Brookfield DTLA Fund Office Trust Investor Inc. - Annual Report: 2022 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| (Mark One) | ||||||||||||||
| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||||
| For the fiscal year ended | December 31, 2022 | ||||
| or | ||||||||||||||
| ☐ | 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, New York, 10281
(Address of principal executive offices and zip code)
(212) 417-7000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| 7.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share | DTLA-P | 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 ☐ No ☑
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 ☐ No ☑
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 ☑ No ☐
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 ☑ No ☐
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 | ¨ | Accelerated filer | ¨ | Non-accelerated filer | ☑ | |||||||||||||||||||||
| Smaller reporting company | ☐ | Emerging growth company | ☐ | |||||||||||||||||||||||
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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. Yes ☐ No ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). Yes ☐ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the registrant’s common equity held by non-affiliates as of June 30, 2022 was $0. There is no established trading market for the registrant’s shares of common equity.
As of March 24, 2023, none of the registrant’s common stock was traded on any public market.
DOCUMENTS INCORPORATED BY REFERENCE
None
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2022
TABLE OF CONTENTS
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| Item 16. | |||||||||||
Forward-Looking Statements
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 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 the intention to continue to provide unaudited annual and quarterly financial statements following the delisting and deregistration of the Series A preferred stock and the potential for the Series A preferred stock to be quoted on the Pink Sheets (as defined below), 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 Fund Office Trust Investor Inc. (“Brookfield DTLA” or “we”) 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:
•The use of debt to finance Brookfield DTLA’s business or that of its subsidiaries, especially given recent increases in market interest rates and their impact on borrowing and hedging costs and the ability to refinance. Brookfield DTLA has experienced defaults on some of its debt obligations and additional defaults are likely. The continuing failure to obtain additional capital or extend or refinance debt maturities on favorable terms or at all is likely to deepen liquidity concerns;
•Our inability to reduce our significant level of indebtedness, particularly in light of the conditions in the financing markets and effects of continuing reduced demand for office space in our market;
•Risks associated with the timing and consequences of current and potential loan defaults and assets dispositions or foreclosures;
•Risks associated with our ability to dispose of properties with potential value above the debt, if and when we decide to do so, at prices or terms set by or acceptable to us;
•Risks incidental to the ownership and operation of real estate properties, including local real estate conditions;
•The impact or unanticipated impact of general economic, political and market factors such as an economic recession in the regions in which Brookfield DTLA or any of its subsidiaries does business, including the effects of reduced demand for office space and the increased interest rate environment and the residual effect of COVID-19 pandemic on our business;
•The ability to enter into new leases or renew leases on favorable terms;
•Business competition;
•Dependence on tenants’ financial condition which may be impacted by higher interest rates and inflationary pressures;
•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;
•Risks relating to trends in the office real estate industry including transition to hybrid or remote work policies and employee work-from home arrangements;
•The possible impact of international conflicts and other developments, including the war in Ukraine and terrorist acts;
•Potential environmental liabilities;
•Changes in tax laws and other tax-related risks, particularly the adverse effect of recent large increases in local real estate transfer taxes which will likely have the effect of materially reducing the values or our assets;
•Dependence on management personnel;
•Illiquidity of investments in real estate;
•Operational and reputational risks;
•Risks related to climate change;
•Catastrophic events, such as earthquakes or pandemics/epidemics;
•Other factors that are described in “Risk Factors” in Part I, Item 1A. “Risk Factors” in this Annual Report on Form 10-K; and
•Other risks and factors detailed from time to time in reports filed by Brookfield DTLA with the United States Securities and Exchange Commission.
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.
PART I
As used in this Annual Report on Form 10-K, unless otherwise indicated, tabular amounts are presented in thousands, except leasing information, percentage data and years.
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. together with its direct and indirect subsidiaries.
Item 1. Business.
Our Company
Brookfield DTLA 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. (“BPY”), an exempted limited partnership under the Laws of Bermuda, which in turn is the flagship commercial property entity wholly-owned by Brookfield Corporation, a corporation under the laws of Ontario, and the primary vehicle through which Brookfield Corporation invests in real estate on a global basis. On December 9, 2022, Brookfield Asset Management Inc. (“BAM”) completed a distribution and listing of 25% of its asset management business — Brookfield Asset Management Ltd. The global alternative asset management business is now owned and operated through Brookfield Asset Management ULC. BAM is now known as Brookfield Corporation.
As of December 31, 2022 and 2021, Brookfield DTLA owned Bank of America Plaza (“BOA Plaza”), EY Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower and 777 Tower, which are Class A office properties, and FIGat7th, a retail center nestled between EY Plaza and 777 Tower. All of these properties are located in the Los Angeles Central Business District (the “LACBD”) in Downtown Los Angeles, which has long been a major office district for law firms, accounting firms and government agencies.
