foot. Total abatements for executed leases as of December 31, 2016 for the twelve months ended December 31, 2017 were 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.


23

Leasing Activity

The following table summarizes leasing activity at Brookfield DTLA’s properties for the year ended December 31, 2018 :

Leasing Activity
Percentage Leased
Leased square feet as of December 31, 2017
6,530,729

86.8
%
Expirations
(670,907
)
(8.9
)%
New leases
334,293

4.4
%
Renewals
299,365

4.0
%
Leased square feet as of December 31, 2018
6,493,480

86.3
%

Property Statistics

The following table presents leasing information for executed leases at Brookfield DTLA’s properties as of December 31, 2018 :

Square Feet
Property
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

29

2006
1,405,428

18.7
%
91.5
%
$
33,172,530

$
25.79

Wells Fargo Center–North Tower
2

35

2013
1,400,639

18.6
%
87.2
%
32,251,343

26.41

Gas Company Tower
1

30

2013
1,345,163

17.9
%
91.8
%
31,123,507

25.21

EY Plaza
1

83

2006
1,224,967

16.3
%
90.9
%
27,917,936

25.08

Wells Fargo Center–South Tower
1

20

2013
1,124,960

14.9
%
76.9
%
22,454,848

25.97

777 Tower
1

47

2013
1,024,835

13.6
%
75.5
%
20,204,329

26.12

7

244

7,525,992

100.0
%
86.3
%
$
167,124,493

$
25.74

__________
(1)
Annualized rent represents the annualized monthly contractual rent under executed leases as of December 31, 2018 . This amount reflects total base rent before any rent abatements as of December 31, 2018 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 executed leases as of December 31, 2018 for the twelve months ending December 31, 2019 are approximately $12.3 million , or $1.89 per leased square foot.
(2)
Annualized rent per rentable square foot represents annualized rent as computed above, divided by leased square feet as of December 31, 2018 .


24

Tenant Information

As of December 31, 2018 , Brookfield DTLA’s properties were leased to 244 tenants. The following table sets forth the annualized rent and leased rentable square feet of our ten largest tenants as of December 31, 2018 :

Tenant

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

Latham & Watkins LLP
$
12,444,278

7.5
%
399,820

6.2
%
Various
2

Southern California Gas Company
9,830,675

5.9
%
461,862

7.1
%
Various
3

The Capital Group Companies

9,520,735

5.7
%
429,955

6.6
%
Various
4

Wells Fargo Bank National Association
7,402,208

4.4
%
314,447

4.8
%
2023
5

Gibson, Dunn & Crutcher LLP
7,400,662

4.4
%
269,173

4.2
%
2022
6

Bank of America N.A.
6,911,368

4.1
%
209,544

3.2
%
Various
7

Oaktree Capital Management, L.P.
5,444,694

3.3
%
207,259

3.2
%
2030
8

Shepard, Mullin, Richter
4,447,467

2.7
%
173,959

2.7
%
2025
9

Ernst & Young U.S. LLP
3,541,414

2.1
%
129,737

2.0
%
Various
10

Sidley Austin (CA) LLP
3,366,525

2.0
%
135,798

2.1
%
2024
$
70,310,026

42.1
%
2,731,554

42.1
%
__________
(1)
Annualized rent is calculated as contractual base rent under executed leases as of December 31, 2018 . 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.

The following table sets forth information regarding the lease expirations of our ten largest tenants as of December 31, 2018 (in thousands, except years):

Rentable Leased Square Feet as of December 31, 2018
Tenant
2019
2020
2021
2022
2023
2024
Beyond
Year of
Final
Expiry
1

Latham & Watkins LLP
26

—

64

—

—

—

310

2031
2

Southern California Gas Company
56

—

—

—

—

—

406

2026
3

The Capital Group Companies
52

—

—

54

—

—

324

2033
4

Wells Fargo Bank National Association
—

—

—

—

315

—

—

2023
5

Gibson, Dunn & Crutcher LLP
—

—

—

269

—

—

—

2022
6

Bank of America N.A.
—

—

—

—

—

—

209

2029
7

Oaktree Capital Management, L.P.
—

—

—

—

—

—

207

2030
8

Shepard, Mullin, Richter
—

—

—

—

—

—

174

2025
9

Ernst & Young U.S. LLP
9

—

—

—

—

—

121

2032
10

Sidley Austin (CA) LLP
—

—

—

—

—

136

—

2024
Leased square feet expiring by year
143

—

64

323

315

136

1,751

Percentage of leased square feet expiring by year
2.2
%
—
%
1.0
%
5.0
%
4.8
%
2.1
%
27.0
%


25

Lease Expirations

The following table presents a summary of lease expirations at Brookfield DTLA’s properties for executed leases as of December 31, 2018 , plus currently available space, for each of the ten calendar years beginning January 1, 2019 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)
2019
416,648

6.4
%
$
9,362,016

5.6
%
$
22.47

$
22.73

2020
351,363

5.4
%
9,261,743

5.5
%
26.36

27.49

2021
351,438

5.4
%
9,394,433

5.6
%
26.73

29.17

2022
653,793

10.1
%
17,845,964

10.7
%
27.30

30.03

2023
912,138

14.1
%
22,462,179

13.4
%
24.63

28.24

2024
528,022

8.1
%
14,218,042

8.5
%
26.93

31.84

2025
713,794

11.0
%
19,905,208

11.9
%
27.89

32.94

2026
580,002

8.9
%
13,639,682

8.2
%
23.52

28.79

2027
179,966

2.8
%
4,827,011

2.9
%
26.82

35.74

2028
20,434

0.3
%
576,433

0.4
%
28.21

39.85

Thereafter
1,785,882

27.5
%
45,631,782

27.3
%
25.55

38.69

Total expiring leases
6,493,480

100.0
%
$
167,124,493

100.0
%
$
25.74

$
32.05

Currently available
1,032,512

Total rentable square feet
7,525,992

__________
(1)
Annualized rent represents the annualized monthly contractual rent under executed leases as of December 31, 2018 . This amount reflects total base rent before any rent abatements as of December 31, 2018 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 executed leases as of December 31, 2018 for the twelve months ending December 31, 2019 are approximately $12.3 million , or $1.89 per leased square foot.
(2)
Current rent per leased square foot represents base rent for executed leases, divided by total leased square feet as of December 31, 2018 .
(3)
Rent per leased square foot at expiration represents base rent, including any future rent steps, and thus represents the base rent that will be in place at lease expiration.


26

Indebtedness

As of December 31, 2018 , Brookfield DTLA’s debt was comprised of mortgage and mezzanine loans secured by seven properties. A summary of our debt as of December 31, 2018 is as follows (in millions, except percentage amounts and years):

Principal
Amount
Percent of
Total Debt
Effective
Interest
Rate
Weighted Average
Term to
Maturity
Fixed-rate
$
908.5

42
%
4.19
%
4 years
Variable-rate swapped to fixed-rate
230.0

11
%
3.90
%
2 years
Variable-rate (1)
1,013.2

47
%
4.57
%
2 years
$
2,151.7

100
%
4.34
%
3 years
__________
(1)
As of December 31, 2018 and the date of this report, a future advance amount of $31.8 million is available under the Wells Fargo Center–South Tower mortgage loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements.


Item 3.
Legal Proceedings.

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.

Item 4.
Mine Safety Disclosures.

Not applicable.

27

PART II

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

Market Information

There is no established public trading market for the registrant’s common stock.

Holders

All of the registrant’s issued and outstanding shares of common stock are held by Brookfield DTLA Holdings LLC.

Dividends

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.

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.


28

Item 6.
Selected Financial Data.

The following table sets forth selected consolidated operating and financial data for Brookfield DTLA (in thousands):

For the Year Ended December 31,
2018
2017
2016
2015
2014
Operating Results
Total revenue
$
315,680

$
306,322

$
310,692

$
299,090

$
294,161

Total expenses
360,337

343,959

348,859

339,444

347,153

Net loss
(44,657
)
(37,637
)
(38,167
)
(40,354
)
(52,992
)
Net income (loss) attributable to
noncontrolling interests:
Series A-1 preferred interest –
current dividends
17,306

17,213

17,213

17,213

17,213

Senior participating preferred interest –
current dividends
—

—

—

2,321

10,044

Senior participating preferred interest –
redemption measurement adjustment
1,482

479

2,428

6,625

2,256

Series B preferred interest –
current preferred return
17,961

13,435

2,084

—

—

Series B common interest –
allocation of net income (loss)
28,343

(45,699
)
(41,055
)
(44,521
)
(52,891
)
Net loss attributable to Brookfield DTLA
(109,749
)
(23,065
)
(18,837
)
(21,992
)
(29,614
)
Series A preferred stock –
current dividends
18,532

18,548

18,548

18,548

18,548

Net loss available to common interest
holders of Brookfield DTLA
$
(128,281
)
$
(41,613
)
$
(37,385
)
$
(40,540
)
$
(48,162
)
Other Information
Cash flows provided by
operating activities
$
17,389

$
31,786

$
35,828

$
29,991

$
22,962

Cash flows used in
investing activities (1)
(90,065
)
(74,696
)
(57,350
)
(58,061
)
(43,729
)
Cash flows provided by (used in)
financing activities
110,941

20,030

4,341

(36,486
)
(25,979
)
__________
(1)
In January 2018, Brookfield DTLA adopted the guidance in Accounting Standards Update (“ASU”) 2016-18, Restricted Cash , which requires entities to include restricted cash with cash and cash equivalents when reconciling the beginning and end of period total amounts shown in the statement of cash flows. Therefore, the change in restricted cash is no longer presented as a separate line item within cash flows from investing activities in the Company’s consolidated statement of cash flows since such balances are now combined with cash and cash equivalents at both the beginning and end of the reporting period. We have retroactively restated the 2017, 2016, 2015 and 2014 consolidated statements of cash flows by reclassifying the decrease or (increase) in restricted cash of $24.5 million, $(6.3) million, $(6.7) million and $(24.3) million , respectively, from cash flows used in investing activities to net change in cash, cash equivalents and restricted cash.

29

The following table sets forth selected consolidated balance sheet data for Brookfield DTLA (in thousands):

As of December 31,
2018
2017
2016
2015
2014 (1)
Financial Position
Investments in real estate, net
$
2,416,245

$
2,413,857

$
2,411,624

$
2,419,119

$
2,430,314

Total assets
2,795,658

2,747,815

2,769,959

2,798,010

2,873,808

Mortgage loans, net
2,140,724

1,991,692

2,076,804

2,111,405

2,107,007

Total liabilities
2,220,690

2,100,014

2,198,862

2,255,952

2,232,606

Mezzanine equity
1,015,889

990,749

829,532

726,595

739,600

Stockholders’ deficit
(440,921
)
(342,948
)
(258,435
)
(184,537
)
(98,398
)
__________
(1)
In December 2015, Brookfield DTLA adopted the guidance in ASU 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 consolidated balance sheet by reclassifying unamortized debt issuance costs of $4.1 million from total assets to mortgage loans, net in accordance with this guidance. We have also reduced total liabilities by $4.1 million in the 2014 consolidated balance sheet.


30

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, a Delaware limited liability company (“DTLA Holdings”, and together with its affiliates excluding the Company and its subsidiaries, the “Manager”). DTLA Holdings is an indirect partially-owned subsidiary of Brookfield Property Partners L.P., a limited partnership under the Laws of Bermuda (“BPY”), which in turn is the flagship listed real estate company of Brookfield Asset Management Inc., a corporation under the Laws of Canada (“BAM”).

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”) and other investments.

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.


31

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 its 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 DTLA Holdings; and
•
Payments in connection with loans; and
•
Proceeds from additional secured or
unsecured debt financings.
•
Distributions to DTLA Holdings.

Potential Sources of Liquidity —

Cash on Hand —

As of December 31, 2018 and 2017 , Brookfield DTLA had cash and cash equivalents totaling $80.4 million and $32.0 million , respectively.


32

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 executed leases at Brookfield DTLA’s properties as of December 31, 2018 :

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

18.7
%
91.5
%
$
33,172,530

$
25.79

Wells Fargo Center–North Tower
1,400,639

18.6
%
87.2
%
32,251,343

26.41

Gas Company Tower
1,345,163

17.9
%
91.8
%
31,123,507

25.21

EY Plaza
1,224,967

16.3
%
90.9
%
27,917,936

25.08

Wells Fargo Center–South Tower
1,124,960

14.9
%
76.9
%
22,454,848

25.97

777 Tower
1,024,835

13.6
%
75.5
%
20,204,329

26.12

7,525,992

100.0
%
86.3
%
$
167,124,493

$
25.74

__________
(1)
Annualized rent represents the annualized monthly contractual rent under executed leases as of December 31, 2018 . This amount reflects total base rent before any rent abatements as of December 31, 2018 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 executed leases as of December 31, 2018 for the twelve months ending December 31, 2019 are approximately $12.3 million , or $1.89 per leased square foot.
(2)
Annualized rent per rentable square foot represents annualized rent as computed above, divided by leased square feet as of December 31, 2018 .


33

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’s properties for executed leases as of December 31, 2018 , plus currently available space, for each of the ten calendar years beginning January 1, 2019 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)
2019
416,648

6.4
%
$
9,362,016

5.6
%
$
22.47

$
22.73

2020
351,363

5.4
%
9,261,743

5.5
%
26.36

27.49

2021
351,438

5.4
%
9,394,433

5.6
%
26.73

29.17

2022
653,793

10.1
%
17,845,964

10.7
%
27.30

30.03

2023
912,138

14.1
%
22,462,179

13.4
%
24.63

28.24

2024
528,022

8.1
%
14,218,042

8.5
%
26.93

31.84

2025
713,794

11.0
%
19,905,208

11.9
%
27.89

32.94

2026
580,002

8.9
%
13,639,682

8.2
%
23.52

28.79

2027
179,966

2.8
%
4,827,011

2.9
%
26.82

35.74

2028
20,434

0.3
%
576,433

0.4
%
28.21

39.85

Thereafter
1,785,882

27.5
%
45,631,782

27.3
%
25.55

38.69

Total expiring leases
6,493,480

100.0
%
$
167,124,493

100.0
%
$
25.74

$
32.05

Currently available
1,032,512

Total rentable square feet
7,525,992

__________
(1)
Annualized rent represents the annualized monthly contractual rent under executed leases as of December 31, 2018 . This amount reflects total base rent before any rent abatements as of December 31, 2018 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 executed leases as of December 31, 2018 for the twelve months ending December 31, 2019 are approximately $12.3 million , or $1.89 per leased square foot.
(2)
Current rent per leased square foot represents base rent for executed leases, divided by total leased square feet as of December 31, 2018 .
(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.


34

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Rental Rates and Leasing Activity. Average asking net effective rents in the LACBD were essentially flat during the year ended December 31, 2018 . Management believes that on average our current rents are at market in the LACBD.

The following table summarizes leasing activity at Brookfield DTLA’s properties for the year ended December 31, 2018 :

Leasing Activity
Percentage Leased
Leased square feet as of December 31, 2017
6,530,729

86.8
%
Expirations
(670,907
)
(8.9
)%
New leases
334,293

4.4
%
Renewals
299,365

4.0
%
Leased square feet as of December 31, 2018
6,493,480

86.3
%

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 DTLA Holdings —

Drawdowns under Capital Commitment—

At the time of the merger with MPG, 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 market rate of return determined at the time of contribution (“preferred return”).

During the years ended December 31, 2017 and 2016 , the Company received cash contributions totaling $111.5 million and $63.3 million , respectively, from DTLA Holdings under this commitment, which are entitled to a 9.0% preferred return. The Company used the funds received during the year ended December 31, 2017 to pay for costs associated with the refinancing of the Wells Fargo Center–North Tower mortgage loan, including a principal paydown and transaction costs, and for general corporate purposes. During the year ended December 31, 2016 , the Company used the funds received to pay for costs associated with the refinancing of the Wells Fargo Center–South Tower and Gas Company Tower mortgage loans, including principal paydowns and funding of loan reserves, and for general corporate purposes.


35

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

The Company received no contributions under this commitment during the year ended December 31, 2018 . As of December 31, 2018 and the date of this report, $85.2 million is available to the Company under this commitment for future funding.

Other Contributions—

In addition to amounts received under the commitment described above, during the years ended December 31, 2018 , 2017 and 2016 , the Company received cash contributions of $1.6 million , $0.5 million and $2.5 million , respectively, from DTLA Holdings that were used for general corporate purposes.

Proceeds from Additional Secured or Unsecured Debt Financings—

Figueroa at 7th—

On February 6, 2018 , Brookfield DTLA refinanced the mortgage loan secured by the Figueroa at 7th retail property and received net proceeds totaling $58.0 million , of which $35.0 million was used to repay the mortgage loan that previously encumbered the property, with the remainder used for general corporate purposes.

EY Plaza—

On March 29, 2018 , Brookfield DTLA refinanced the mortgage loan secured by the EY Plaza office property and received net proceeds totaling $263.4 million , of which $175.8 million was used to repay the mortgage loan that previously encumbered the property, with the remainder used for general corporate purposes.

Wells Fargo Center–North Tower—

On September 21, 2018 , Brookfield DTLA refinanced the mortgage and mezzanine loans secured by the Wells Fargo Center–North Tower office property and received net proceeds totaling $496.0 million , of which $470.0 million was used to repay the loans that previously encumbered the property, with the remainder used for general corporate purposes.


36

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Wells Fargo Center–South Tower—

On November 5, 2018 , Brookfield DTLA refinanced the mortgage loan secured by the Wells Fargo Center–South Tower office property. Under the new loan, a maximum future advance amount of $37.0 million was available that could be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements.

During the year ended December 31, 2018 , the Company received $5.2 million from the lender for approved leasing costs. As of December 31, 2018 and the date of this report, an advance amount of $31.8 million remains available under this loan that can be drawn to fund future approved leasing costs.

Potential Uses of Liquidity —

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

Property Operations —

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 its 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. Should the cash generated by Brookfield DTLA’s properties not be sufficient to fund their operations, such cash would be provided by 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 funds its operations.

At the time of the merger with MPG, 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. As of December 31, 2018 and the date of this report, $85.2 million is available to the Company under this commitment for future funding.

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.


37

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Brookfield DTLA expects that capital improvements and leasing activities at its properties will require material amounts of cash for at least several years. Brookfield DTLA projects spending approximately $412 million over the next five years consisting of $82 million for capital expenditures, $233 million for tenant improvements, and $97 million for leasing costs. The expected capital improvements include, but are not limited to, renovations and physical capital upgrades to Brookfield DTLA’s properties, such as atrium renovations at Wells Fargo Center, upgrades to fire alarm, security and HVAC systems, elevator upgrades, parking structure lighting, and roof replacements.

On November 5, 2018 , Brookfield DTLA refinanced the mortgage loan secured by the Wells Fargo Center–South Tower office property. Under the new loan, a maximum future advance amount of $37.0 million was available that could be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements.

During the year ended December 31, 2018 , the Company received $5.2 million from the lender for approved leasing costs. As of December 31, 2018 and the date of this report, an advance amount of $31.8 million remains available under this loan that can be drawn to fund future approved leasing costs.

Payments in Connection with Loans —

777 Tower—

On October 31, 2018 , Brookfield DTLA extended the maturity date of the mortgage loan secured by the 777 Tower office property and incurred costs totaling approximately $0.8 million in connection with this transaction that were paid using cash on hand.

Wells Fargo Center–South Tower—

On November 5, 2018 , Brookfield DTLA refinanced the mortgage loan secured by the Wells Fargo Center–South Tower office property and received net proceeds totaling $250.0 million that were used to repay the loan that previously encumbered the property. The Company incurred costs totaling $3.5 million in connection with this transaction, of which $3.0 million were paid using proceeds from the refinancing and $0.5 million using cash on hand.


38

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Debt Maturities—

As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. Brookfield DTLA currently intends to refinance the mortgage loan secured by the 777 Tower office property on or about November 1, 2019 , its scheduled maturity date. As of December 31, 2018 , we do not meet the criteria specified in the loan agreement to extend the maturity date of this loan. As of December 31, 2018 , the Company does not expect to make a principal paydown when the loan is refinanced (based on current market conditions). 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.

Distributions to DTLA Holdings —

During the years ended December 31, 2018 , 2017 and 2016 , the Company made distributions using cash on hand totaling $30.1 million , $0.5 million and $0.6 million , respectively, to DTLA Holdings related to the Series B preferred and senior participating preferred interests during 2018 and the senior participating preferred interest during 2017 and 2016 , respectively.

Indebtedness

As of December 31, 2018 , Brookfield DTLA’s debt was comprised of mortgage and mezzanine loans secured by seven properties. A summary of our debt as of December 31, 2018 is as follows (in millions, except percentage amounts and years):

Principal
Amount
Percent of
Total Debt
Effective
Interest
Rate
Weighted Average
Term to
Maturity
Fixed-rate
$
908.5

42
%
4.19
%
4 years
Variable-rate swapped to fixed-rate
230.0

11
%
3.90
%
2 years
Variable-rate (1)
1,013.2

47
%
4.57
%
2 years
$
2,151.7

100
%
4.34
%
3 years
__________
(1)
As of December 31, 2018 and the date of this report, a future advance amount of $31.8 million is available under the Wells Fargo Center–South Tower mortgage loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements.


39

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, 2018 is as follows (in thousands, except percentage amounts and dates):

Interest
Rate
Contractual
Maturity Date
Principal
Amount
Annual Debt
Service (1)
Floating-Rate Debt
Variable-Rate Loans:
Wells Fargo Center–North Tower (2)
4.11
%
10/9/2020
$
400,000

$
16,652

Wells Fargo Center–North Tower (3)
6.46
%
10/9/2020
65,000

4,255

Wells Fargo Center–North Tower (4)
7.46
%
10/9/2020
35,000

2,646

Wells Fargo Center–South Tower (5)
4.15
%
11/4/2021
258,186

10,862

777 Tower (6)
4.53
%
11/1/2019
220,000

10,104

EY Plaza (7)
6.90
%
11/27/2020
35,000

2,448

Total variable-rate loans
1,013,186

46,967

Variable-Rate Swapped to Fixed-Rate Loan:
EY Plaza (8)
3.90
%
11/27/2020
230,000

9,091

Total floating-rate debt
1,243,186

56,058

Fixed-Rate Debt
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

Figueroa at 7th
3.88
%
3/1/2023
58,500

2,301

Total fixed-rate rate debt
908,500

38,591

Total debt
2,151,686

$
94,649

Less: unamortized debt issuance costs
10,962

Total debt, net
$
2,140,724

__________
(1)
Annual debt service for variable-rate loans is calculated using the one-month LIBOR rate in place on the debt as of December 31, 2018 plus the contractual spreads per the loan agreements. Annual debt service for fixed-rate loans is calculated based on contractual interest rates per the loan agreements.
(2)
This loan bears interest at LIBOR plus 1.65% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.25% . Brookfield DTLA has three options to extend the maturity date of this loan, each for a period of one year, as long as the maturity dates of both of the mezzanine loans are extended when the maturity date of the mortgage loan is extended.
(3)
This loan bears interest at LIBOR plus 4.00% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.25% . Brookfield DTLA has three options to extend the maturity date of this loan, each for a period of one year, as long as the maturity date of the other mezzanine loan is extended when the maturity date of the mortgage loan is extended.
(4)
This loan bears interest at LIBOR plus 5.00% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.25% . Brookfield DTLA has three options to extend the maturity date of this loan, each for a period of one year, as long as the maturity date of the other mezzanine loan is extended when the maturity date of the mortgage loan is extended.

40

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

(5)
This loan bears interest at LIBOR plus 1.80% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.50% . Brookfield DTLA has two options to extend the maturity date of this loan, each for a period of one year. As of December 31, 2018 , a future advance amount of $31.8 million is available under this loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements.
(6)
This loan bears interest at LIBOR plus 2.18% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 5.75% . Brookfield DTLA has one option to extend the maturity date of this loan for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). As of December 31, 2018 , we do not meet the criteria specified in the loan agreement to extend this loan. See “—Debt Maturities—777 Tower” below.
(7)
This loan bears interest at LIBOR plus 4.55% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 3.50% .
(8)
This loan bears interest at LIBOR plus 1.65% . As required by the loan agreement, we have entered into interest rate swap contracts to hedge this loan, which effectively fix the LIBOR portion of the interest rate at 2.27% . The effective interest rate of 3.90% includes interest on the swaps.

Debt Refinanced

Figueroa at 7th—

On February 6, 2018 , Brookfield DTLA refinanced the mortgage loan secured by the Figueroa at 7th retail property and received net proceeds totaling $58.0 million , of which $35.0 million was used to repay the mortgage loan that previously encumbered the property, with the remainder used for general corporate purposes.

The new $58.5 million loan bears interest at a fixed rate equal to 3.88% , requires the payment of interest-only until maturity, and matures on March 1, 2023 . The loan is locked out from prepayment until March 1, 2020 , after which it can be prepaid, in whole or in part, with prepayment fees (as defined in the underlying loan agreement) until November 1, 2022 , after which the loan may be repaid without penalty.

EY Plaza—

On March 29, 2018 , Brookfield DTLA refinanced the mortgage loan secured by the EY Plaza office property and received net proceeds totaling $263.4 million , of which $175.8 million was used to repay the mortgage loan that previously encumbered the property, with the remainder used for general corporate purposes.

The new $265.0 million loan is comprised of a $230.0 million mortgage loan and a $35.0 million mezzanine loan, each of which bears interest at variable rates equal to LIBOR plus 1.65% and 4.55% , respectively, requires the payment of interest-only until maturity, and matures on November 27, 2020 . The mortgage loan can be prepaid, in whole or in part, with prepayment fees (as defined in the underlying loan agreement) and payment of early termination fees to the counterparties to the interest rate swap contracts, as long as the mezzanine loan has been repaid in full prior to any prepayment of the mortgage loan.


41

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Wells Fargo Center–North Tower—

On September 21, 2018 , Brookfield DTLA refinanced the mortgage and mezzanine loans secured by the Wells Fargo Center–North Tower office property and received net proceeds totaling $496.0 million , of which $470.0 million was used to repay the loans that previously encumbered the property, with the remainder used for general corporate purposes.

The new $500.0 million loan is comprised of a $400.0 million mortgage loan, a $65.0 million mezzanine loan, and a $35.0 million mezzanine loan, each of which bears interest at variable rates equal to LIBOR plus 1.65% , 4.00% , and 5.00% , respectively, requires the payment of interest-only until maturity, and matures on October 9, 2020 . The mortgage loan can be prepaid, in whole or in part, with prepayment fees (as defined in the underlying loan agreement), as long as the mezzanine loans are repaid on a pro rata basis with the mortgage loan, until October 9, 2019 , after which the loan may be repaid without penalty. Brookfield DTLA has three options to extend the maturity dates of the mortgage and mezzanine loans, each for a period of one year, as long as the maturity dates of both of the mezzanine loans are extended when the maturity date of the mortgage loan is extended.

Wells Fargo Center–South Tower—

On November 5, 2018 , Brookfield DTLA refinanced the mortgage loan secured by the Wells Fargo Center–South Tower office property and received net proceeds totaling $250.0 million that were used to repay the loan that previously encumbered the property. The Company incurred costs totaling $3.5 million in connection with this transaction, of which $3.0 million were paid using proceeds from the refinancing and $0.5 million using cash on hand.

The new $290.0 million mortgage loan is comprised of an initial advance amount of $253.0 million and a maximum future advance amount of $37.0 million that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements. The loan bears interest at a variable rate of LIBOR plus 1.80% , matures on November 4, 2021 , and requires the payment of interest-only until maturity. The loan can be prepaid, in whole or in part, with prepayment fees (as defined in the underlying loan agreement) until November 5, 2019 , after which the loan can be repaid without penalty. Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year.

During the year ended December 31, 2018 , the Company received $5.2 million from the lender for approved leasing costs under the future advance portion of the mortgage loan. As of December 31, 2018 and the date of this report, an advance amount of $31.8 million remains available under this loan that can be drawn to fund future approved leasing costs.


42

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Debt Extension

On October 31, 2018 , Brookfield DTLA extended the maturity date of the mortgage loan secured by the 777 Tower office property for a period of one year to November 1, 2019 . The Company incurred costs totaling approximately $0.8 million in connection with this transaction that were paid using cash on hand.

Debt Maturities

777 Tower—

Brookfield DTLA currently intends to refinance the mortgage loan secured by the 777 Tower office property on or about November 1, 2019 , its scheduled maturity date. As of December 31, 2018 , we do not meet the criteria specified in the loan agreement to extend the maturity date of this loan. As of December 31, 2018 , the Company does not expect to make a principal paydown when the loan is refinanced (based on current market conditions). 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.

Non-Recourse Carve Out Guarantees

All of Brookfield DTLA’s $2.2 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 DTLA Holdings or one of its subsidiaries, if certain triggering events (as defined in the loan agreements) occur. Although these events differ from loan to loan, some of the common events include:

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

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

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


43

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

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

The maximum amount DTLA Holdings would be required to pay under a “non‑recourse carve out” guarantee is the principal amount of the loan (or a total of $2.2 billion as of December 31, 2018 for all loans). This maximum amount does not include liabilities related to environmental issues or hazardous substances. Losses resulting from the breach of our loan agreement representations related to environmental issues or hazardous substances are generally recourse to DTLA Holdings pursuant to our “non-recourse carve out” guarantees and any such losses would be in addition to the total principal amounts of our loans. The potential losses are not quantifiable and can be material in certain circumstances, depending on the severity of the environmental or hazardous substance issues. Since each of our non-recourse loans is secured by the office building owned by the special purpose property-owning subsidiary of DTLA Holdings, the amount due to the lender from DTLA Holdings in the event a “non-recourse carve out” guarantee is triggered could subsequently be partially or fully mitigated by the net proceeds received from any disposition of the office building; however, such proceeds may not be sufficient to cover the maximum potential amount due, depending on the particular asset.

Debt Reporting

Pursuant to the terms of certain of our mortgage loan agreements, Brookfield DTLA is required to report a debt service coverage ratio (“DSCR”) calculated using the formulas specified in the underlying loan agreements. We have submitted the required reports to the lenders for the measurement periods ended December 31, 2018 and were in compliance with the amounts required by the loan agreements.



44

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Discussion of Results of Operations

Comparison of the Year Ended December 31, 2018 to December 31, 2017

Consolidated Statements of Operations Information
(In millions, except percentage amounts)
For the Year Ended
December 31,
(Decrease)/
Increase
%
Change
2018
2017
Revenue:
Rental income
$
162.2

$
165.7

$
(3.5
)
(2
)%
Tenant reimbursements
105.9

96.5

9.4

10
%
Parking
37.3

37.1

0.2

—
%
Interest and other
10.3

7.0

3.3

47
%
Total revenue
315.7

306.3

9.4

3
%
Expenses:
Rental property operating and maintenance
99.0

94.0

5.0

5
%
Real estate taxes
40.0

37.7

2.3

6
%
Parking
10.2

9.4

0.8

8
%
Other expense
9.9

11.5

(1.6
)
(14
)%
Depreciation and amortization
96.2

97.8

(1.6
)
(2
)%
Interest
105.0

93.5

11.5

12
%
Total expenses
360.3

343.9

16.4

5
%
Net loss
$
(44.6
)
$
(37.6
)
$
(7.0
)

Rental Income

Rental income decreased $3.5 million , or 2% , for the year ended December 31, 2018 as compared to the year ended December 31, 2017 , primarily as a result of decreased amortization of above- and below-market lease intangibles due to lease expirations.

Rental Property Operating and Maintenance Expense

Rental property operating and maintenance expense increased $5.0 million , or 5% , for the year ended December 31, 2018 as compared to the year ended December 31, 2017 , largely due to higher utility, insurance and repair and maintenance costs.

Real Estate Taxes Expense

Real estate taxes expense increased $2.3 million , or 6% , for the year ended December 31, 2018 as compared to the year ended December 31, 2017 , primarily as a result of increased property tax assessments at our Figueroa at 7th retail property.


45

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Interest Expense

Interest expense increased $11.5 million , or 12% , for the year ended December 31, 2018 as compared to the year ended December 31, 2017 , mainly due to increases in LIBOR rates, an increase in debt outstanding at EY Plaza and Figueroa at 7th totaling $111.7 million from refinancing activity during the first quarter of 2018, and the writeoff of unamortized debt issuance costs in connection with the refinancing of Wells Fargo Center–North Tower mortgage and mezzanine loans at the end of the third quarter of 2018.

Comparison of the Year Ended December 31, 2017 to December 31, 2016

Consolidated Statements of Operations Information
(In millions, except percentage amounts)
For the Year Ended
December 31,
(Decrease)/
Increase
%
Change
2017
2016
Revenue:
Rental income
$
165.7

$
169.2

$
(3.5
)
(2
)%
Tenant reimbursements
96.5

95.6

0.9

1
%
Parking
37.1

36.6

0.5

1
%
Interest and other
7.0

9.3

(2.3
)
(25
)%
Total revenue
306.3

310.7

(4.4
)
(1
)%
Expenses:
Rental property operating and maintenance
94.0

92.8

1.2

1
%
Real estate taxes
37.7

37.4

0.3

1
%
Parking
9.4

8.4

1.0

12
%
Other expense
11.5

11.2

0.3

2
%
Depreciation and amortization
97.8

104.0

(6.2
)
(6
)%
Interest
93.5

95.1

(1.6
)
(2
)%
Total expenses
343.9

348.9

(5.0
)
(1
)%
Net loss
$
(37.6
)
$
(38.2
)
$
0.6


Rental Income

Rental income decreased $3.5 million , or 2% , for the year ended December 31, 2017 as compared to the year ended December 31, 2016 , primarily as a result of a 1.1% decrease in occupancy and lower lease termination income received during 2017.


46

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Interest and Other Revenue

Interest and other revenue decreased $2.3 million , or 25% , for the year ended December 31, 2017 as compared to the year ended December 31, 2016 , mainly as a result of a $1.1 million settlement received during 2016 from the insurance carrier under the MPG directors and officers liability insurance policy that partially reimbursed the Company for amounts paid to settle the merger litigation with the MPG common and preferred stockholders for which there was no comparable activity during 2017.

Rental Property Operating and Maintenance Expense

Rental property operating and maintenance expense increased $1.2 million , or 1% , for the year ended December 31, 2017 as compared to the year ended December 31, 2016 due to higher utility, repair and maintenance costs.

Parking Expense

Parking expense increased $1.0 million , or 12% , for the year ended December 31, 2017 as compared to the year ended December 31, 2016 , primarily as a result of increased participation payments to a local governmental agency who shares in the revenue of one of our parking facilities.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased $6.2 million , or 6% , for the year ended December 31, 2017 as compared to the year ended December 31, 2016 , largely as a result of an acceleration of depreciation and amortization expense related to lease termination activity.

Interest Expense

Interest expense decreased $1.6 million , or 2% , for the year ended December 31, 2017 as compared to the year ended December 31, 2016 as a result of principal paydowns on the Wells Fargo Center–North Tower and South Tower mortgage loans, and the Gas Company Tower mortgage loan in connection with refinancing activities.


47

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Discussion of Consolidated Cash Flows

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 its, 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 “Liquidity and Capital Resources—Potential Uses of Liquidity—Property Operations” above.

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

A summary of changes in Brookfield DTLA’s cash flows is as follows (in thousands):

For the Year Ended December 31,
Dollar
Change
2018
2017
Net cash provided by operating activities
$
17,389

$
31,786

$
(14,397
)
Net cash used in investing activities
(90,065
)
(74,696
)
(15,369
)
Net cash provided by financing activities
110,941

20,030

90,911


Operating Activities

Brookfield DTLA’s cash flow from operating activities is primarily dependent upon (1) the occupancy level of its portfolio, (2) the rental rates achieved on its leases, and (3) the collectability of rent and other amounts billed to tenants and is also tied to the level of operating expenses. Net cash provided by operating activities for the year ended December 31, 2018 totaled $17.4 million compared to net cash provided by operating activities of $31.8 million for the year ended December 31, 2017 . The $14.4 million decrease in cash provided by operating activities is primarily due to changes in working capital.


48

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Investing Activities

Brookfield DTLA’s cash flow from investing activities is generally impacted by the amount of capital expenditures for its properties. Net cash used in investing activities totaled $90.1 million for the year ended December 31, 2018 , compared to net cash used in investing activities of $74.7 million during the year ended December 31, 2017 . During the year ended December 31, 2018 , the Company continued the atrium renovations and elevator upgrades at Wells Fargo Center totaling $23.8 million.

Financing Activities

Brookfield DTLA’s cash flow from financing activities is generally impacted by its loan activity, contributions from and distributions to its mezzanine equity holders and its stockholders. Net cash provided by financing activities totaled $110.9 million for the year ended December 31, 2018 , compared to net cash provided by financing activities of $20.0 million during the year ended December 31, 2017 . Net proceeds from the refinancing of the Wells Fargo Center–North Tower, EY Plaza and Figueroa at 7th mortgage loans, partially offset by distributions to the Series B and senior participating preferred interests, were the main source of the cash inflows during the year ended December 31, 2018 . Contributions from the Series B preferred interest, partially offset by cash used to refinance the Wells Fargo Center–North Tower mortgage loan, were the primary driver of the cash inflows during the year ended December 31, 2017 .

Off-Balance Sheet Arrangements

Brookfield DTLA did not have any off-balance sheet transactions, arrangements or obligations as of the date this report was filed, and December 31, 2018 and 2017 , respectively.


49

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Contractual Obligations

The following table provides information with respect to Brookfield DTLA’s commitments as of December 31, 2018 , including any guaranteed or minimum commitments under contractual obligations (in thousands):

2019
2020
2021
2022
2023
Thereafter
Total
Principal payments on
mortgage loans
$
220,000

$
765,000

$
708,186

$
—

$
58,500

$
400,000

$
2,151,686

Interest payments –
Fixed-rate debt (1)
38,591

38,697

30,590

18,726

16,803

11,025

154,432

Variable-rate swapped to
fixed-rate debt
9,069

9,017

—

—

—

—

18,086

Variable-rate debt (2)
45,306

31,381

9,166

—

—

—

85,853

Tenant-related commitments (3)
85,606

11,281

9,650

2,410

1,143

2,582

112,672

$
398,572

$
855,376

$
757,592

$
21,136

$
76,446

$
413,607

$
2,522,729

__________
(1)
Interest payments on fixed-rate debt are calculated based on contractual interest rates and scheduled maturity dates.
(2)
Interest payments on variable-rate debt are calculated based on scheduled maturity dates and the one-month LIBOR rate in place on the debt as of December 31, 2018 plus the contractual spread per the loan agreements.
(3)
Tenant-related commitments include tenant improvements and leasing commissions and are based on executed leases as of December 31, 2018 .