On May 31, 2019, Brookfield DTLA Fund Properties II LLC (“Fund II”), a wholly-owned subsidiary of the Company, entered into an agreement to contribute and transfer all of its wholly-owned interests in Brookfield DTLA 4050/755 Inc., the indirect property owner of Beaudry (previously known as 755 South Figueroa), a residential development property, in exchange for noncontrolling interests in a newly formed joint venture with Brookfield DTLA FP IV Holdings LLC, a wholly-owned subsidiary of DTLA Holdings. As of December 31, 2022, the Company’s ownership interest in the joint venture was 22.1%, a decrease from 33.6% as of December 31, 2021 as a result of additional capital contributed by Brookfield DTLA FP IV Holdings LLC to the joint venture during the year ended December 31, 2022.
Brookfield DTLA primarily receives its income from lease income, including tenant reimbursements, generated from the operations of its office and retail properties, and to a lesser extent, revenue from its parking garages.
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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.
Corporate Strategy
Brookfield DTLA’s current strategy is to own and invest in commercial properties primarily in the LACBD that are of high-quality, determined by management’s view of the certainty of receiving lease income payments generated by the tenants of those assets.
Competition
Brookfield DTLA competes in the leasing of primarily 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, which includes the operation and management of its six commercial office properties and one retail property. 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 by management 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.
Management also views the unconsolidated real estate joint venture, Brookfield DTLA Fund Properties IV LLC, as a separate operating segment. This joint venture engages in the development of the multifamily residential real estate property, Beaudry, which has different economic characteristics compared to commercial office and retail properties described above. The progress of the development project, funding requirements, projected returns and other discrete financial information of the joint venture are regularly reviewed by management to assess performance. However, since this joint venture is not considered material to the overall results of the Company, it is not a reportable segment.
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Geographical Information—
All of Brookfield DTLA’s properties are owned and our business is conducted in the state of California.
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 shorter or 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 lease income is generated by a small number of tenants. No tenant accounted for more than 10% of our consolidated lease income during the years ended December 31, 2022, 2021 and 2020. See Item 2. “Properties—Tenant Information.”
During the years ended December 31, 2022, 2021 and 2020, BOA Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower, EY Plaza and 777 Tower each contributed more than 10% of Brookfield DTLA’s consolidated revenue. The revenue generated by these six properties totaled 96%, 95% and 97% of Brookfield DTLA’s consolidated revenue during the years ended December 31, 2022, 2021 and 2020, respectively.
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.
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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. In addition, 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.
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.
The values of our assets are affected by the taxes on real estate transactions. In particular, sales and other transfers of our real estate assets often are subject to real estate transfer and other similar taxes. An increase in these taxes from 0.45% to 5.5% will go into effect on April 1, 2023, which increase is likely to materially and adversely affect the values of our real estate assets.
Environmental, Social and Governance (“ESG”)
As the largest manager of Class A office properties in Downtown Los Angeles, we achieve our sustainability goals through an integrated approach based on three principles:
•Develop, operate and renovate properties to achieve optimum energy efficiency, occupant satisfaction and reduced carbon emissions.
•Incorporate innovative environmental strategies in order to achieve best-in-industry environmental performance in all new office developments.
•Seek best-in-class environmental certifications, actively participate in green industry organizations, and support new initiatives that foster the energy and resource-efficient operation of office buildings and environmentally sustainable communities and practices.
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During the year ended December 31, 2022, the following energy reduction initiatives were made in our properties:
•At EY Plaza, we replaced the light fixtures in the corridor with light emitting diode (“LED”) fixtures, resulting in energy savings totaling 429 kilowatt hours (“kWh”) per year;
•At 777 Tower, we retrofitted 24 elevator lights and 45 hallway lights to LED to extend the lifespan of the lights and become more energy efficient;
•At BOA Plaza, we completed the lighting projects totaling 680 light fixtures which resulted in total savings of over 133,000 kWh per year;
•We achieved an Energy Star of 87, 91and 94 at BOA Plaza, EY Plaza and Wells Fargo Center, respectively;
•BOA Plaza is undergoing a light retrofit which will result in 204,000 kWh savings; and
•At Wells Fargo Center, we are replacing our centrifugal chillers with R-11 refrigerant and a 5 cell wood cooling tower, which will reduce our carbon footprint.
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 a portfolio shared aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $500.0 million of earthquake insurance for California, and $350.0 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 properties located in the United States.
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 business, financial condition, or results of operations. Brookfield DTLA is in compliance with the contractual obligations regarding terrorism insurance contained in such policies. See Item 1A. “Risk Factors—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, 2022, Brookfield DTLA had no employees. The operations and activities of Brookfield DTLA are externally 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.