Related Party Transactions

Management Agreements

Certain subsidiaries of Brookfield DTLA have entered into arrangements with the Manager, pursuant to which the Manager provides property management and various other services. Property management fees under the management agreements entered into in connection with these arrangements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays the Manager an asset management fee, which is calculated based on 0.75% of the capital contributed by DTLA Holdings. Leasing management fees paid to the Manager range from 1.00% to 4.00% of expected rents, depending on the terms of the lease and whether a third-party broker was paid a commission for the transaction. Construction management fees are paid to the Manager based on 3.00% of hard and soft construction costs.


50

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

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

For the Year Ended December 31,
2018
2017
2016
Property management fee expense
$
8,111

$
8,136

$
7,964

Asset management fee expense
6,330

6,330

6,330

Leasing and construction management fee expenses
3,209

5,198

3,049

General, administrative and reimbursable expenses
3,007

2,613

2,466


Insurance Agreements

Properties held by certain Brookfield DTLA subsidiaries and affiliates are covered under insurance policies entered into by the Manager that provide, among other things, all risk property and business interruption coverage for BPY’s commercial portfolio with an aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $437.5 million of earthquake insurance, and $372.5 million of flood and weather catastrophe insurance. In addition, Brookfield DTLA’s properties are covered by a terrorism insurance policy that provides a maximum of $4.0 billion per occurrence for all of BPY’s U.S. properties. Brookfield DTLA is in compliance with the contractual obligations regarding terrorism insurance contained in such policies. Insurance premiums for Brookfield DTLA’s properties are paid by the Manager and Brookfield DTLA reimburses the Manager for the actual cost of such premiums.

A summary of costs incurred by the applicable Brookfield DTLA subsidiaries and affiliates under this arrangement is as follows (in thousands):

For the Year Ended December 31,
2018
2017
2016
Insurance expense
$
8,026

$
7,795

$
7,948



51

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Other Related Party Transactions with BAM Affiliates

Brookfield DTLA leases office space to a tenant in which an affiliate of BAM is an investor. Additionally, the Company purchases chilled water for air conditioning at one of its properties from an affiliate of BAM. A summary of the impact of related party transactions with BAM affiliates on the Company’s consolidated statement of operations is as follows (in thousands):

For the Year Ended December 31,
2018
2017
2016
Rental income and tenant reimbursements revenue
$
1,928

$
—

$
—

Rental property and maintenance expense
862

579

—


Litigation


Critical Accounting Policies

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

Business Combinations

Effective January 1, 2018, Bro okfield DTLA adopted, on a prospective basis, the guidance in ASU 2017-01, Clarifying the Definition of a Business to ASC Topic 805, Business Combinations. Prior to the adoption of this guidance, the Company applied purchase accounting to the assets and liabilities related to real estate investments acquired from third parties. Prior to adopting this guidance, Brookfield DTLA allocated the purchase price of real estate acquired to tangible assets, consisting primarily of land, building and tenant improvements, and identifiable intangible assets and liabilities, consisting of the value of above- and below-market leases, in-place leases, and tenant relationships, based in each case on their fair value in accordance with GAAP in effect at the time of the acquisitions. Management may be required to use considerable judgment when allocating the fair value of assets and liabilities acquired.


52

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

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

Consolidation

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

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

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

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


53

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Impairment Evaluation

Real estate is reviewed for impairment if events or changes in circumstances indicate that the carrying amount of the real estate may not be recoverable. In such an event, a comparison is made of the current and projected operating cash flows of the property into the foreseeable future on an undiscounted basis to the carrying amount of the real estate. If the undiscounted cash flows expected to be generated by an asset are less than its carrying amount, an impairment provision would be recorded to write down the carrying amount of such asset to its fair value. Brookfield DTLA assesses fair value based on estimated cash flow projections utilizing appropriate discount and capitalization rates and available market information. Projections of future cash flow take into account the specific business plan for the property and management’s best estimate of the most probable set of economic conditions expected to prevail in the market. The assessment as to whether our investments in real estate are impaired is highly subjective. The calculations involve management’s best estimate of the holding period, market comparables, future occupancy levels, rental rates, capitalization rates, lease‑up periods and capital requirements for each property. A change in any one of more of these factors could materially impact whether a property is impaired as of any given valuation date. Management believes no impairment of Brookfield DTLA’s real estate assets existed at December 31, 2018 and 2017 .

Revenue Recognition

Rental income from leases providing for periodic increases in base rent is recognized on a straight-line basis over the noncancelable term of the respective leases. Certain leases with retail tenants also provide for the payment by the lessee of additional rent based on a percentage of the tenant’s sales. Percentage rents are recognized only after the tenant sales thresholds have been achieved. Amounts paid to a tenant for improvements owned or costs incurred by the tenant are treated as tenant inducements. Amortization of tenant inducements is recorded on a straight-line basis over the term of the related lease as a reduction of rental income.

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

Allowance for Doubtful Accounts

Brookfield DTLA periodically evaluates the collectability of amounts due from tenants and maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under the lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. Brookfield DTLA also evaluates its deferred rents receivable to consider if an allowance is necessary. The allowance for doubtful accounts totaled $314 thousand and $206 thousand as of December 31, 2018 and 2017 , respectively.


54

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Effects of Inflation

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

Recent Accounting Pronouncements

Accounting Pronouncements Adopted in 2018

Effective January 1, 2018, Brookfield DTLA adopted, on a modified retrospective basis, the guidance in Financial Accounting Standards Board (“FASB”) ASU 2014-09, Revenue from Contracts with Customers Accounting Standards Codification (“ASC”) Topic 606. ASU 2014-09, as amended by subsequent ASUs on the topic, established a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services and requires certain additional disclosures. The adoption of this pronouncement did not have an impact on Brookfield DTLA’s consolidated financial statements.

Effective January 1, 2018, Brookfield DTLA adopted, on a retrospective basis, the guidance in ASU 2016-18, Restricted Cash to Topic 230, Statement of Cash Flows. ASU 2016-18 requires entities to include restricted cash with cash and cash equivalents when reconciling the beginning and end of period total amounts shown in the statement of cash flows. Therefore, the change in restricted cash is no longer presented as a separate line item within cash flows from investing activities in the Company’s consolidated statement of cash flows since such balances are now combined with cash and cash equivalents at both the beginning and end of the reporting period. For the year ended December 31, 2017 , the Company used net cash in investing activities of $74.7 million instead of the $50.2 million previously reported, while for the year ended December 31, 2016 , the net cash used in investing activities was $57.4 million instead of the $63.6 million previously reported.

Effective January 1, 2018, Brookfield DTLA adopted, on a retrospective basis, the guidance in ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments to Topic 230, Statement of Cash Flows . ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The adoption of this guidance did not have an impact on Brookfield DTLA’s consolidated financial statements.


55

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Accounting Pronouncements Effective January 1, 2019

Leases

In February 2016, the FASB issued an update (“ASU 2016-02”), Leases (Topic 842) . The primary difference between Topic 842 and current GAAP is the recognition of lease assets and liabilities on the balance sheet by lessees for leases classified as operating leases under current GAAP. The accounting applied by lessors is largely unchanged from current GAAP, for example, the vast majority of operating leases will remain classified as operating leases, and lessors will continue to recognize lease income for those leases on a straight-line basis over the lease term.

In July 2018, the FASB issued ASU 2018-11, which includes an optional practical expedient for lessors to elect, by class of underlying asset, to not separate the lease from the non-lease components as required by Topic 842 if certain criteria are met. For leases where we are the lessor, the Company qualifies for the single component presentation and as a result, leases will be accounted for in a similar method to existing standards.

Topic 842 defines initial direct costs of a lease (which the Company has historically capitalized) as incremental costs that would not have been incurred had the lease not been executed. Costs to negotiate or arrange a lease regardless of its outcome, such as fixed employee compensation, tax or legal advice to negotiate lease terms, and lessor costs related to advertising or soliciting potential tenants, will be expensed as incurred under the new guidance. During the year ended December 31, 2018 , the Company capitalized $137 thousand of leasing costs that would not qualify as initial direct costs and would have been expensed under Topic 842.

ASU 2016-02 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018. We currently expect to adopt this standard effective January 1, 2019 using the practical expedients provided in the standard and the changes approved by the FASB.

Other

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, to Topic 815, Derivatives and Hedging . ASU 2017-12 introduced amendments intended to make targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The objective of the update is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. ASU 2017-12 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018. We do not expect the adoption of this guidance to have material impact on Brookfield DTLA’s consolidated financial statements.


56

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Accounting Pronouncements Effective January 1, 2020

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), and made changes to its conceptual framework, Conceptual Framework for Financial Reporting-Chapter 8: Notes to Financial Statements , that are intended to improve the effectiveness of disclosures in notes to financial statements. ASU 2018-13 removes, modifies and adds certain disclosure requirements related to fair value measurements required by Topic 820. The guidance is effective for interim and annual periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for any eliminated or modified disclosures. We are currently evaluating the impact of the adoption of this guidance on Brookfield DTLA’s consolidated financial statements.

In October 2018, the FASB issued ASU 2018-17, Consolidation ( Topic 810 ), Targeted Improvements to Related Party Guidance for Variable Interest Entities , which amends two aspects of the related-party guidance in Topic 810. Specifically, ASU 2018-17 (1) adds an elective private company scope exception to the variable interest entity guidance for entities under common control and (2) removes a sentence in ASC 810-10-55-37D regarding the evaluation of fees paid to decision makers to conform with the amendments in ASU 2016-17, Consolidation ( Topic 810 ), Interests Held through Related Parties That Are under Common Control (issued in October 2016). ASU 2018-17 is effective for interim and annual periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance on Brookfield DTLA’s consolidated financial statements.


57

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

Interest Rate Risk

Interest rate fluctuations may impact Brookfield DTLA’s results of operations and cash flow. As of December 31, 2018 , $1,013.2 million , or 47% , of Brookfield DTLA’s debt bears interest at variable rates based on one ‑ month LIBOR. Brookfield DTLA does not trade in financial instruments for speculative purposes.

Brookfield DTLA’s interest rate swap and cap contracts in place as of December 31, 2018 are as follows (in thousands, except rate and date information):

Notional
Value
Strike
Rate
Effective
Date
Expiration
Date
Fair
Value
Interest rate swap
$
172,600

2.18
%
11/27/2013
11/2/2020
$
951

Interest rate swap
54,206

2.47
%
3/29/2018
11/2/2020
23

Interest rate cap
400,000

4.25
%
9/21/2018
10/15/2020
6

Interest rate cap
65,000

4.25
%
9/21/2018
10/15/2020
1

Interest rate cap
35,000

4.25
%
9/21/2018
10/15/2020
1

Interest rate cap
290,000

4.50
%
11/5/2018
11/4/2020
3

Interest rate cap
220,000

5.75
%
10/15/2018
11/1/2019
—

Interest rate cap
35,000

3.50
%
3/29/2018
10/1/2019
—

$
985


Interest Rate Sensitivity

The impact of an assumed 50 basis point movement in interest rates would have had the following impact on Brookfield DTLA’s consolidated statements of operations and financial position during the year ended December 31, 2018 (in thousands):

Fair Value of
Interest
Expense
Mortgage
Loans
Interest
Rate Swaps
50 basis point increase
$
5,152

$
(6,818
)
$
1,876

50 basis point decrease
(5,152
)
6,797

(1,898
)

The impact of a 50 basis point increase or decrease in interest rates would have an immaterial effect on the fair value of Brookfield DTLA’s interest rate cap contracts as of December 31, 2018 .

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



58

Item 8.
Financial Statements and Supplementary Data.

Index to Consolidated Financial Statements




59

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Brookfield DTLA Fund Office Trust Investor Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Brookfield DTLA Fund Office Trust Investor Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017 , the related consolidated statements of operations, comprehensive loss, stockholders’ deficit, and cash flows, for each of the three years in the period ended December 31, 2018 , and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017 , and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 , in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/ DELOITTE & TOUCHE LLP

New York, NY

April 1, 2019

We have served as the Company’s auditor since 2013.


60

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

As of December 31,
2018
2017
ASSETS
Investments in Real Estate:
Land
$
227,555

$
227,555

Buildings and improvements
2,245,818

2,208,498

Tenant improvements
361,077

320,269

Investments in real estate, gross
2,834,450

2,756,322

Less: accumulated depreciation
418,205

342,465

Investments in real estate, net
2,416,245

2,413,857

Cash and cash equivalents
80,421

31,958

Restricted cash
25,349

35,547

Rents, deferred rents and other receivables, net
151,509

129,482

Intangible assets, net
44,640

58,289

Deferred charges, net
67,731

69,635

Prepaid and other assets, net
9,763

9,047

Total assets
$
2,795,658

$
2,747,815

LIABILITIES AND DEFICIT
Liabilities:
Mortgage loans, net
$
2,140,724

$
1,991,692

Accounts payable and other liabilities
63,678

80,810

Due to affiliates, net
3,834

11,273

Intangible liabilities, net
12,454

16,239

Total liabilities
2,220,690

2,100,014

Commitments and Contingencies ( See Note 14 )


Mezzanine Equity:
7.625% Series A Cumulative Redeemable Preferred Stock,
$0.01 par value, 9,730,370 shares issued and
outstanding as of December 31, 2018 and 2017
409,932

391,400

Noncontrolling Interests:
Series A-1 preferred interest
400,816

383,510

Senior participating preferred interest
23,443

25,548

Series B preferred interest
181,698

190,291

Total mezzanine equity
1,015,889

990,749

Stockholders’ Deficit:
Common stock, $0.01 par value, 1,000 shares issued and
outstanding as of December 31, 2018 and 2017
—

—

Additional paid-in capital
195,825

194,210

Accumulated deficit
(385,158
)
(256,877
)
Accumulated other comprehensive loss
(107
)
(273
)
Noncontrolling interest – Series B common interest
(251,481
)
(280,008
)
Total stockholders’ deficit
(440,921
)
(342,948
)
Total liabilities and deficit
$
2,795,658

$
2,747,815


See accompanying notes to consolidated financial statements.

61

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)

For the Year Ended December 31,
2018
2017
2016
Revenue:
Rental income
$
162,203

$
165,689

$
169,168

Tenant reimbursements
105,930

96,518

95,578

Parking
37,252

37,093

36,614

Interest and other
10,295

7,022

9,332

Total revenue
315,680

306,322

310,692

Expenses:
Rental property operating and maintenance
98,940

93,945

92,744

Real estate taxes
40,013

37,758

37,401

Parking
10,165

9,374

8,430

Other expense
9,920

11,508

11,239

Depreciation and amortization
96,264

97,808

103,970

Interest
105,035

93,566

95,075

Total expenses
360,337

343,959

348,859

Net loss
(44,657
)
(37,637
)
(38,167
)
Net income (loss) attributable to
noncontrolling interests:
Series A-1 preferred interest –
current dividends
17,306

17,213

17,213

Senior participating preferred interest –
redemption measurement adjustment
1,482

479

2,428

Series B preferred interest –
current preferred return
17,961

13,435

2,084

Series B common interest –
allocation of net income (loss)
28,343

(45,699
)
(41,055
)
Net loss attributable to Brookfield DTLA
(109,749
)
(23,065
)
(18,837
)
Series A preferred stock –
current dividends
18,532

18,548

18,548

Net loss available to common interest
holders of Brookfield DTLA
$
(128,281
)
$
(41,613
)
$
(37,385
)









See accompanying notes to consolidated financial statements.

62

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)

For the Year Ended December 31,
2018
2017
2016
Net loss
$
(44,657
)
$
(37,637
)
$
(38,167
)
Other comprehensive income:
Derivative transactions:
Unrealized derivative holding gains
1,548

2,799

2,042

Reclassification adjustment for realized
gains included in net loss
(1,198
)
—

—

Total other comprehensive income
350

2,799

2,042

Comprehensive loss
(44,307
)
(34,838
)
(36,125
)
Less: comprehensive income (loss)
attributable to noncontrolling interests
65,276

(13,107
)
(18,261
)
Comprehensive loss available to
common interest holders of
Brookfield DTLA
$
(109,583
)
$
(21,731
)
$
(17,864
)





















See accompanying notes to consolidated financial statements.


63

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(In thousands, except share amounts)

Number of
Shares
Common
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Non-
controlling
Interest
Total
Stockholders’
Deficit
Common
Stock
Balance, December 31, 2015
1,000

$
—

$
191,710

$
(177,879
)
$
(2,580
)
$
(195,788
)
$
(184,537
)
Net loss
(18,837
)
(19,330
)
(38,167
)
Other comprehensive income
973

1,069

2,042

Contributions from
DTLA Holdings
2,500

2,500

Dividends on Series A
Preferred Stock, Series A-1
preferred interest,
senior participating
preferred interest and
Series B preferred interest
(18,548
)
(21,725
)
(40,273
)
Balance, December 31, 2016
1,000

—

194,210

(215,264
)
(1,607
)
(235,774
)
(258,435
)
Net loss
(23,065
)
(14,572
)
(37,637
)
Other comprehensive income
1,334

1,465

2,799

Dividends on Series A
Preferred Stock, Series A-1
preferred interest,
senior participating
preferred interest and
Series B preferred interest
(18,548
)
(31,127
)
(49,675
)
Balance, December 31, 2017
1,000

—

194,210

(256,877
)
(273
)
(280,008
)
(342,948
)
Net (loss) income
(109,749
)
65,092

(44,657
)
Other comprehensive income
166

184

350

Contributions from
DTLA Holdings
1,615

1,615

Dividends on Series A
Preferred Stock, Series A-1
preferred interest,
senior participating
preferred interest and
Series B preferred interest
(18,532
)
(36,749
)
(55,281
)
Balance, December 31, 2018
1,000

$
—

$
195,825

$
(385,158
)
$
(107
)
$
(251,481
)
$
(440,921
)












See accompanying notes to consolidated financial statements.

64

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

For the Year Ended December 31,
2018
2017
2016
Cash flows from operating activities:
Net loss
$
(44,657
)
$
(37,637
)
$
(38,167
)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization
96,264

97,808

103,970

Provision for doubtful (recovery of) accounts
190

(7
)
(271
)
Amortization of below-market leases/
above-market leases
222

(2,219
)
(3,465
)
Straight-line rent amortization
(11,399
)
(11,237
)
(16,798
)
Amortization of tenant inducements
4,228

3,816

3,399

Amortization of debt issuance costs and
discounts
9,565

6,400

4,329

Realized gain on derivative financial instruments
(1,198
)
—

—

Changes in assets and liabilities:
Rents, deferred rents and other receivables, net
(12,179
)
(3,850
)
(9,122
)
Deferred charges, net
(22,209
)
(15,336
)
(9,516
)
Prepaid and other assets, net
(82
)
139

(53
)
Accounts payable and other liabilities
6,083

(3,037
)
(3,469
)
Due to affiliates, net
(7,439
)
(3,054
)
4,991

Net cash provided by operating activities
17,389

31,786

35,828

Cash flows from investing activities:
Expenditures for real estate improvements
(90,065
)
(74,696
)
(57,350
)
Net cash used in investing activities
(90,065
)
(74,696
)
(57,350
)














See accompanying notes to consolidated financial statements.

65

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)

For the Year Ended December 31,
2018
2017
2016
Cash flows from financing activities:
Proceeds from mortgage loans
$
1,081,686

$
470,000

$
720,000

Principal payments on mortgage loans
(931,831
)
(554,028
)
(751,518
)
Dividend paid on Series A preferred stock
—

—

(21,893
)
Contributions from noncontrolling interests
—

112,012

63,280

Distributions to noncontrolling interests
(30,141
)
(470
)
(616
)
Contributions from DTLA Holdings
1,615

—

2,500

Financing fees paid
(10,388
)
(7,484
)
(7,412
)
Net cash provided by financing activities
110,941

20,030

4,341

Net change in cash, cash equivalents and
restricted cash
38,265

(22,880
)
(17,181
)
Cash, cash equivalents and restricted cash
at beginning of year
67,505

90,385

107,566

Cash, cash equivalents and restricted cash
at end of year
$
105,770

$
67,505

$
90,385

Supplemental disclosure of cash flow information:
Cash paid for interest
$
96,074

$
88,160

$
89,630

Cash paid for income taxes, net
1,127

214

584

Supplemental disclosure of non-cash activities:
Accrual for real estate improvements
$
17,179

$
25,616

$
24,465

Accrual for deferred leasing costs
2,997

3,277

2,349

Increase in fair value of interest rate swaps
1,548

2,799

2,042

Writeoff of fully depreciated buildings
and improvements
—

4,007

—

Writeoff of fully depreciated tenant improvements
—

56,291

—

Writeoff of fully amortized deferred charges
—

20,481

—

Writeoff of fully amortized intangible assets
—

68,990

—

Writeoff of fully amortized intangible liabilities
—

16,783

—











See accompanying notes to consolidated financial statements.

66

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)

The following is a reconciliation of Brookfield DTLA’s cash, cash equivalents and restricted cash at the beginning and end of the years ended December 31, 2018 , 2017 and 2016 :

For the Year Ended December 31,
2018
2017
2016
Cash and cash equivalents at beginning of year
$
31,958

$
30,301

$
53,736

Restricted cash at beginning of year
35,547

60,084

53,830

Cash, cash equivalents and restricted cash at
beginning of year
$
67,505

$
90,385

$
107,566

Cash and cash equivalents at end of year
$
80,421

$
31,958

$
30,301

Restricted cash at end of year
25,349

35,547

60,084

Cash, cash equivalents and restricted cash at
end of year
$
105,770

$
67,505

$
90,385

































See accompanying notes to consolidated financial statements.

67


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1—Organization and Description of Business

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, a Delaware limited liability company (“DTLA Holdings”, and together with its affiliates excluding the Company and its subsidiaries, the “Manager”). DTLA Holdings is an indirect partially-owned subsidiary of Brookfield Property Partners L.P., a limited partnership under the Laws of Bermuda (“BPY”), which in turn is the flagship listed real estate company of Brookfield Asset Management Inc., a corporation under the Laws of Canada (“BAM”).

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”) and other investments.

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.

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

As used in these consolidated financial statements and related notes, unless the context requires otherwise, the terms “Brookfield DTLA,” the “Company,” “us,” “we” and “our” refer to Brookfield DTLA Fund Office Trust Investor Inc.

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated balance sheets as of December 31, 2018 and 2017 include the accounts of Brookfield DTLA and subsidiaries in which it has a controlling financial interest. All intercompany transactions have been eliminated in consolidation as of and for the years ended December 31, 2018 , 2017 and 2016 .

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


68


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

Use of Estimates

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


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Reclassifications

During the year ended December 31, 2018 , the Company reclassified asset management fees earned by the Manager from rental property operating and maintenance expense to other expense in the consolidated statement of operations. Management does not include asset management fees as an input when evaluating the operating performance of Brookfield DTLA’s properties and created a new category within other expense during 2018 to capture such fees. For the years ended December 31, 2017 and 2016 , the Company reported rental property operating and maintenance expense totaling $100.3 million and $99.1 million and other expense totaling $5.2 million and $4.9 million in the consolidated statements of operations, respectively. After the reclassification, rental property operating and maintenance expense now totals $94.0 million and $92.8 million and other expense now totals $11.5 million and $11.2 million in the consolidated statements of operations for the years ended December 31, 2017 and 2016 , respectively. These reclassifications had no effect on the Company’s financial position, results of operations or cash flows in any year.

During the year ended December 31, 2018 , the Company also reclassified lease termination fees from interest and other income to rental income in the consolidated statement of operations in anticipation of adopting Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). For the years ended December 31, 2017 and 2016 , the Company reported interest and other income totaling $10.3 million and $13.7 million and rental income totaling $162.4 million and $164.8 million in the consolidated statements of operations, respectively. After the reclassification, interest and other income now totals $7.0 million and $9.3 million and rental income now totals $165.7 million and $169.2 million in the consolidated statements of operations for the years ended December 31, 2017 and 2016 , respectively. These reclassifications had no effect on the Company’s financial position, results of operations or cash flows in any year.

Accounting Pronouncements Adopted in 2018

Effective January 1, 2018, Brookfield DTLA adopted, on a modified retrospective basis, the guidance in Financial Accounting Standards Board (“FASB”) ASU 2014-09, Revenue from Contracts with Customers Accounting Standards Codification (“ASC”) Topic 606. ASU 2014-09, as amended by subsequent ASUs on the topic, established a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services and requires certain additional disclosures. The adoption of this pronouncement did not have an impact on Brookfield DTLA’s consolidated financial statements.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Effective January 1, 2018, Brookfield DTLA adopted, on a retrospective basis, the guidance in ASU 2016-18, Restricted Cash to Topic 230, Statement of Cash Flows. ASU 2016-18 requires entities to include restricted cash with cash and cash equivalents when reconciling the beginning and end of period total amounts shown in the statement of cash flows. Therefore, the change in restricted cash is no longer presented as a separate line item within cash flows from investing activities in the Company’s consolidated statement of cash flows since such balances are now combined with cash and cash equivalents at both the beginning and end of the reporting period. For the year ended December 31, 2017 , the Company used net cash in investing activities of $74.7 million instead of the $50.2 million previously reported, while for the year ended December 31, 2016 , the net cash used in investing activities was $57.4 million instead of the $63.6 million previously reported.

Effective January 1, 2018, Brookfield DTLA adopted, on a retrospective basis, the guidance in ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments to Topic 230, Statement of Cash Flows . ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The adoption of this guidance did not have an impact on Brookfield DTLA’s consolidated financial statements.

Accounting Pronouncements Effective January 1, 2019

Leases

In February 2016, the FASB issued an update (“ASU 2016-02”), Leases (Topic 842) . The primary difference between Topic 842 and current GAAP is the recognition of lease assets and liabilities on the balance sheet by lessees for leases classified as operating leases under current GAAP. The accounting applied by lessors is largely unchanged from current GAAP, for example, the vast majority of operating leases will remain classified as operating leases, and lessors will continue to recognize lease income for those leases on a straight-line basis over the lease term.

In July 2018, the FASB issued ASU 2018-11, which includes an optional practical expedient for lessors to elect, by class of underlying asset, to not separate the lease from the non-lease components as required by Topic 842 if certain criteria are met. For leases where we are the lessor, the Company qualifies for the single component presentation and as a result, leases will be accounted for in a similar method to existing standards.

Topic 842 defines initial direct costs of a lease (which the Company has historically capitalized) as incremental costs that would not have been incurred had the lease not been executed. Costs to negotiate or arrange a lease regardless of its outcome, such as fixed employee compensation, tax or legal advice to negotiate lease terms, and lessor costs related to advertising or soliciting potential tenants, will be expensed as incurred under the new guidance. During the year ended December 31, 2018 , the Company capitalized $137 thousand of leasing costs that would not qualify as initial direct costs and would have been expensed under Topic 842.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

ASU 2016-02 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018. We currently expect to adopt this standard effective January 1, 2019 using the practical expedients provided in the standard and the changes approved by the FASB.

Other

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, to Topic 815, Derivatives and Hedging . ASU 2017-12 introduced amendments intended to make targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The objective of the update is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. ASU 2017-12 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018. We do not expect the adoption of this guidance to have material impact on Brookfield DTLA’s consolidated financial statements.

Accounting Pronouncements Effective January 1, 2020

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), and made changes to its conceptual framework, Conceptual Framework for Financial Reporting-Chapter 8: Notes to Financial Statements , that are intended to improve the effectiveness of disclosures in notes to financial statements. ASU 2018-13 removes, modifies and adds certain disclosure requirements related to fair value measurements required by Topic 820. The guidance is effective for interim and annual periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for any eliminated or modified disclosures. We are currently evaluating the impact of the adoption of this guidance on Brookfield DTLA’s consolidated financial statements.

In October 2018, the FASB issued ASU 2018-17, Consolidation ( Topic 810 ), Targeted Improvements to Related Party Guidance for Variable Interest Entities , which amends two aspects of the related-party guidance in Topic 810. Specifically, ASU 2018-17 (1) adds an elective private company scope exception to the variable interest entity guidance for entities under common control and (2) removes a sentence in ASC 810-10-55-37D regarding the evaluation of fees paid to decision makers to conform with the amendments in ASU 2016-17, Consolidation ( Topic 810 ), Interests Held through Related Parties That Are under Common Control (issued in October 2016). ASU 2018-17 is effective for interim and annual periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance on Brookfield DTLA’s consolidated financial statements.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Significant Accounting Policies

Business Combinations—

Effective January 1, 2018, Brookfield DTLA adopted, on a prospective basis, the guidance in ASU 2017-01, Clarifying the Definition of a Business to ASC Topic 805, Business Combinations. Prior to the adoption of this guidance, the Company applied purchase accounting to the assets and liabilities related to real estate investments acquired from third parties. Prior to adopting this guidance, Brookfield DTLA allocated the purchase price of real estate acquired to tangible assets, consisting primarily of land, building and tenant improvements, and identifiable intangible assets and liabilities, consisting of the value of above- and below-market leases, in-place leases, and tenant relationships, based in each case on their fair value in accordance with GAAP in effect at the time of the acquisitions.

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

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

Investments in Real Estate—

Land is carried at cost. Buildings are recorded at historical cost and are depreciated on a straight‑line basis over the estimated useful life of the building, which is 60 years with an estimated salvage value of 5% . Building improvements are recorded at historical cost and are depreciated on a straight-line basis over their estimated useful lives, which range from 7 years to 25 years. Land improvements are combined with building improvements for financial reporting purposes and are carried at cost. Tenant improvements that are determined to be assets of Brookfield DTLA are recorded at cost; amortization is included in depreciation and amortization expense in the consolidated statement of operations on a straight‑line basis over the shorter of the useful life or the applicable lease term.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Depreciation expense related to investments in real estate during the years ended December 31, 2018 , 2017 and 2016 was $75.7 million , $73.6 million and $73.0 million , respectively.

Real estate is reviewed for impairment if events or changes in circumstances indicate that the carrying amount of the real estate may not be recoverable. In such an event, a comparison is made of the current and projected operating cash flows of the property into the foreseeable future on an undiscounted basis to the carrying amount of the real estate. If the undiscounted cash flows expected to be generated by an asset are less than its carrying amount, an impairment provision would be recorded to write down the carrying amount of such asset to its fair value. Brookfield DTLA assesses fair value based on estimated cash flow projections utilizing appropriate discount and capitalization rates and available market information. Projections of future cash flow take into account the specific business plan for the property and management’s best estimate of the most probable set of economic conditions expected to prevail in the market. Management believes no impairment of Brookfield DTLA’s real estate assets existed at December 31, 2018 and 2017 .

Cash and Cash Equivalents—

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

Restricted Cash—

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

Rents, Deferred Rents and Other Receivables, Net—

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

Rents, deferred rents and other receivables, net also includes amounts paid to a tenant for improvements owned or costs incurred by the tenant. Such amounts are treated as tenant inducements and are presented in the consolidated balance sheet net of accumulated amortization totaling $16.7 million and $12.5 million as of December 31, 2018 and 2017 , respectively. Amortization of tenant inducements is recorded on a straight-line basis over the term of the related lease as a reduction of rental income in the consolidated statement of operations.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The allowance for doubtful accounts for Brookfield DTLA totaled $314 thousand and $206 thousand as of December 31, 2018 and 2017 , respectively. During the years ended December 31, 2018 , 2017 and 2016 , Brookfield DTLA recorded a provision for doubtful accounts of $190 thousand , and recoveries of accounts of $7 thousand and $271 thousand , respectively.

Due to/from Affiliates, Net—

Amounts due to/from affiliates, net consist of related party receivables and payables from affiliates of BAM primarily for fees for property and asset management and other services. These amounts are due on demand and are non‑interest bearing. See Note 12 “Related Party Transactions.”

Deferred Charges, Net—

Leasing costs are deferred and are presented as deferred charges in the consolidated balance sheet net of accumulated amortization totaling $50.3 million and $39.8 million as of December 31, 2018 and 2017 , respectively. Deferred leasing costs are amortized on a straight‑line basis over the terms of the related leases as part of depreciation and amortization expense in the consolidated statement of operations.

Prepaid and Other Assets, Net—

Prepaid and other assets, net include prepaid insurance, real estate taxes and interest, fair value of derivative financial instruments, other operating costs and non-operating furniture and equipment, net of accumulated depreciation totaling $4.6 million and $4.3 million , as of December 31, 2018 and 2017 , respectively.

Mortgage Loans, Net—

Mortgage loans are presented in the consolidated balance sheet net of unamortized debt issuance costs totaling $11.0 million and $10.1 million as of December 31, 2018 and 2017 , respectively.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Debt issuance costs and discounts totaling $9.6 million , $6.4 million and $4.3 million were amortized during the years ended December 31, 2018 , 2017 and 2016 , respectively, over the terms of the related mortgage loans on a basis that approximates the effective interest method and are included as part of interest expense in the consolidated statement of operations.

Revenue Recognition—

Rental income from leases providing for periodic increases in base rent is recognized on a straight-line basis over the noncancelable term of the respective leases. Certain leases with retail tenants also provide for the payment by the lessee of additional rent based on a percentage of the tenant’s sales. Percentage rents are recognized only after the tenant sales thresholds have been achieved.

Recoveries of operating expenses and real estate taxes are recorded as tenant reimbursements in the consolidated statement of operations in the period during which the expenses are incurred.

Derivative Financial Instruments—

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

At the inception of the contracts, Brookfield DTLA designates its interest rate swap contracts as cash flow hedges and documents the relationship of the hedge to the underlying transaction. Hedge effectiveness is assessed at inception and throughout the life of the hedge to ensure the hedge qualifies for hedge accounting. Changes in fair value associated with hedge ineffectiveness, if any, are recorded in the consolidated statement of operations. Changes in fair value of cash flow hedge derivative financial instruments are deferred and recorded as part of accumulated other comprehensive loss in the consolidated statement of stockholders’ deficit until the underlying transaction affects earnings. In the event that an anticipated transaction is no longer likely to occur, the Company recognizes the change in fair value of the derivative financial instrument in its consolidated statement of operations in the period the determination is made.

Additionally, Brookfield DTLA uses interest rate cap contracts to limit impact of changes in the LIBOR rate on certain of its mortgage and mezzanine loans. Due to the short-term nature of the contracts involved, the Company does not use hedge accounting for these contracts, and as such, changes in fair value are recorded in the period of change in the consolidated statement of operations.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Segment Reporting

Brookfield DTLA currently 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.

Accounting for Conditional Asset Retirement Obligations

Brookfield DTLA has evaluated whether it has any conditional asset retirement obligations, which are a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional upon future events that may or may not be within an entity’s control. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Accordingly, Brookfield DTLA recognized a liability for a conditional asset retirement obligation in the consolidated balance sheet as of December 31, 2018 and 2017 .

Note 3 — Intangible Assets and Liabilities

Brookfield DTLA’s intangible assets and liabilities are summarized as follows (in thousands):

As of December 31,
2018
2017
Intangible Assets
In-place leases
$
66,365

$
66,365

Tenant relationships
30,078

30,078

Above-market leases
31,270

31,270

Intangible assets, gross
127,713

127,713

Less: accumulated amortization
83,073

69,424

Intangible assets, net
$
44,640

$
58,289

Intangible Liabilities
Below-market leases
$
59,561

$
59,561

Less: accumulated amortization
47,107

43,322

Intangible liabilities, net
$
12,454

$
16,239



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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

For the Year Ended December 31,
2018
2017
2016
Rental income
$
(222
)
$
2,218

$
3,465

Depreciation and amortization expense
9,642

13,527

19,609


As of December 31, 2018 , the estimate of the amortization/accretion of intangible assets and liabilities during the next five years and thereafter is as follows (in thousands):

In-Place
Leases
Other
Intangible Assets
Intangible
Liabilities
2019
$
5,742

$
4,043

$
3,223

2020
4,786

3,228

2,975

2021
4,533

3,171

2,797

2022
3,847

2,944

2,460

2023
2,221

2,569

674

Thereafter
2,975

4,581

325

$
24,104

$
20,536

$
12,454



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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 4 — Mortgage Loans

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

Contractual
Maturity Date
Principal Amount
as of December 31,
Interest Rate
2018
2017
Floating-Rate Debt
Variable-Rate Loans:
Wells Fargo Center–North Tower (1)
10/9/2020
4.11
%
$
400,000

$
—

Wells Fargo Center–North Tower (2)
10/9/2020
6.46
%
65,000

—

Wells Fargo Center–North Tower (3)
10/9/2020
7.46
%
35,000

—

Wells Fargo Center–South Tower (4)
11/4/2021
4.15
%
258,186

—

777 Tower (5)
11/1/2019
4.53
%
220,000

220,000

EY Plaza (6)
11/27/2020
6.90
%
35,000

—

Total variable-rate loans
1,013,186

220,000

Variable-Rate Swapped to Fixed-Rate Loan:
EY Plaza (7)
11/27/2020
3.90
%
230,000

—

Total floating-rate debt
1,243,186

220,000

Fixed-Rate Debt:
BOA Plaza
9/1/2024
4.05
%
400,000

400,000

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

319,000

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

131,000

Figueroa at 7th
3/1/2023
3.88
%
58,500

—

Total fixed-rate debt
908,500

850,000

Debt Refinanced:
Wells Fargo Center–North Tower
—

470,000

Wells Fargo Center–South Tower
—

250,000

EY Plaza
—

176,831

Figueroa at 7th
—

35,000

Total debt refinanced
—

931,831

Total debt
2,151,686

2,001,831

Less: unamortized debt issuance costs
10,962

10,139

Total debt, net
$
2,140,724

$
1,991,692

__________
(1)
This loan bears interest at LIBOR plus 1.65% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.25% . Brookfield DTLA has three options to extend the maturity date of this loan, each for a period of one year, as long as the maturity dates of both of the mezzanine loans are extended when the maturity date of the mortgage loan is extended.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(2)
This loan bears interest at LIBOR plus 4.00% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.25% . Brookfield DTLA has three options to extend the maturity date of this loan, each for a period of one year, as long as the maturity date of the other mezzanine loan is extended when the maturity date of the mortgage loan is extended.
(3)
This loan bears interest at LIBOR plus 5.00% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.25% . Brookfield DTLA has three options to extend the maturity date of this loan, each for a period of one year, as long as the maturity date of the other mezzanine loan is extended when the maturity date of the mortgage loan is extended.
(4)
This loan bears interest at LIBOR plus 1.80% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.50% . Brookfield DTLA has two options to extend the maturity date of this loan, each for a period of one year. As of December 31, 2018 , a future advance amount of $31.8 million is available under this loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements.
(5)
This loan bears interest at LIBOR plus 2.18% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 5.75% . Brookfield DTLA has one option to extend the maturity date of this loan for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). As of December 31, 2018 , we do not meet the criteria specified in the loan agreement to extend this loan. See “—Debt Maturities—777 Tower” below.
(6)
This loan bears interest at LIBOR plus 4.55% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 3.50% .
(7)
This loan bears interest at LIBOR plus 1.65% . As required by the loan agreement, we have entered into interest rate swap contracts to hedge this loan, which effectively fix the LIBOR portion of the interest rate at 2.27% . The effective interest rate of 3.90% includes interest on the swaps.