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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”). All reports we file with the SEC are available free of charge via EDGAR through the SEC website at http://www.sec.gov and on the Company’s website, http://www.dtlaofficefund.com, under “Reports & Filings—SEC Filings” as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Such filings are also 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.
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.
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Item 1A. Risk Factors.
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, 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.
RISKS RELATED TO THE OWNERSHIP OF BROOKFIELD DTLA 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, 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 for which it will be entitled to receive a preferred return. Pursuant to the amendments to the Limited Liability Company Agreement of Fund II effective November 2022, such contribution commitment by DTLA Holdings increased to $425.0 million. As of December 31, 2022, $88.6 million is available to the Company under this commitment for future funding.
The Series B preferred interest in Fund II held by DTLA Holdings is senior to the interest in Fund II 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, rank senior to the Series A preferred stock. The Series B preferred interest in Fund II 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.
In addition, the amount of cash Brookfield DTLA currently generates from its operations is not sufficient to cover its investing and financing activities, including upcoming debt obligations, leasing costs and capital expenditures, without issuing additional debt or equity, resulting in “negative cash burn,” and there can be no assurance that the amount of Brookfield DTLA’s negative cash burn will decrease. Brookfield DTLA does not expect this situation to improve this year. If Brookfield DTLA’s operating cash flows and capital continues to be insufficient to cover its operating costs or to repay its indebtedness as it comes due, we may seek to 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.
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The Series A preferred stock ranks junior to any indebtedness of Brookfield DTLA and its 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 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. Other than as required under the “Distribution Waterfall” as described in Part II — Item 8. Financial Statements — Note 8 — “Mezzanine Equity”, there is no commitment or obligation on the part of Brookfield DTLA or DTLA Holdings to redeem or make distributions to the Series A preferred stock, Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest (collectively, the “Preferred Interests”). If we are unable to obtain sufficient sources of liquidity, including through asset sales above their secured debt balances, or through contributions from stockholders or from affiliates that hold interests in our subsidiaries, and the Company makes or is required to make distributions under the “Distributions Waterfall”, it is unlikely that we would be able to make distributions to the Preferred Interests in amounts equal to their redemption values, especially as the Series A preferred stock ranks junior to Series B preferred interest. Moreover, given our current valuations, as well as our obligations and liabilities, there can be no assurance that there would be any cash available for distributions to holders of the Series A preferred stock after the Company satisfies its debt obligations and makes the distributions to the Series B preferred interest holders to which they are entitled.
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 date, 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 declares and pays 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.
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Brookfield DTLA’s ability to pay dividends is limited by the requirements of Maryland law. Brookfield DTLA’s ability to pay dividends on the Series A preferred stock is limited by the laws of the State of Maryland. Under 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 its 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, it would be legally permissible for the Company to do so.
There was no established trading market for shares of the Series A preferred stock at the time of issuance and Brookfield DTLA has begun the process for the delisting and deregistration of the shares. 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, as described in Part II, Item 9B. “Other Information.”, on March 31, 2023, Brookfield DTLA began the process for the voluntary delisting and deregistration of the Series A preferred stock. After the delisting and deregistration of the Series A preferred stock, the Company intends to continue to make unaudited annual and quarterly financial statements available to investors. The Company also will seek to have the Series A preferred stock quoted on the Pink Sheets Electronic Quotation Service (the “Pink Sheets”) in the OTC Pink Limited Information marketplace, although it cannot provide any assurance that any broker-dealer will make a market in the Series A preferred stock, which is a requirement for Pink Sheet quotation. When 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. The extent of the public market for the Series A preferred stock and availability of such quotations will 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, the interest in maintaining a market in the Series A preferred stock on the part of securities firms and other factors. Following the termination of the registration, Brookfield DTLA will not be required to furnish any information to holders of the Series A preferred stock.
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Brookfield DTLA’s charter contains provisions that may delay, defer or prevent transactions that may be beneficial to holders of the Company’s 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 conduct its operations so as 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 Brookfield DTLA’s stockholders, including holders of the Series A preferred stock.
Brookfield DTLA may authorize and issue capital stock without the approval of holders of the Series A preferred stock. While Brookfield DTLA may not, without a vote of the holders of the Series A preferred stock, authorize, create, issue or increase the authorized or issued amount of any class of capital stock ranking senior to the Series A preferred stock with respect to payment of dividends or the distribution of assets upon the liquidation, dissolution or winding up of the affairs of Brookfield DTLA, its charter authorizes the board of directors of Brookfield DTLA, without any action by its stockholders, to (i) amend the charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that Brookfield DTLA has the authority to issue, (ii) issue authorized but unissued shares of common stock or Series A preferred stock, and (iii) classify or reclassify any unissued shares of common stock or Series A preferred stock and to set the preferences, rights and other terms of such classified or unclassified shares. There can be no assurance that the board of directors of Brookfield DTLA will not establish additional classes and/or series of capital stock that would delay, defer or prevent a transaction that may be in the best interests of its stockholders, including holders of the Series A preferred stock.