The weighted average interest rate of our debt was 4.34% and 4.29% as of December 31, 2018 and 2017 , respectively.

Debt Refinanced

Figueroa at 7th—

On February 6, 2018 , Brookfield DTLA refinanced the mortgage loan secured by the Figueroa at 7th retail property and received net proceeds totaling $58.0 million , of which $35.0 million was used to repay the mortgage loan that previously encumbered the property, with the remainder used for general corporate purposes.

The new $58.5 million loan bears interest at a fixed rate equal to 3.88% , requires the payment of interest-only until maturity, and matures on March 1, 2023. The loan is locked out from prepayment until March 1, 2020 , after which it can be prepaid, in whole or in part, with prepayment fees (as defined in the underlying loan agreement) until November 1, 2022 , after which the loan may be repaid without penalty.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

EY Plaza—

On March 29, 2018 , Brookfield DTLA refinanced the mortgage loan secured by the EY Plaza office property and received net proceeds totaling $263.4 million , of which $175.8 million was used to repay the mortgage loan that previously encumbered the property, with the remainder used for general corporate purposes.

The new $265.0 million loan is comprised of a $230.0 million mortgage loan and a $35.0 million mezzanine loan, each of which bears interest at variable rates equal to LIBOR plus 1.65% and 4.55% , respectively, requires the payment of interest-only until maturity, and matures on November 27, 2020 . The mortgage loan can be prepaid, in whole or in part, with prepayment fees (as defined in the underlying loan agreement) and payment of early termination fees to the counterparties to the interest rate swap contracts, as long as the mezzanine loan has been repaid in full prior to any prepayment of the mortgage loan.

As required by the mortgage and mezzanine loan agreements, on March 29, 2018 the Company entered into derivative financial instruments to manage the risk of fluctuations in interest rates on its consolidated statement of operations. See Note 11 “Financial Instruments.”

Wells Fargo Center–North Tower—

On September 21, 2018 , Brookfield DTLA refinanced the mortgage and mezzanine loans secured by the Wells Fargo Center–North Tower office property and received net proceeds totaling $496.0 million , of which $470.0 million was used to repay the loans that previously encumbered the property, with the remainder used for general corporate purposes.

The new $500.0 million loan is comprised of a $400.0 million mortgage loan, a $65.0 million mezzanine loan, and a $35.0 million mezzanine loan, each of which bears interest at variable rates equal to LIBOR plus 1.65% , 4.00% , and 5.00% , respectively, requires the payment of interest-only until maturity, and matures on October 9, 2020 . The mortgage loan can be prepaid, in whole or in part, with prepayment fees (as defined in the underlying loan agreement), as long as the mezzanine loans are repaid on a pro rata basis with the mortgage loan, until October 9, 2019 , after which the loan may be repaid without penalty. Brookfield DTLA has three options to extend the maturity dates of the mortgage and mezzanine loans, each for a period of one year, as long as the maturity dates of both of the mezzanine loans are extended when the maturity date of the mortgage loan is extended.

As required by the mortgage and mezzanine loan agreements, on September 21, 2018 the Company entered into derivative financial instruments to manage the risk of fluctuations in interest rates on its consolidated statement of operations. See Note 11 “Financial Instruments.”


81


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Wells Fargo Center–South Tower—

On November 5, 2018 , Brookfield DTLA refinanced the mortgage loan secured by the Wells Fargo Center–South Tower office property and received net proceeds totaling $250.0 million that were used to repay the loan that previously encumbered the property. The Company incurred costs totaling $3.5 million in connection with this transaction, of which $3.0 million were paid using proceeds from the refinancing and $0.5 million using cash on hand.

The new $290.0 million mortgage loan is comprised of an initial advance amount of $253.0 million and a maximum future advance amount of $37.0 million that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements. The loan bears interest at a variable rate of LIBOR plus 1.80% , matures on November 4, 2021 , and requires the payment of interest-only until maturity. The loan can be prepaid, in whole or in part, with prepayment fees (as defined in the underlying loan agreement) until November 5, 2019 , after which the loan can be repaid without penalty. Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year.

During the year ended December 31, 2018 , the Company received $5.2 million from the lender for approved leasing costs under the future advance portion of the mortgage loan. As of December 31, 2018 , an advance amount of $31.8 million remains available under this loan that can be drawn to fund future approved leasing costs.

As required by the mortgage loan agreement, on November 5, 2018 the Company entered into a derivative financial instrument to manage the risk of fluctuations in interest rates on its consolidated statement of operations. See Note 11 “Financial Instruments.”

Debt Extension

777 Tower—

On October 31, 2018 , Brookfield DTLA extended the maturity date of the mortgage loan secured by the 777 Tower office property for a period of one year to November 1, 2019 . The Company incurred costs totaling approximately $0.8 million in connection with this transaction that were paid using cash on hand.

As required by the extension agreement, on October 15, 2018 the Company entered into a derivative financial instrument to manage the risk of fluctuations in interest rates on its consolidated statement of operations. See Note 11 “Financial Instruments.”


82


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Debt Maturities

As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. As of December 31, 2018 , our debt to be repaid during the next five years and thereafter is as follows (in thousands):

2019
$
220,000

2020
765,000

2021
708,186

2022
—

2023
58,500

Thereafter
400,000

$
2,151,686


As of December 31, 2018 , $220.0 million of our debt may be prepaid without penalty, $400.0 million may be defeased (as defined in the underlying loan agreement), $1,473.2 million may be prepaid with prepayment penalties, and $58.5 million is locked out from prepayment until March 1, 2020 .

777 Tower—

Brookfield DTLA currently intends to refinance the mortgage loan secured by the 777 Tower office property on or about November 1, 2019 , its scheduled maturity date. As of December 31, 2018 , we do not meet the criteria specified in the loan agreement to extend the maturity date of this loan. As of December 31, 2018 , the Company does not expect to make a principal paydown when the loan is refinanced (based on current market conditions). 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.


83


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Non-Recourse Carve Out Guarantees

All of Brookfield DTLA’s $2.2 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 DTLA Holdings or one of its subsidiaries, if certain triggering events (as defined in the loan agreements) occur. Although these events differ from loan to loan, some of the common events include:

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

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

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

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

The maximum amount DTLA Holdings would be required to pay under a “non‑recourse carve out” guarantee is the principal amount of the loan (or a total of $2.2 billion as of December 31, 2018 for all loans). This maximum amount does not include liabilities related to environmental issues or hazardous substances. Losses resulting from the breach of our loan agreement representations related to environmental issues or hazardous substances are generally recourse to DTLA Holdings pursuant to the “non-recourse carve out” guarantees and any such losses would be in addition to the total principal amounts of the loans. The potential losses are not quantifiable and can be material in certain circumstances, depending on the severity of the environmental or hazardous substance issues. Since each of our non-recourse loans is secured by the office building owned by the special purpose property-owning subsidiary of DTLA Holdings, the amount due to the lender from DTLA Holdings in the event a “non-recourse carve out” guarantee is triggered could subsequently be partially or fully mitigated by the net proceeds received from any disposition of the office building; however, such proceeds may not be sufficient to cover the maximum potential amount due, depending on the particular asset.


84


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Debt Reporting Compliance

Pursuant to the terms of certain of our mortgage loan agreements, Brookfield DTLA is required to report a debt service coverage ratio (“DSCR”) calculated using the formulas specified in the underlying loan agreements. We have submitted the required reports to the lenders for the measurement periods ended December 31, 2018 and were in compliance with the amounts required by the loan agreements.

Note 5 —Mezzanine Equity

Mezzanine equity in the consolidated balance sheet is comprised of the Series A preferred stock, a Series A-1 preferred interest, a senior participating preferred interest, and a Series B preferred interest (collectively, the “Preferred Interests”). The Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest are held by a noncontrolling interest holder. The Preferred Interests are classified in mezzanine equity because they are callable, and the holder of the Series A-1 preferred interest, senior participating preferred interest, Series B preferred interest, and some of the Series A preferred stock indirectly controls the ability to elect to redeem such instruments, through its controlling interest in the Company and its subsidiaries. There is no commitment or obligation on the part of Brookfield DTLA or DTLA Holdings to redeem the Preferred Interests.

The Preferred Interests included within mezzanine equity were recorded at fair value on the date of issuance and have been adjusted to the greater of their carrying amount or redemption value as of December 31, 2018 and 2017 . Adjustments to increase the carrying amount to redemption value are recorded in the consolidated statement of operations as a redemption measurement adjustment.

Distributions

During the years ended December 31, 2018 , 2017 and 2016 , the Company made distributions using cash on hand totaling $30.1 million , $0.5 million and $0.6 million , respectively, to DTLA Holdings related to the Series B preferred and senior participating preferred interests during 2018 and the senior participating preferred interest during 2017 and 2016 , respectively.

Series A Preferred Stock

Brookfield DTLA is authorized to issue up to 10,000,000 shares of Series A preferred stock, $0.01 par value per share, with a liquidation preference of $25.00 per share. As of December 31, 2018 and 2017 , 9,730,370 shares of Series A preferred stock were outstanding, of which 9,357,469 shares were issued to third parties and 372,901 shares were issued to DTLA Fund Holding Co., a subsidiary of DTLA Holdings.


85


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

No dividends were declared on the Series A preferred stock during the years ended December 31, 2018 , 2017 and 2016 . Dividends on the Series A preferred stock are cumulative, and therefore, will continue to accrue at an annual rate of $1.90625 per share. As of December 31, 2018 , the cumulative amount of unpaid dividends totals $166.7 million and has been reflected in the carrying amount of the Series A preferred stock.

During the year ended December 31, 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.

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

As of December 31, 2018 , the Series A preferred stock is reported at its redemption value of $409.9 million calculated using the redemption price of $25.00 per share plus all accumulated and unpaid dividends on such Series A preferred stock through December 31, 2018 .

Series A-1 Preferred Interest

The Series A-1 preferred interest is held by DTLA Holdings or wholly owned subsidiaries of DTLA Holdings.

The Series A-1 preferred interest has mirror rights to the Series A preferred interests issued by New OP, which are held by a wholly owned subsidiary of Brookfield DTLA. The Series A-1 preferred interest shares pro rata with the Series A preferred interest in distributions from New OP at the rate of 48.13% to the Series A-1 preferred interest and 51.87% to the Series A preferred interest until their accumulated and unpaid dividends and preferred liquidation preferences have been reduced to zero. Thereafter, distributions will be made 47.66% to the common component of the Series A interest and 52.34% to the common component of the Series B interest, which is held by DTLA Holdings. The economic terms of the Series A preferred stock mirror those of the New OP Series A preferred interests, including distributions in respect of the preferred liquidation preference.


86


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of December 31, 2018 , the Series A-1 preferred interest is reported at its redemption value of $400.8 million calculated using its liquidation value of $225.7 million plus $175.1 million of accumulated and unpaid dividends on such Series A-1 preferred interest through December 31, 2018 .

Senior Participating Preferred Interest

Brookfield DTLA Fund Properties III LLC (“DTLA OP”) issued a senior participating preferred interest to DTLA Holdings in connection with the formation of Brookfield DTLA and the MPG acquisition. The senior participating preferred interest represents a 4.0% participating interest in the residual value of DTLA OP.

During the years ended December 31, 2018 , 2017 and 2016 , Brookfield DTLA made distributions totaling $3.6 million , $0.5 million and $0.6 million , respectively, to DTLA Holdings as returns of investment related to the senior participating preferred interest held using cash on hand. Additionally, the Company received a cash contribution of $0.5 million during the year ended December 31, 2017 from DTLA Holdings, which was used for general corporate purposes.

As of December 31, 2018 , the senior participating preferred interest is reported at its redemption value of $23.4 million using the value of the participating interest.

Series B Preferred Interest

At the time of the merger with MPG, 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, to fund up to $260.0 million of its future cash needs, for which it will be entitled to receive a market rate of return determined at the time of contribution (“preferred return”). As of December 31, 2018 , $85.2 million is available to the Company under this commitment for future funding.

The Series B preferred interest in New OP held by 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.

During the year ended December 31, 2017 , the Company received cash contributions totaling $111.5 million from DTLA Holdings, which are entitled to a 9.0% preferred return as part of the Series B preferred interest. The Company used the funds received to pay for costs associated with the refinancing of the Wells Fargo Center–North Tower mortgage loan, including a principal paydown and transaction costs, and for general corporate purposes.


87


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

During the year ended December 31, 2016 , the Company received cash contributions totaling $63.3 million from DTLA Holdings under this commitment, which are entitled to a 9.0% preferred return as part of the Series B preferred interest. The Company used the funds received to pay for costs associated with the refinancing of the Wells Fargo Center–South Tower and Gas Company Tower mortgage loans, including principal paydowns and funding of loan reserves, and for general corporate purposes.

During the year ended December 31, 2018 , Brookfield DTLA made distributions totaling $26.6 million to DTLA Holdings as preferred returns on the Series B preferred interest using cash on hand.

As of December 31, 2018 , the Series B preferred interest is reported at its redemption value of $181.7 million calculated using its liquidation value of $174.8 million plus $6.9 million of unpaid preferred returns on such Series B preferred interest through December 31, 2018 .


88


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Change in Mezzanine Equity

A summary of the change in mezzanine equity is as follows (in thousands, except share amounts):

Number of
Shares of
Series A
Preferred
Stock
Series A
Preferred
Stock
Noncontrolling Interests
Total
Mezzanine
Equity
Series A-1
Preferred
Interest
Senior
Participating
Preferred
Interest
Series B
Preferred
Interest
Balance, December 31, 2015
9,730,370

$
354,304

$
349,084

$
23,207

$
—

$
726,595

Issuance of Series B preferred interest
63,280

63,280

Current dividends


18,548

17,213

—

—

35,761

Current preferred return
2,084

2,084

Redemption measurement adjustment
2,428

2,428

Distributions to holders
(616
)
—

(616
)
Balance, December 31, 2016
9,730,370

372,852

366,297

25,019

65,364

829,532

Issuance of Series B preferred interest
111,492

111,492

Current dividends
18,548

17,213

—

—

35,761

Current preferred return
13,435

13,435

Redemption measurement adjustment
479

479

Contribution from holders
520

520

Distributions to holders
(470
)
—

(470
)
Balance, December 31, 2017
9,730,370

391,400

383,510

25,548

190,291

990,749

Issuance of Series B preferred interest
—

—

Current dividends
18,532

17,306

—

—

35,838

Current preferred return
17,961

17,961

Redemption measurement adjustment
1,482

1,482

Distributions to holders
(3,587
)
(26,554
)
(30,141
)
Balance, December 31, 2018
9,730,370

$
409,932

$
400,816

$
23,443

$
181,698

$
1,015,889



89


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 6 —Stockholders’ Deficit

Brookfield DTLA is authorized to issue up to 1,000,000 shares of common stock, $0.01 par value per share. As of December 31, 2018 and 2017 , 1,000 shares of common stock were issued and outstanding. No dividends were declared on the common stock during the years ended December 31, 2018 , 2017 and 2016 .

Brookfield DTLA 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.

During the years ended December 31, 2018 and 2016 , Brookfield DTLA received capital contributions totaling $1.6 million and $2.5 million , respectively, from DTLA Holdings, which were used for general corporate purposes.

Note 7—Noncontrolling Interests

Mezzanine Equity Component

The Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest consist of equity interests of New OP, DTLA OP and New OP, respectively, which are owned directly by DTLA Holdings. These noncontrolling interests are presented as mezzanine equity in the consolidated balance sheet. See Note 5 “Mezzanine Equity.”

Stockholders’ Deficit Component

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


90


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 8—Accumulated Other Comprehensive Loss

A summary of the change in accumulated other comprehensive loss related to Brookfield DTLA’s derivative financial instruments designated as cash flow hedges is as follows (in thousands):

For the Year Ended December 31,
2018
2017
2016
Balance at beginning of year
$
(574
)
$
(3,373
)
$
(5,415
)
Other comprehensive income
before reclassifications
1,548

2,799

2,042

Amounts reclassified from accumulated
other comprehensive loss
(1,198
)
—

—

Net current-year other comprehensive income
350

2,799

2,042

Balance at end of year
$
(224
)
$
(574
)
$
(3,373
)

Note 9 —Income Taxes

Income Taxes

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. Our TRS did not have significant tax provisions or deferred income tax items for the years ended December 31, 2018 , 2017 and 2016 .

Qualification and taxation as a REIT depends upon Brookfield DTLA’s ability to meet the various qualification tests imposed under the Code related to annual operating results, asset diversification, distribution levels and diversity of stock ownership. Accordingly, no assurance can be given that Brookfield DTLA will be organized or be able to operate in a manner so as to continue to qualify or remain qualified as a REIT. If Brookfield DTLA fails to qualify as a REIT in any taxable year, we will be subject to federal and state income tax on our taxable income at regular corporate tax rates, and we may be ineligible to qualify as a REIT for four subsequent tax years. Brookfield DTLA may be subject to certain state or local income taxes, or franchise taxes on its REIT activities. Brookfield DTLA’s taxable income or loss is different than its financial statement income or loss. As of December 31, 2018 and 2017 , Brookfield DTLA had net operating loss carryforwards totaling $288 million and $240 million , respectively, which expire between 2033 and 2038 .


91


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act amended the Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. Effective January 1, 2018, the Act reduced the corporate tax rate from a maximum rate of 35% to a flat rate of 21% for businesses. Since Brookfield DTLA has elected to qualify as a REIT with the intent of distributing 100% of its taxable income, there was no material impact to the Company’s consolidated financial statements.

Uncertain Tax Positions

Brookfield DTLA recognizes tax benefits from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more likely than not recognition threshold. Brookfield DTLA has no unrecognized tax benefits as of December 31, 2018 and 2017 , and does not expect its unrecognized tax benefits balance to change during the next 12 months. As of December 31, 2018 , Brookfield DTLA’s 2013 tax period and 2014, 2015, 2016 and 2017 tax years remain open due to the statute of limitations and may be subject to examination by federal, state and local authorities.


92


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 10— Fair Value Measurements

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

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

Fair Value Measurements Using
Total
Fair
Value
Quoted Prices in
Active Markets
for Identical
Assets (Liabilities)
(Level 1)
Significant
Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Interest rate swaps at:
December 31, 2018
$
974

$
—

$
974

$
—

December 31, 2017
(574
)
—

(574
)
—

December 31, 2016
(3,373
)
—

(3,373
)
—

Interest rate caps at:
December 31, 2018
$
11

$
—

$
11

$
—

December 31, 2017
15

—

15

—

December 31, 2016
53

—

53

—



93


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 11 — Financial Instruments

Derivative Financial Instruments

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

Fair Value as of December 31,
2018
2017
Derivatives designated as hedging instruments:
Interest rate swaps
$
974

$
(574
)
Derivatives not designated as hedging instruments:
Interest rate caps
11

15


Interest rate swap assets and caps are included in prepaid and other assets, net and interest rate swap liabilities are included in accounts payable and other liabilities in the consolidated balance sheet.

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

Amount of Gain
Recognized in AOCL
Amount of Gain
Reclassified from
AOCL to Statement
of Operations
Derivatives designated as hedging instruments:
Interest rate swaps for the year ended:
December 31, 2018
$
1,548

$
1,198

December 31, 2017
2,799

—

December 31, 2016
2,042

—


The gain reclassified from accumulated other comprehensive loss during the year ended December 31, 2018 is included as part of interest and other revenue in the consolidated statement of operations.

Changes in the fair value of interest rate caps during the years ended December 31, 2018 , 2017 and 2016 had an immaterial impact on the Company’s consolidated statements of operations.


94


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Interest Rate Swaps—

As of December 31, 2018 , Brookfield DTLA held the following interest rate swap contracts pursuant to the terms of the EY Plaza mortgage loan agreement (in thousands, except percentages and dates):

Notional
Amount
Swap
Rate
LIBOR
Spread
Effective
Interest
Rate
Expiration
Date
Interest rate swap
$
172,600

2.18
%
1.65
%
3.83
%
11/2/2020
Interest rate swap
54,206

2.47
%
1.65
%
4.12
%
11/2/2020
$
226,806

2.27
%
1.65
%
3.90
%

As required by the EY Plaza mortgage loan agreement, on March 29, 2018 the Company entered into an interest rate swap contract with a notional amount of $54.2 million and a swap rate of 2.47% , which effectively fixes the LIBOR portion of the interest rate at 4.12% . The swap requires net settlement each month.

Interest Rate Caps—

Brookfield DTLA holds interest rate cap contracts pursuant to the terms of certain of its mortgage and mezzanine loan agreements with the following notional amounts (in thousands):

As of December 31,
2018
2017
Wells Fargo Center–North Tower
$
400,000

$
370,000

Wells Fargo Center–North Tower
65,000

55,000

Wells Fargo Center–North Tower
35,000

45,000

Wells Fargo Center–South Tower
290,000

270,000

777 Tower
220,000

220,000

EY Plaza
35,000

—

$
1,045,000

$
960,000


As required by the EY Plaza mezzanine loan agreement, on March 29, 2018 the Company entered into an interest rate cap contract with a notional amount of $35.0 million that limits the LIBOR portion of the interest rate to 3.50% . The cap contract expires on October 1, 2019 .


95


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

As required by the Wells Fargo Center–North Tower mortgage and mezzanine loan agreements, on September 21, 2018 the Company entered interest rate cap contracts with notional amounts totaling $500.0 million that limit the LIBOR portion of the interest rates to 4.25% . The cap contracts expire on October 15, 2020 .

As required by the 777 Tower extension agreement, on October 15, 2018 the Company entered into an interest rate cap contract with a notional amount of $220.0 million that limits the LIBOR portion of the interest rate to 5.75% . The cap contract expires on November 1, 2019 .

As required by the Wells Fargo Center–South Tower mortgage loan agreement, on November 5, 2018 the Company entered into an interest rate cap contract with a notional amount of $290.0 million that limits the LIBOR portion of the interest rate to 4.50% . The cap contract expires on November 4, 2020 .

Other Financial Instruments

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

The estimated fair value and carrying amount of Brookfield DTLA’s mortgage and mezzanine loans are as follows (in thousands):

As of December 31,
2018
2017
Estimated fair value
$
2,142,813

$
2,003,600

Carrying amount
2,151,686

2,001,831


We calculated the estimated fair value of our mortgage loans using methods and techniques appropriate for each loan after an observation of market participants and current lending markets. The primary techniques used are applications of the Income Approach which converts future amounts (for example, cash flows) to a single current (that is, discounted) amount using a risk adjusted discount rate. The estimated fair value of mortgage loans is classified as Level 3.



96


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 12—Related Party Transactions

Management Agreements

Certain subsidiaries of Brookfield DTLA have entered into arrangements with the Manager, pursuant to which the Manager provides property management and various other services. Property management fees under the management agreements entered into in connection with these arrangements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays the Manager an asset management fee, which is calculated based on 0.75% of the capital contributed by DTLA Holdings. Leasing management fees paid to the Manager range from 1.00% to 4.00% of expected rents, depending on the terms of the lease and whether a third-party broker was paid a commission for the transaction. Construction management fees are paid to the Manager based on 3.00% of hard and soft construction costs.

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

For the Year Ended December 31,
2018
2017
2016
Property management fee expense
$
8,111

$
8,136

$
7,964

Asset management fee expense
6,330

6,330

6,330

Leasing and construction management fee expenses
3,209

5,198

3,049

General, administrative and reimbursable expenses
3,007

2,613

2,466


Costs incurred under these arrangements are included in rental property operating and maintenance expense in the consolidated statement of operations, with the exception of asset management fee expense which is included in other expense.

Insurance Agreements

Properties held by certain Brookfield DTLA subsidiaries and affiliates are covered under insurance policies entered into by the Manager that provide, among other things, all risk property and business interruption coverage for BPY’s commercial portfolio with an aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $437.5 million of earthquake insurance, and $372.5 million of flood and weather catastrophe insurance. In addition, Brookfield DTLA’s properties are covered by a terrorism insurance policy that provides a maximum of $4.0 billion per occurrence for all of BPY’s U.S. properties. Brookfield DTLA is in compliance with the contractual obligations regarding terrorism insurance contained in such policies. Insurance premiums for Brookfield DTLA’s properties are paid by the Manager and Brookfield DTLA reimburses the Manager for the actual cost of such premiums.


97


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A summary of costs incurred by the applicable Brookfield DTLA subsidiaries and affiliates under this arrangement, which are included in rental property operating and maintenance expense in the consolidated statement of operations, is as follows (in thousands):

For the Year Ended December 31,
2018
2017
2016
Insurance expense
$
8,026

$
7,795

$
7,948


Other Related Party Transactions with BAM Affiliates

Brookfield DTLA leases office space to a tenant in which an affiliate of BAM is an investor. Additionally, the Company purchases chilled water for air conditioning at one of its properties from an affiliate of BAM. A summary of the impact of related party transactions with BAM affiliates on the Company’s consolidated statement of operations is as follows (in thousands):

For the Year Ended December 31,
2018
2017
2016
Rental income and tenant reimbursements revenue
$
1,928

$
—

$
—

Rental property and maintenance expense
862


579


—


Note 13—Rental Income

Brookfield DTLA’s properties are leased to tenants under net operating leases with initial expiration dates ranging from 2019 to 2035 . The future minimum base rental income (on a non‑straight‑line basis) to be received under executed noncancelable tenant operating leases as of December 31, 2018 is as follows (in thousands):

2019
$
160,732

2020
162,373

2021
162,175

2022
147,958

2023
130,674

Thereafter
587,950

$
1,351,862



98


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Certain leases with retail tenants also provide for the payment by the lessee of additional rent based on a percentage of the tenant’s sales. The amounts shown in the table above do not include percentage rents. The Company recorded percentage rents totaling $2.0 million , $3.1 million and $2.8 million during the years ended December 31, 2018 , 2017 and 2016 , respectively.

Note 14—Commitments and Contingencies

Concentration of Tenant Credit Risk

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

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 years ended December 31, 2018 , 2017 and 2016 .

Concentration of Property Revenue Risk

During the years ended December 31, 2018 , 2017 and 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 98% , 100% and 100% of Brookfield DTLA’s consolidated revenue during the years ended December 31, 2018 , 2017 and 2016 , respectively.

Litigation

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.



99


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 15—Quarterly Financial Information (Unaudited)

First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(In thousands)
Year Ended December 31, 2018
Revenue
$
75,211

$
84,194

$
77,151

$
79,124

Expenses
84,990

89,458

91,789

94,100

Net loss
(9,779
)
(5,264
)
(14,638
)
(14,976
)
Net (loss) income attributable to
noncontrolling interests:
Series A-1 preferred interest –
current dividends
4,303

4,303

4,303

4,397

Senior participating preferred interest –
redemption measurement adjustment
1,657

768

220

(1,163
)
Series B preferred interest –
current preferred return
3,879

3,921

3,965

6,196

Series B common interest –
allocation of net (loss) income
(12,695
)
(9,889
)
(14,531
)
65,458

Net loss attributable to Brookfield DTLA
(6,923
)
(4,367
)
(8,595
)
(89,864
)
Series A preferred stock –
current dividends
4,637

4,637

4,637

4,621

Net loss available to common interest
holders of Brookfield DTLA
$
(11,560
)
$
(9,004
)
$
(13,232
)
$
(94,485
)
Year Ended December 31, 2017
Revenue
$
75,915

$
76,070

$
77,067

$
77,270

Expenses
86,021

84,571

86,204

87,163

Net loss
(10,106
)
(8,501
)
(9,137
)
(9,893
)
Net loss attributable to noncontrolling interests:
Series A-1 preferred interest –
current dividends
4,303

4,303

4,303

4,304

Senior participating preferred interest –
redemption measurement adjustment
56

(191
)
385

229

Series B preferred interest –
current preferred return
1,644

3,861

3,965

3,965

Series B common interest –
allocation of net loss
(10,858
)
(11,050
)
(11,738
)
(12,053
)
Net loss attributable to Brookfield DTLA
(5,251
)
(5,424
)
(6,052
)
(6,338
)
Series A preferred stock –
current dividends
4,637

4,637

4,637

4,637

Net loss available to common interest
holders of Brookfield DTLA
$
(9,888
)
$
(10,061
)
$
(10,689
)
$
(10,975
)


100


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 16—Investments in Real Estate

A summary of information related to Brookfield DTLA’s investments in real estate as of December 31, 2018 is as follows (in thousands):

Encum-
brances
Initial Cost
to Company
Costs Capitalized
Subsequent to
Acquisition
Gross Amount at Which
Carried at Close of Period
Accum-
ulated
Depre-
ciation (3)
Year
Acquired
Land
Buildings and
Improve-
ments
Improve-
ments
Carrying
Costs
Land
Buildings
and
Improve-
ments (1)
Total (2)
Los Angeles, CA
Wells Fargo Center–
North Tower
333 S. Grand
Avenue
$
500,000

$
41,024

$
456,363

$
94,924

$
—

$
41,024

$
551,287

$
592,311

$
70,932

2013
BOA Plaza
333 S. Hope
Street
400,000

54,163

354,422

48,130

—

54,163

402,552

456,715

106,833

2006
Wells Fargo Center–
South Tower
355 S. Grand
Avenue
258,186

21,231

401,149

44,677

—

21,231

445,826

467,057

50,528

2013
Gas Company
Tower
525-555 W.
Fifth Street
450,000

20,742

396,159

65,881

—

20,742

462,040

482,782

51,813

2013
EY Plaza (4)
725 S. Figueroa
Street
323,500

47,385

286,982

118,822

—

47,385

405,804

453,189

95,304

2006
777 Tower
777 S. Figueroa
Street
220,000

38,010

303,697

24,759

—

38,010

328,456

366,466

42,795

2013
Development site at
755 S. Figueroa
Street
—

5,000

—

10,930

—

5,000

10,930

15,930

—

$
2,151,686

$
227,555

$
2,198,772

$
408,123

$
—

$
227,555

$
2,606,895

$
2,834,450

$
418,205

__________
(1)
Land improvements are combined with building improvements for financial reporting purposes and are carried at cost.
(2)
The aggregate gross cost of Brookfield DTLA’s investments in real estate for federal income tax purposes approximated $2.6 billion as of December 31, 2018 .
(3)
Depreciation in the consolidated statement of operations is computed on a straight-line basis over the following estimated useful lives: buildings ( 60 years, with an estimated salvage value of 5% ), building improvements (ranging from 7 years to 25 years), and tenant improvements (the shorter of the useful life or the applicable lease term).
(4)
Includes the mortgage loan encumbering the Figueroa at 7th retail property.


101


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following is a reconciliation of Brookfield DTLA’s investments in real estate (in thousands):

For the Year Ended December 31,
2018
2017
2016
Investments in Real Estate
Balance at beginning of year
$
2,756,322

$
2,740,773

$
2,675,249

Additions during the year:
Improvements
78,128

75,847

65,524

Deductions during the year:
Other (1)
—

60,298

—

Balance at end of year
$
2,834,450

$
2,756,322

$
2,740,773

__________
(1)
During the year ended December 31, 2017 , the amount reported represents the cost of fully depreciated buildings and improvements and tenant improvements written off during the period.

The following is a reconciliation of Brookfield DTLA’s accumulated depreciation on its investments in real estate (in thousands):

For the Year Ended December 31,
2018
2017
2016
Accumulated Depreciation
Balance at beginning of year
$
342,465

$
329,149

$
256,130

Additions during the year:
Depreciation expense
75,740

73,614

73,019

Deductions during the year:
Other (1)
—

60,298

—

Balance at end of year
$
418,205

$
342,465

$
329,149

__________
(1)
During the year ended December 31, 2017 , the amount reported represents the accumulated depreciation of fully depreciated buildings and improvements and tenant improvements written off during the period.


102

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

None.

Item 9A.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

As required by SEC Rule 13a-15(b), Brookfield DTLA carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and its principal financial officer, of the effectiveness of the design and operation of Brookfield DTLA’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, G. Mark Brown, our principal executive officer, and Bryan D. Smith, our principal financial officer, concluded that these disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2018 .

Management’s Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Our management, including Messrs. Brown and Smith, evaluated the effectiveness of Brookfield DTLA’s internal control over financial reporting using the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2018 .

Changes in Internal Control over Financial Reporting

There have been no changes in Brookfield DTLA’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2018 that have materially affected, or that are reasonable likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.


103

PART III

Item 10.
Directors, Executive Officers and Corporate Governance.

Executive Officers of the Registrant

Brookfield DTLA Fund Office Trust Investor Inc., a Maryland Corporation (“Brookfield DTLA,” the “Company,” “us,” “we” and “our”), does not directly employ any of the persons responsible for managing its business. Brookfield DTLA is a direct subsidiary of Brookfield DTLA Holdings LLC, a Delaware limited liability company (“DTLA Holdings”, and together with its affiliates excluding the Company and its subsidiaries, the “Manager”), manages our operations and activities, and it, together with the board of directors and officers, makes decisions on our behalf. Our executive officers are employed by the Manager and the Company does not directly or indirectly pay any compensation to them. The compensation of the executive officers is set by the Manager and the Company has no control over the determination of their compensation. Our executive officers participate in employee benefit plans and arrangements sponsored by the Manager. The Company has not established any employee benefit plans or entered into any employment agreements with any of our executive officers. In determining the total compensation paid to the Company’s executive officers, the Manager considers, among other things, its business, results of operations and financial condition taken as a whole.

Our current executive officers are as follows:

Name
Age
Position
Executive
Officer
Since
G. Mark Brown
54
Chairman of the Board and Principal
Executive Officer of Brookfield DTLA
(also a Managing Partner in Brookfield
Asset Management’s real estate group)
2017
Bryan D. Smith
48
Chief Financial Officer of Brookfield DTLA
(also a Senior Vice President in Brookfield
Asset Management’s real estate group)
2018

G. Mark Brown was appointed Chairman of the Board and Principal Executive Officer of Brookfield DTLA in May 2017. Mr. Brown has served on the board of directors since the Company was formed in 2013. Mr. Brown is a Managing Partner in Brookfield Asset Management Inc. (“BAM”)’s real estate group. Mr. Brown has been employed by the Manager since 2000, and has held various senior executive roles, including Global Chief Investment Officer. The board of directors appointed Mr. Brown as Chairman of the Board and Principal Executive Officer based on, among other factors, his knowledge of the Company and his experience in commercial real estate.

Bryan D. Smith was appointed Chief Financial Officer of Brookfield DTLA on August 10, 2018 to fill the vacancy created by the resignation of Edward F. Beisner. He has been employed by the Manager as a Senior Vice President in BAM’s real estate group since March 2018. Prior to joining BAM, Mr. Smith was the Chief Financial Officer of US Real Estate at The Carlyle Group since June 2013. The board of directors appointed Mr. Smith as Chief Financial Officer based on, among other factors, his experience in finance and commercial real estate.

104

Directors of the Registrant

Our current board of directors is as follows:

Name
Age
Position
Director
Since
G. Mark Brown
54
Director (also Chairman of the Board and
Principal Executive Officer of
Brookfield DTLA, and a Managing Partner
in Brookfield Asset Management’s real
estate group)
2013
Michelle L. Campbell
48
Director (also Senior Vice President and
Secretary of Brookfield DTLA and
a Senior Vice President in Brookfield
Asset Management’s real estate group)
2014
Andrew Dakos
53
Director
2017
Murray Goldfarb
44
Director (also a Managing Partner in
Brookfield Asset Management’s
real estate group)
2018
Phillip Goldstein
74
Director
2017
Ian Parker
54
Director (also Chief Operating Officer of
Brookfield DTLA and Chief Operating
Officer for Brookfield Properties
in the Western US and Canada)
2017
Robert L. Stelzl
73
Director
2014

Messrs. Brown, Goldfarb and Parker and Ms. Campbell are employed by the Manager. The Manager manages Brookfield DTLA’s operations and activities, and it, together with the board of directors and officers, makes decisions on the Company’s behalf. Certain subsidiaries of the Company have entered into arrangements with the Manager, pursuant to which the Manager provides property management and various other services to the Company.

Pursuant to Brookfield DTLA’s charter, holders of the Company’s Series A preferred stock are entitled to elect two directors (“Preferred Directors”) until the full payment (or setting aside for payment) of all dividends on the Series A preferred stock that are in arrears, as well as dividends for the then-current period. Messrs. Dakos and Goldstein were elected by the holders of the Series A preferred stock to serve as Preferred Directors at a Special Meeting of holders of the Series A preferred stock in December 2017. Mr. Dakos and Mr. Goldstein will continue to serve on the board of directors until their successors are duly elected and qualified or, if earlier, until the full payment (or setting aside for payment) of all dividends on the Series A preferred stock that are in arrears, as well as dividends for the then-current period in accordance with Maryland law, the Company’s charter and the Second Amended and Restated Bylaws of the Company, dated August 11, 2014 (the “Amended Bylaws”).

G. Mark Brown has served on the board of directors since Brookfield DTLA was formed in 2013 and has served as Chairman of the Board and the Company’s Principal Executive Officer since May 2017. Mr. Brown is a Managing Partner in BAM’s real estate group. Mr. Brown has been employed by the Manager since 2000 in various senior executive roles, including Global Chief Investment Officer. The board of directors nominated Mr. Brown to serve as a director based on, among other factors, his knowledge of the Company and his experience in commercial real estate.


105

Michelle L. Campbell has served on the board of directors since 2014 and has served as Senior Vice President and Secretary of Brookfield DTLA since March 2016 and as Vice President and Secretary of Brookfield DTLA since it was formed in 2013. Ms. Campbell is a Senior Vice President in BAM’s real estate group and has been employed by the Manager in various legal positions since 2007. The board of directors nominated Ms. Campbell to serve as a director based on, among other factors, her knowledge of the Company and her experience in legal matters and commercial real estate.

Andrew Dakos has served on the board of directors since December 2017, following his election at a Special Meeting of holders of Brookfield DTLA’s Series A preferred stock. Mr. Dakos is a principal of Bulldog Investors, LLC (“Bulldog Investors”), an SEC-registered investment adviser to certain private funds, separately-managed accounts and Special Opportunities Fund, Inc., a New York Stock Exchange (the “NYSE”)-listed registered closed-end investment company (“Special Opportunities Fund”). Mr. Dakos co-manages Bulldog Investor’s investment strategy. Mr. Dakos also serves as President and Director of Special Opportunities Fund, Chairman and President of Swiss Helvetia Fund, Inc., Trustee of Crossroads Liquidating Trust, and President and a Trustee of High Income Securities Fund.

Murray Goldfarb has served on the board of directors since August 2018. Mr. Goldfarb is a Managing Partner in BAM’s real estate group. Mr. Goldfarb has been employed by the Manager since 2012, prior to which he was a partner at the law firm of Fried, Frank, Harris, Shriver & Jacobson LLP. The board of directors nominated Mr. Goldfarb to serve as a director based on, among other factors, his knowledge of the Company and its affiliates and his experience in legal matters and commercial real estate.

Phillip Goldstein has served on the board of directors since December 2017, following his election at a Special Meeting of holders of Brookfield DTLA’s Series A preferred stock. Mr. Goldstein is a co‑founder and Principal of Bulldog Investors. Mr. Goldstein is the lead investment strategist for Bulldog Investors. Mr. Goldstein also serves as Chairman of The Mexico Equity and Income Fund, Inc., Secretary and Chairman of Special Opportunities Fund, Director of MVC Capital, Inc., Director of Swiss Helvetia Fund, Inc., Trustee of Crossroads Liquidating Trust, and a Trustee of High Income Securities Fund.

Ian Parker has served on the board of directors since 2017. Mr. Parker is Chief Operating Officer of Brookfield DTLA and is also Chief Operating Officer for Brookfield Properties in the Western US and Canada. Mr. Parker has been employed by the Manager in various senior operational roles since 1996. The board of directors nominated Mr. Parker to serve as a director based on, among other factors, his knowledge of the Company’s affiliates and his experience in commercial real estate.

Robert L. Stelzl has served on the board of directors since 2014. Mr. Stelzl is a private real estate investor and investment manager. In 2003, he retired from Colony Capital, LLC, a global real estate private equity investor, after 14 years as a principal and member of the Investment Committee. The board of directors nominated Mr. Stelzl to serve as a director based on, among other factors, his experience in commercial real estate.


106

Board Leadership Structure and Risk Oversight

The Amended Bylaws give the board of directors the flexibility to determine whether the roles of principal executive officer and Chairman of the Board should be held by the same person or by two separate individuals. In connection with the listing of the Series A preferred stock on the NYSE, the board of directors determined that having one person serve as both principal executive officer and Chairman of the Board is in the best interest of the Company’s stockholders. We believe this structure makes the best use of the principal executive officer’s extensive knowledge of the Company and fosters real-time communication between management and the board of directors. Since 2017, Mr. Brown has served as Chairman of the Board and Principal Executive Officer of Brookfield DTLA.

The board of directors is actively involved in overseeing Brookfield DTLA’s risk management. Under our Corporate Governance Guidelines, the board of directors is responsible for assessing the major risks facing the Company and its business and approving and monitoring appropriate systems to manage those risks. Under its charter, the Audit Committee is responsible for reviewing and approving the Company’s policies with respect to risk assessment and management, particularly financial risk exposure, and discussing with management the steps taken to monitor and control risks.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires that Brookfield DTLA’s executive officers and directors, and beneficial owners of more than 10% of a registered class of its equity securities, file reports of ownership and changes in ownership of such securities with the U.S. Securities and Exchange Commission (the “SEC”). Such officers, directors and greater than 10% stockholders are also required to furnish us with copies of all Section 16(a) forms they file.

Based on our review of the copies of all Section 16(a) forms received by us and other information, we believe that with regard to the fiscal year ended December 31, 2018 , all of our executive officers, directors and greater than 10% stockholders complied with all applicable filing requirements, except as follows: Phillip Goldstein was late in filing a Form 5 with respect to the disposition of directly‑held shares of Series A preferred stock. The required form was filed on March 29, 2019.

Changes to Nominating Procedures for Use by Security Holders

There were no material changes to the procedures by which stockholders may recommend nominees to the board of directors during the fiscal year ended December 31, 2018 .

Board Governance Documents

The board of directors maintains a charter for its Audit Committee, has adopted written policies regarding the Approval of Audit and Non-Audit Services Provided by the External Auditor and has adopted Corporate Governance Guidelines. The board of directors has also adopted the Code of Business Conduct and Ethics and Personal Trading Policy of BAM, each applicable to the directors, officers and employees of BAM and its subsidiaries. Brookfield DTLA is an indirect subsidiary of BAM. These documents are available in print to any person who sends 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.


107

Audit Committee

The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act. Mr. Stelzl is currently Chairman of the Audit Committee and Mr. Dakos is a member of the Audit Committee. Mr. Stelzl has served on the Audit Committee since his election to the board of directors in 2014, and was also appointed as Chair of the Audit Committee in 2014. Mr. Dakos has served on the Audit Committee since March 2018. Messrs. Dakos and Stelzl are independent board members. Based on his experience and expertise, the board of directors has determined that Mr. Stelzl is an “audit committee financial expert” as defined by the SEC. The independent members of Brookfield DTLA’s Audit Committee also satisfy the enhanced independence standards applicable to audit committees set forth in Rule 10A ‑ 3(b)(i) under the Exchange Act.

Certifications

The Sarbanes-Oxley Act Section 302 certifications of our principal executive officer and principal financial officer are filed with this Annual Report on Form 10-K as Exhibits 31.1 and 31.2, respectively.


108

Item 11. Executive Compensation.

Compensation Discussion and Analysis

Brookfield DTLA does not directly employ any of the persons responsible for managing its business. The Manager, through DTLA Holdings, manages our operations and activities, and it, together with the board of directors and officers, makes decisions on our behalf. Our executive officers are employed by the Manager and we do not directly or indirectly pay any compensation to them. The compensation of the executive officers is set by the Manager and we have no control over the determination of their compensation. Our executive officers participate in employee benefit plans and arrangements sponsored by the Manager. We have not established any employee benefit plans or entered into any employment agreements with any of our executive officers. In determining the total compensation paid to our executive officers, the Manager considers, among other things, its business, results of operations and financial condition taken as a whole.

Compensation of Directors

The following table summarizes the compensation earned by each of our independent directors during the fiscal year ended December 31, 2018 :

Name (1)
Fees Earned or
Paid in Cash ($) (2)
Total ($)
(a)
(b)
(g)
Andrew Dakos
65,000

65,000

Phillip Goldstein
55,000

55,000

Robert L. Stelzl
65,000

65,000

__________
(1)
Each non-independent member of the board of directors does not receive any additional compensation from the Company for his or her services as a director.
(2)
Amounts shown in Column (b) are those earned during the fiscal year ended December 31, 2018 for annual retainer fees and, in the case of Messrs. Dakos and Stelzl, Audit Committee fees.

Compensation Risk Assessment

Brookfield DTLA believes that the compensation policies and practices of the Company, and of the Manager with respect to the executive officers of the Company, appropriately balance risk in connection with the achievement of annual and long-term goals and that they do not encourage unnecessary or excessive risk taking. Brookfield DTLA believes that the compensation policies and practices of the Company, and of the Manager with respect to the executive officers of the Company, are not reasonably likely to have a material adverse effect on its financial position or results of operations.


109

COMPENSATION COMMITTEE REPORT

The board of directors of Brookfield DTLA Fund Office Trust Investor Inc. has reviewed and discussed the 2018 Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with the Company’s management. Based on this review and their discussions, the board of directors has determined that the 2018 Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2018 to be filed with the SEC.

The Board of Directors

G. Mark Brown, Chairman
Michelle L. Campbell
Andrew Dakos
Murray Goldfarb
Phillip Goldstein
Ian Parker
Robert L. Stelzl



110

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

Principal Stockholders

Common Stock

As of March 29, 2019 , DTLA Holdings owns 100% of the issued and outstanding shares of the Brookfield DTLA’s common stock.

Series A Preferred Stock

Based on our review of all forms filed with the SEC by holders of the Series A preferred stock with respect to ownership of shares of the Series A preferred stock and other information, as of March 29, 2019 , there is no person known to us to beneficially own more than 5% of Brookfield DTLA’s Series A preferred stock. Please note that under U.S. securities laws, the Series A preferred stock is generally not considered voting stock and, therefore, persons beneficially owning more than 5% of our Series A preferred stock have no obligation to notify us or the SEC of their beneficial ownership of such Series A preferred stock. Consequently, there may be other holders of more than 5% of the Series A preferred stock that are not known to us.

Security Ownership of our Directors and Executive Officers

Common Stock

As of March 29, 2019 , none of Brookfield DTLA’s current directors or current executive officers owns any shares of the Company’s common stock.


111

Series A Preferred Stock

The following table sets forth the beneficial ownership of our Series A preferred stock by each of (1) our current directors, (2) our current Chairman of the Board (principal executive officer) and Chief Financial Officer (principal financial officer) (together, our “current executive officers”), and (3) our current directors and executive officers listed in Item 10. “Directors, Executive Officers and Corporate Governance” as a group, in each case as of March 29, 2019 . In preparing this information, the Company relied solely upon information provided by its current directors and current executive officers.

Name of Beneficial Owner (1)
Amount and
Nature of
Beneficial
Ownership (2)
Percent  of
Class (2)
(a)
(b)
(c)
G. Mark Brown
—

*

Michelle L. Campbell
—

*

Andrew Dakos (3)
208,069

2.14
%
Murray Goldfarb
—

*

Phillip Goldstein (4)
208,069

2.14
%
Ian Parker
—

*

Bryan D. Smith
—

*

Robert L. Stelzl
—

*

Directors and Executive Officers as a group
208,069

2.14
%
__________
*
Less than 1%.
(1)
The address for each listed beneficial owner is c/o Brookfield DTLA Fund Office Trust Investor Inc., 250 Vesey Street, 15th Floor, New York, New York, 10281.
(2)
Under Rule 13d-3 of the Exchange Act, certain shares may be deemed to be beneficially owned by more than one person (if, for example, a person shares the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of Series A preferred stock actually outstanding as of March 29, 2019 .
(3)
All shares reported by Mr. Dakos are held by clients of Bulldog Investors. Mr. Dakos disclaims any beneficial interest in such shares.
(4)
All shares reported by Mr. Goldstein are held by clients of Bulldog Investors. Mr. Goldstein disclaims any beneficial interest in such shares.


112

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

Policies and Procedures for Related Party Transactions

Under Brookfield DTLA’s Corporate Governance Guidelines, each director is required to inform the board of directors of any potential or actual conflicts, or what might appear to be a conflict of interest he or she may have with the Company. If a director has a personal interest in a matter before the board of directors or a committee, he or she must not participate in any vote on the matter except where the board of directors or the committee has expressly determined that it is appropriate for him or her to do so. Under BAM’s Code of Business Conduct and Ethics, officer and employee conflicts of interest are generally prohibited as a matter of Company policy.

Management Agreements

Certain subsidiaries of Brookfield DTLA have entered into arrangements with the Manager, pursuant to which the Manager provides property management and various other services. Property management fees under the management agreements entered into in connection with these arrangements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays the Manager an asset management fee, which is calculated based on 0.75% of the capital contributed by DTLA Holdings. Leasing management fees paid to the Manager range from 1.00% to 4.00% of expected rents, depending on the terms of the lease and whether a third-party broker was paid a commission for the transaction. Construction management fees are paid to the Manager based on 3.00% of hard and soft construction costs.

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

For the Year Ended December 31,
2018
2017
2016
Property management fee expense
$
8,111

$
8,136

$
7,964

Asset management fee expense
6,330

6,330

6,330

Leasing and construction management fee expenses
3,209

5,198

3,049

General, administrative and reimbursable expenses
3,007

2,613

2,466


Insurance Agreements

Properties held by certain Brookfield DTLA subsidiaries and affiliates are covered under insurance policies entered into by the Manager that provide, among other things, all risk property and business interruption coverage for BPY’s commercial portfolio with an aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $437.5 million of earthquake insurance, and $372.5 million of flood and weather catastrophe insurance. In addition, Brookfield DTLA’s properties are covered by a group terrorism insurance policy secured by the Manager that provides a maximum of $4.0 billion per occurrence for all of BPY’s U.S. properties. Brookfield DTLA is in compliance with the contractual obligations regarding terrorism insurance contained in such policies. Insurance premiums for Brookfield DTLA’s properties are paid by the Manager and Brookfield DTLA reimburses the Manager for the actual cost of such premiums.


113

A summary of costs incurred by the applicable Brookfield DTLA subsidiaries and affiliates under this arrangement is as follows (in thousands):

For the Year Ended December 31,
2018
2017
2016
Insurance expense
$
8,026

$
7,795

$
7,948


Other Related Party Transactions with BAM Affiliates

Brookfield DTLA leases office space to a tenant in which an affiliate of BAM is an investor. Additionally, the Company purchases chilled water for air conditioning at one of its properties from an affiliate of BAM. A summary of the impact of related party transactions with BAM affiliates on the Company’s consolidated statement of operations is as follows (in thousands):

For the Year Ended December 31,
2018
2017
2016
Rental income and tenant reimbursements revenue
$
1,928

$
—

$
—

Rental property and maintenance expense
862


579


—


Director Independence

Because the Series A preferred stock is the only publicly listed security of the Company, Brookfield DTLA is a special entity as defined by the NYSE rules on corporate governance (the “NYSE Rules”) and has chosen to rely on the NYSE Rules’ “special entity exemption” with respect to certain independence requirements. Of the Company’s seven directors, three are currently independent of management, DTLA Holdings and the Manager. The board of directors has adopted independence standards as part of its Corporate Governance Guidelines, which are available in print to any person who sends a written request to that effect to the attention of our Secretary, as provided for above under the heading “—Board Governance Documents.”

The independence standards contained in our Corporate Governance Guidelines incorporate the categories of relationships between a director and a listed company that would make a director ineligible to be independent according to the standards issued by the NYSE.

In accordance with NYSE Rules and our Corporate Governance Guidelines, on March 28, 2019 , the board of directors affirmatively determined that each of the following directors is and was independent within the meaning of both our and the NYSE’s director independence standards, as then in effect:

Andrew Dakos
Phillip Goldstein
Robert L. Stelzl


114

Item 14. Principal Accounting Fees and Services.

The following table summarizes the aggregate fees billed to Brookfield DTLA for professional services rendered by its independent registered public accounting firm, Deloitte & Touche LLP (“Deloitte”):

Fees (1)
For the Year Ended December 31,
2018
2017
Audit fees (2)
$
754,100

$
731,000

Audit-related fees
—

—

Tax fees
—

—

All other fees
—

—

$
754,100

$
731,000

__________
(1)
All services rendered for these fees were pre-approved in accordance with the Audit Committee’s policy regarding the approval of audit and non-audit services provided by the external auditor.
(2)
Audit fees consist of fees for professional services provided in connection with the audits of the Company’s annual consolidated financial statements, audits of the Company’s subsidiaries required for statute or otherwise and the performance of interim reviews of the Company’s quarterly unaudited condensed consolidated financial statements.

Pre-approval Policies and Procedures of the Audit Committee

Consistent with SEC rules regarding auditor independence, Brookfield DTLA has adopted written policies, which require the Audit Committee or the Chair of the Audit Committee to pre‑approve both audit and non‑audit services to be performed for the Company by Deloitte. Any decisions of the Chair of the Audit Committee to pre‑approve a permitted service (as defined in the policy) shall be reported to the Audit Committee at each of its regularly schedule meetings. The Audit Committee does not delegate to management its responsibilities to pre-approve services performed by Deloitte. The pre‑approval of audit and non-audit services may be given at any time up to a year before commencement of the specified service.



115

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a)
The following documents are filed as part of this Annual Report on Form 10-K:
1.
Financial Statements
2.
Financial Statement Schedules for the Years Ended December 31, 2018, 2017 and 2016
All financial statement schedules are omitted because they are not applicable, or the
required information is included in the consolidated financial statements or
3.
Exhibits (listed by number corresponding to Item 601 of Regulation S-K)

Incorporated by Reference
Exhibit No.
Exhibit Description
Form
File No.
Exhibit No.
Filing Date
Articles of Incorporation
of Brookfield DTLA Fund
Office Trust Investor Inc.
S-4
333-189273
3.1
June 12, 2013
Second Amended and
Restated Bylaws of
Brookfield DTLA Fund
Office Trust Investor Inc.
8-K
001-36135
3.2
August 14, 2014
Articles of Incorporation
of Brookfield DTLA
Fund Office Trust Inc.
S-4
333-189273
3.3
June 12, 2013
Bylaws of Brookfield
DTLA Fund Office
Trust Inc.
S-4
333-189273
3.4
June 12, 2013
Articles of Amendment of
Brookfield DTLA Fund
Office Trust Inc.
S-4/A
333-189273
3.5
October 9, 2013
Articles Supplementary of
Brookfield DTLA Fund
Office Trust Investor Inc.
7.625% Series A
Cumulative Redeemable
Preferred Stock
S-4/A
333-189273
4.1
August 27, 2013

116

Incorporated by Reference
Exhibit No.
Exhibit Description
Form
File No.
Exhibit No.
Filing Date
Articles Supplementary of
Brookfield DTLA Fund
Office Trust Investor Inc.
15% Series B
Cumulative Nonvoting
Preferred Stock
S-4/A
333-189273
4.2
August 27, 2013
Articles Supplementary of
Brookfield DTLA Fund
Office Trust Inc.
7.625% Series A
Cumulative Redeemable
Preferred Stock
S-4/A
333-189273
4.3
August 27, 2013
Articles Supplementary of
Brookfield DTLA Fund
Office Trust Inc.
15% Series B
Cumulative Nonvoting
Preferred Stock
S-4/A
333-189273
4.4
August 27, 2013
Form of Certificate of
Series A Preferred Stock
of Brookfield DTLA Fund
Office Trust Investor Inc.
10-K
001-36135
4.1
April 8, 2014
Form of Indemnity
Agreement
8-K
001-36135
10.1
November 4, 2013
Limited Liability
Company Agreement of
Brookfield DTLA Fund
Properties II LLC
8-K
001-36135
10.1
April 1, 2019
Limited Liability
Company Agreement of
Brookfield DTLA Fund
Properties III LLC
8-K
001-36135
10.2
April 1, 2019
Loan Agreement dated
as of February 6, 2018
by and between
BOP FIGat7th LLC,
as Borrower, and
Metropolitan Life
Insurance Company,
as Lender
8-K
001-36135
10.3
April 1, 2019


117

Incorporated by Reference
Exhibit No.
Exhibit Description
Form
File No.
Exhibit No.
Filing Date
Guaranty as of
February 6, 2018 by
Brookfield DTLA
Holdings LLC
(“Guarantor”) in favor of
Metropolitan Life
Insurance Company
(“Lender”)
Amended and Restated
Loan Agreement dated as
of March 29, 2018, by and
among EYP Realty, LLC,
as Borrower, Wells Fargo
Bank, National
Association, as
Administrative Agent,
Wells Fargo Securities,
LLC, as Sole Lead
Arranger and Sole
Bookrunner, Landesbank
Baden-Württemberg,
New York Branch, as
Documentation Agent and
the Financial Institutions
now or hereafter
signatories hereto and
their assignees pursuant to
Section 13.12, as Lenders
8-K
001-36135
10.4
April 1, 2019
Mezzanine Loan
Agreement dated as of
March 29, 2018 by and
among EYP Mezzanine
LLC, as Borrower, and
RVP Mezz Debt 1 LLC,
as Lender
8-K
001-36135
10.5
April 1, 2019
Mezzanine Limited
Guaranty made as of
March 29, 2018 by
Brookfield DTLA
Holdings LLC
(“Guarantor”) in favor of
RVP Mezz Debt 1 LLC
(“Lender”)


118

Incorporated by Reference
Exhibit No.
Exhibit Description
Form
File No.
Exhibit No.
Filing Date
Loan Agreement dated
as of September 21, 2018
among North Tower, LLC,
as Borrower, the Financial
Institutions party hereto
and their Assignees under
Section 18.15, as Lenders,
Citibank, N.A., as
Administrative Agent,
and Citigroup Global
Markets Inc. and Natixis,
New York Branch, as
Joint Lead Arranger
8-K
001-36135
10.6
April 1, 2019
Completion Guaranty
dated September 21, 2018
by Brookfield DTLA
Holdings LLC (the
“Guarantor”) in favor of
Citibank, N.A. (the
“Administrative Agent”)
and each of the Lenders
Limited Recourse
Guaranty dated
September 21, 2018 by
Brookfield DTLA
Holdings LLC (the
“Guarantor”) in favor of
Citibank, N.A. (the
“Administrative Agent”)
and each of the Lenders
Unfunded Obligations
Guaranty dated
September 21, 2018 by
Brookfield DTLA
Holdings LLC (the
“Guarantor”) in favor of
Citibank, N.A. (the
“Administrative Agent”)
and each of the Lenders
Mezzanine A Loan
Agreement dated as of
September 21, 2018
between North Tower
Mezzanine, LLC, as
Borrower, and Mirae
Asset Daewoo Co., Ltd.,
as Lender
8-K
001-36135
10.7
April 1, 2019

119

Incorporated by Reference
Exhibit No.
Exhibit Description
Form
File No.
Exhibit No.
Filing Date
Mezzanine B Loan
Agreement dated as of
September 21, 2018
between North Tower
Mezzanine II, LLC,
as Borrower, and
Citi Global Markets
Realty Corp., as Lender
8-K
001-36135
10.8
April 1, 2019
Loan Agreement dated
as of July 11, 2016
between
Maguire Properties –
555 W. Fifth, LLC and
Maguire Properties –
350 S. Figueroa, LLC,
collectively, as Borrower,
and Deutsche Bank AG,
New York Branch and
Barclays Bank PLC,
collectively, as Lender
10-K
001-36135
10.7
March 20, 2017
Mezzanine Loan
Agreement dated as of
July 11, 2016 between
Maguire Properties –
555 W. Fifth Mezz
I, LLC, as Borrower,
and Deutsche Bank AG,
New York Branch and
Barclays Bank PLC,
collectively, as Lender
10-K
001-36135
10.8
March 20, 2017
Guaranty of Recourse
Obligations executed
as of July 11, 2016 by
Brookfield DTLA
Holdings LLC, as
Guarantor, for the benefit
of Deutsche Bank AG,
New York Branch and of
Barclays Bank PLC,
collectively as Lender
10-K
001-36135
10.9
March 20, 2017

120

Incorporated by Reference
Exhibit No.
Exhibit Description
Form
File No.
Exhibit No.
Filing Date
Mezzanine Guaranty of
Recourse Obligations
executed as of
July 11, 2016 by
Brookfield DTLA
Holdings LLC, as
Guarantor, for the benefit
of Deutsche Bank AG,
New York Branch and of
Barclays Bank PLC,
collectively as Lender
10-K
001-36135
10.10
March 20, 2017
Deed of Trust, Security
Agreement and Fixture
Filing by Maguire
Properties – 777 Tower,
LLC, as Trustor to
Fidelity National Title
Insurance Company, as
Trustee for the benefit of
Metropolitan Life
Insurance Company,
as Beneficiary, dated
October 15, 2013
8-K
001-36135
10.2
April 7, 2014
Promissory Note, dated as
of October 15, 2013,
between Maguire
Properties – 777 Tower,
LLC and Metropolitan
Life Insurance Company
8-K
001-36135
10.3
April 7, 2014
Amended and Restated
Promissory Note dated
September 1, 2016 by
Maguire Properties –
777 Tower, LLC and
Metropolitan Life
Insurance Company
10-K
001-36135
10.13
March 20, 2017
Loan extension letter
dated October 25, 2018
among Metropolitan
Life Insurance Company
(“Lender”), Maguire
Properties – 777 Tower,
LLC (“Borrower”) and
Brookfield DTLA
Holdings LLC
(“Guarantor”)


121

Incorporated by Reference
Exhibit No.
Exhibit Description
Form
File No.
Exhibit No.
Filing Date
Loan Agreement dated as
of November 5, 2018 by
and among Maguire
Properties–355 S. Grand,
LLC, as Borrower,
Landesbank Hessen-
Thürigen Girozentrale,
New York Branch, as
Administrative Agent,
Barclays Bank PLC, as
Syndication Agent,
Landesbank Hessen-
Thürigen Girozentrale,
Barclays Bank PLC and
Natixis, New York
Branch, as Joint Lead
Arrangers. Landesbank
Hessen-Thürigen
Girozentrale as Hedge
Coordinator, and the
Financial Institutions now
or hereafter signatories
hereto and their assignees,
as Lenders
8-K
001-36135
10.9
April 1, 2019
Limited Guaranty made
as of November 5, 2018
by Brookfield DTLA
Holdings LLC
(“Guarantor”) in favor of
Landesbank Hessen-
Thüringen Girozentrale,
New York Branch, as
Administrative Agent on
behalf of the Lenders
(together with its
successors and assigns,
“Administrative Agent”)
and each of the Lenders
party to the Loan
Agreement
8-K
001-36135
10.10
April 1, 2019


122

Incorporated by Reference
Exhibit No.
Exhibit Description
Form
File No.
Exhibit No.
Filing Date
Loan Agreement, dated as
of August 7, 2014, among
333 South Hope Co. LLC
and 333 South Hope Plant
LLC, collectively,
as Borrower,
Wells Fargo Bank,
National Association,
as Lender, and
Citigroup Global Markets
Realty Corp., as Lender
10-K
001-36135
10.24
March 31, 2015
Deed of Trust, Assignment
of Leases and Rents,
Security Agreement and
Fixture Filing, dated as of
August 7, 2014, by
333 South Hope Co.
LLC and
333 South Hope Plant
LLC, collectively, as
grantor, to Fidelity
National Title Company,
as trustee, for the benefit
of Wells Fargo Bank,
National Association and
Citigroup Global Markets
Realty Corp., collectively,
as beneficiary
10-K
001-36135
10.25
March 31, 2015
Guaranty of Recourse
Obligations dated as of
August 7, 2014
10-K
001-36135
10.26
March 31, 2015
Reserve Guaranty
dated as of August 7, 2014
10-K
001-36135
10.27
March 31, 2015
Side Letter regarding
Reserve Guaranty
dated as of August 7, 2014
10-K
001-36135
10.28
March 31, 2015
List of Subsidiaries of the
Registrant as of
December 31, 2018
Certification of Principal
Executive Officer dated
April 1, 2019 pursuant
to Section 302 of the
Sarbanes-Oxley Act
of 2002


123

Incorporated by Reference
Exhibit No.
Exhibit Description
Form
File No.
Exhibit No.
Filing Date
Certification of Principal
Financial Officer
dated April 1, 2019
pursuant to Section 302 of
the Sarbanes-Oxley Act
of 2002
Certification of Principal
Executive Officer and
Principal Financial
Officer dated
April 1, 2019 pursuant
to 18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the
Sarbanes-Oxley
Act of 2002 (1)
(b)

Exhibits Required by Item 601 of Regulation S-K
See Item 3 above.
(c)

Financial Statement Schedules
See Item 2 above.
_________
*

Filed herewith.
**

Furnished herewith.
(1
)
This exhibit should not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934.

Item 16.    Form 10-K Summary.

None.


124

SIGNATURES

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

Date:
April 1, 2019

BROOKFIELD DTLA FUND OFFICE
TRUST INVESTOR INC.
Registrant
By:
/s/ G. MARK BROWN
G. Mark Brown
Chairman of the Board
(Principal executive officer)
By:
/s/ BRYAN D. SMITH
Bryan D. Smith
Chief Financial Officer
(Principal financial officer)


125

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

Date:
April 1, 2019
By:
/s/ G. MARK BROWN
G. Mark Brown
Chairman of the Board
(Principal executive officer)
April 1, 2019
By:
/s/ BRYAN D. SMITH
Bryan D. Smith
Chief Financial Officer
(Principal financial and accounting officer)
April 1, 2019
By:
/s/ MICHELLE L. CAMPBELL
Michelle L. Campbell
Senior Vice President, Secretary and Director
April 1, 2019
By:
/s/ ANDREW DAKOS
Andrew Dakos
Director
April 1, 2019
By:
/s/ MURRAY GOLDFARB
Murray Goldfarb
Director
April 1, 2019
By:
/s/ PHILLIP GOLDSTEIN
Phillip Goldstein
Director
April 1, 2019
By:
/s/ IAN PARKER
Ian Parker
Chief Operating Officer and Director
April 1, 2019
By:
/s/ ROBERT L. STELZL
Robert L. Stelzl
Director



126
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 5. Market For Registrant S Common Equity, Related Stockholder MattersItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial ConditionItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Organization and Description Of BusinessNote 2 Basis Of Presentation and Summary Of Significant Accounting PoliciesNote 3 Intangible Assets and LiabilitiesNote 4 Mortgage LoansNote 5 Mezzanine EquityNote 6 Stockholders DeficitNote 7 Noncontrolling InterestsNote 8 Accumulated Other Comprehensive LossNote 9 Income TaxesNote 10 Fair Value MeasurementsNote 11 Financial InstrumentsNote 12 Related Party TransactionsNote 13 Rental IncomeNote 14 Commitments and ContingenciesNote 15 Quarterly Financial Information (unaudited)Note 16 Investments in Real EstateItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9. Changes in and Disagreements with Accountants on AccountingItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 12. Security Ownership Of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement SchedulesItem 16. Form 10-k Summary

Exhibits

3.1 Articles of Incorporationof Brookfield DTLA FundOffice TrustInvestorInc. S-4 333-189273 3.1 June12,2013 3.2 Second Amended andRestated Bylaws ofBrookfield DTLA FundOffice Trust Investor Inc. 8-K 001-36135 3.2 August14,2014 3.3 Articles of Incorporationof BrookfieldDTLAFund Office TrustInc. S-4 333-189273 3.3 June12,2013 3.4 Bylaws of BrookfieldDTLA Fund OfficeTrust Inc. S-4 333-189273 3.4 June12,2013 3.5 Articles of Amendment ofBrookfield DTLA FundOffice Trust Inc. S-4/A 333-189273 3.5 October9,2013 4.1 Articles Supplementary ofBrookfield DTLA FundOffice Trust Investor Inc.7.625% SeriesACumulative RedeemablePreferred Stock S-4/A 333-189273 4.1 August27,2013 4.2 Articles Supplementary ofBrookfield DTLA FundOffice Trust Investor Inc.15% SeriesBCumulative NonvotingPreferred Stock S-4/A 333-189273 4.2 August27,2013 4.3 Articles Supplementary ofBrookfield DTLA FundOffice Trust Inc.7.625%SeriesACumulative RedeemablePreferred Stock S-4/A 333-189273 4.3 August 27,2013 4.4 Articles Supplementary ofBrookfield DTLA FundOffice Trust Inc.15%SeriesBCumulative NonvotingPreferred Stock S-4/A 333-189273 4.4 August27,2013 4.5 Form of Certificate ofSeriesA Preferred Stockof Brookfield DTLA FundOffice Trust Investor Inc. 10-K 001-36135 4.1 April8,2014 10.1 Form of IndemnityAgreement 8-K 001-36135 10.1 November4,2013 10.2 Limited LiabilityCompany Agreement ofBrookfield DTLA FundProperties II LLC 8-K 001-36135 10.1 April1,2019 10.3 Limited LiabilityCompany Agreement ofBrookfield DTLA FundProperties III LLC 8-K 001-36135 10.2 April1,2019 10.4 Loan Agreement datedas of February6,2018by and betweenBOP FIGat7th LLC,as Borrower, andMetropolitan LifeInsurance Company,as Lender 8-K 001-36135 10.3 April1,2019 10.5* Guaranty as ofFebruary6,2018 byBrookfield DTLAHoldings LLC(Guarantor) in favor ofMetropolitan LifeInsurance Company(Lender) 10.6 Amended and RestatedLoan Agreement dated asof March29,2018, by andamong EYP Realty, LLC,as Borrower, Wells FargoBank, NationalAssociation, asAdministrative Agent,Wells Fargo Securities,LLC, as Sole LeadArranger and SoleBookrunner, LandesbankBaden-Wrttemberg,New York Branch, asDocumentation Agent andthe Financial Institutionsnow or hereaftersignatories hereto andtheir assignees pursuant toSection13.12, as Lenders 8-K 001-36135 10.4 April1,2019 10.7 Mezzanine LoanAgreement dated as ofMarch29,2018 by andamong EYP MezzanineLLC, as Borrower, andRVP Mezz Debt 1 LLC,as Lender 8-K 001-36135 10.5 April1,2019 10.8* Mezzanine LimitedGuaranty made as ofMarch29,2018 byBrookfield DTLAHoldings LLC(Guarantor) in favor ofRVP Mezz Debt 1 LLC(Lender) 10.9 Loan Agreement datedas of September21,2018among North Tower, LLC,as Borrower, the FinancialInstitutions party heretoand their Assignees underSection18.15, as Lenders,Citibank, N.A., asAdministrative Agent,and Citigroup GlobalMarkets Inc. and Natixis,New York Branch, asJoint Lead Arranger 8-K 001-36135 10.6 April1,2019 10.10* Completion Guarantydated September21,2018by Brookfield DTLAHoldings LLC (theGuarantor) in favor ofCitibank, N.A. (theAdministrative Agent)and each of the Lenders 10.11* Limited RecourseGuaranty datedSeptember21,2018 byBrookfield DTLAHoldings LLC (theGuarantor) in favor ofCitibank, N.A. (theAdministrative Agent)and each of the Lenders 10.12* Unfunded ObligationsGuaranty datedSeptember21,2018 byBrookfield DTLAHoldings LLC (theGuarantor) in favor ofCitibank, N.A. (theAdministrative Agent)and each of the Lenders 10.13 Mezzanine A LoanAgreement dated as ofSeptember21,2018between North TowerMezzanine, LLC, asBorrower, and MiraeAsset Daewoo Co., Ltd.,as Lender 8-K 001-36135 10.7 April1,2019 10.14 Mezzanine B LoanAgreement dated as ofSeptember21,2018between North TowerMezzanine II, LLC,as Borrower, andCiti Global MarketsRealty Corp., as Lender 8-K 001-36135 10.8 April1,2019 10.15 Loan Agreement datedas of July11,2016betweenMaguire Properties 555 W. Fifth, LLC andMaguire Properties 350 S. Figueroa, LLC,collectively, as Borrower,and Deutsche Bank AG,New York Branch andBarclays Bank PLC,collectively, as Lender 10-K 001-36135 10.7 March20,2017 10.16 Mezzanine LoanAgreement dated as ofJuly11,2016 betweenMaguire Properties 555 W. Fifth MezzI, LLC, as Borrower,and Deutsche Bank AG,New York Branch andBarclays Bank PLC,collectively, as Lender 10-K 001-36135 10.8 March20,2017 10.17 Guaranty of RecourseObligations executedas of July11,2016 byBrookfield DTLAHoldings LLC, asGuarantor, for the benefitof Deutsche Bank AG,New York Branch and ofBarclays Bank PLC,collectively as Lender 10-K 001-36135 10.9 March20,2017 10.18 Mezzanine Guaranty ofRecourse Obligationsexecuted as ofJuly11,2016 byBrookfield DTLAHoldings LLC, asGuarantor, for the benefitof Deutsche Bank AG,New York Branch and ofBarclays Bank PLC,collectively as Lender 10-K 001-36135 10.10 March20,2017 10.19 Deed of Trust, SecurityAgreement and FixtureFiling by MaguireProperties 777Tower,LLC, as Trustor toFidelity National TitleInsurance Company, asTrustee for the benefit ofMetropolitan LifeInsurance Company,as Beneficiary, datedOctober15,2013 8-K 001-36135 10.2 April7,2014 10.20 Promissory Note, dated asof October15,2013,between MaguireProperties 777Tower,LLC and MetropolitanLife Insurance Company 8-K 001-36135 10.3 April7,2014 10.21 Amended and RestatedPromissory Note datedSeptember1,2016 byMaguire Properties 777Tower, LLC andMetropolitan LifeInsurance Company 10-K 001-36135 10.13 March20,2017 10.22* Loan extension letterdated October25,2018among MetropolitanLife Insurance Company(Lender), MaguireProperties 777 Tower,LLC (Borrower) andBrookfield DTLAHoldings LLC(Guarantor) 10.23 Loan Agreement dated asof November5,2018 byand among MaguireProperties355S. Grand,LLC, as Borrower,Landesbank Hessen-Thrigen Girozentrale,New York Branch, asAdministrative Agent,Barclays Bank PLC, asSyndication Agent,Landesbank Hessen-Thrigen Girozentrale,Barclays Bank PLC andNatixis, New YorkBranch, as Joint LeadArrangers. LandesbankHessen-ThrigenGirozentrale as HedgeCoordinator, and theFinancial Institutions nowor hereafter signatorieshereto and their assignees,as Lenders 8-K 001-36135 10.9 April1,2019 10.24 Limited Guaranty madeas of November5,2018by Brookfield DTLAHoldings LLC(Guarantor) in favor ofLandesbank Hessen-Thringen Girozentrale,New York Branch, asAdministrative Agent onbehalf of the Lenders(together with itssuccessors and assigns,Administrative Agent)and each of the Lendersparty to the LoanAgreement 8-K 001-36135 10.10 April1,2019 10.25 Loan Agreement, dated asof August7,2014, among333South Hope Co. LLCand 333South Hope PlantLLC, collectively,as Borrower,WellsFargo Bank,National Association,as Lender, andCitigroup Global MarketsRealty Corp., as Lender 10-K 001-36135 10.24 March31,2015 10.26 Deed of Trust, Assignmentof Leases and Rents,Security Agreement andFixture Filing, dated as ofAugust7,2014, by333 South Hope Co.LLC and333 South Hope PlantLLC, collectively, asgrantor, to FidelityNational Title Company,as trustee, for the benefitof Wells Fargo Bank,National Association andCitigroup Global MarketsRealty Corp., collectively,as beneficiary 10-K 001-36135 10.25 March31,2015 10.27 Guaranty of RecourseObligations dated as ofAugust7,2014 10-K 001-36135 10.26 March31,2015 10.28 Reserve Guarantydated as of August7,2014 10-K 001-36135 10.27 March31,2015 10.29 Side Letter regardingReserve Guarantydated as of August7,2014 10-K 001-36135 10.28 March31,2015 21.1* List of Subsidiaries of theRegistrant as ofDecember31,2018 31.1* Certification of PrincipalExecutive Officer datedApril1,2019 pursuantto Section 302 of theSarbanes-Oxley Actof2002 31.2* Certification of PrincipalFinancial Officerdated April1,2019pursuant to Section 302 ofthe Sarbanes-Oxley Actof2002 32.1** Certification of PrincipalExecutive Officer andPrincipal FinancialOfficer datedApril1,2019 pursuantto 18 U.S.C. Section 1350,as adopted pursuant toSection 906 of theSarbanes-OxleyActof2002 (1)