Holders of the Series A preferred stock have limited voting rights. DTLA Holdings owns 100% of the outstanding shares of Brookfield DTLA’s common stock and controls 100% of the aggregate voting power of the Company’s 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 the Company’s assets or otherwise) that would materially adversely affect the rights of holders of the Series A preferred stock. By virtue of their limited voting rights, holders of the 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 the Company 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
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“interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of the outstanding voting stock of Brookfield DTLA or any affiliate or associate who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of Brookfield DTLA) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and supermajority stockholder voting requirements on these combinations; and (2) “control share” provisions that provide that a holder of “control shares” of Brookfield DTLA (defined as shares that, when aggregated with other shares controlled by the stockholder except solely by virtue of a revocable proxy, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) has no voting rights with respect to such shares except to the extent approved by Brookfield DTLA’s stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. Brookfield DTLA has opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL by resolution of the board of directors of Brookfield DTLA, and in the case of the control share provisions of the MGCL pursuant to a provision in its bylaws. However, the board of directors of Brookfield DTLA may by resolution elect to opt in to the business combination provisions of the MGCL and Brookfield DTLA may, by amendment to its bylaws, opt in to the control share provisions of the MGCL in the future. In addition, provided that Brookfield DTLA has a class of equity securities registered under the Exchange Act and at least three independent directors, Subtitle 8 of Title 3 of the MGCL permits Brookfield DTLA to elect to be subject, by provision in its charter or bylaws or a resolution of the board of directors of Brookfield DTLA and notwithstanding any contrary provision in its 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 holders of the Series A preferred stock.
The Manager controls the management and operations of Brookfield DTLA. The Company does not directly employ any of the persons responsible for managing its business or operations. The Manager, through DTLA Holdings, manages the operations and activities, and 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).
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There may be conflicts of interest in Brookfield DTLA’s relationship with the Manager. Brookfield DTLA and its subsidiaries have entered or may enter into arrangements with the Manager, pursuant to which the Manager provides property management and various other services. In consideration for the services provided under these arrangements, the Manager is paid fees by 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 interests 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 BPY, Brookfield Asset Management Ltd. and Brookfield Corporation, their affiliates and possibly other entities for the time and attention of these officers.
COMPANY AND REAL ESTATE INDUSTRY RISKS
There are numerous risks associated with the use of debt to finance our business, including refinancing and interest rate risks. As of the issuance date of this Annual Report, the Company had $2.3 billion of total consolidated debt, including $1,128.9 million and $400.0 million maturing in 2023 and 2024, respectively. These risks, including the following, may adversely impact our operating results and financial condition: our cash flows 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 and meet all of our other obligations; for our variable-rate debt, the benchmark rates and credit spreads on which these debts are based have materially increased and there can be no assurance that the rate will not further increase in the future, increasing our interest expense. In addition, the cost of acquiring interest rate protection agreements, which we are required to obtain with respect to the Company’s existing floating rate secured loans (and which we expect will be required to obtain for similar loan to refinance our maturing debt), has risen sharply and there is no assurance that we will be able to hedge such exposure effectively or at all in the future or bear the increased cost of such hedges. We may not be able to refinance indebtedness (or negotiate extensions) on our properties at maturity due to various business and market factors (including disruptions and volatility in the capital and credit markets, estimated cash flows of our properties, and the value (or appraised value) of our properties), financial, competitive, business and other factors, including factors beyond our control.
The amount of cash Brookfield DTLA currently generates from its operations is not sufficient to cover its investing and financing activities, including upcoming debt obligations, leasing costs and capital expenditures, without issuing additional debt or equity, resulting in “negative cash burn,” and there can be no assurance that the amount of Brookfield DTLA’s negative cash burn will decrease. Brookfield DTLA does not expect this situation to improve this year. If current market conditions continue (or deteriorate further) and unless we can raise additional funds from outside sources, including our affiliates, it is likely that in some cases we will not be able to repay or refinance the debt secured by our properties at maturity, and we could default on such debt unless we can obtain an extension of the maturity date. A default 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 and therefore we may not receive proceeds from the sale of that property. In addition, because of insufficient available cash, we have not made and may not be able to make interest or other required payments on certain of our debt obligations.
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See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity and Going Concern” for additional discussion of debt in default and potential default.
If we are unable to refinance our debt as it matures on acceptable terms, or at all, or we cannot timely make all of the payments of interest and other amounts due on our debt, 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 debt is likely to be on terms that are expected to be materially less favorable than the current terms of the related indebtedness and include operational and financial covenants significantly more restrictive than our current debt covenants which may limit the operation or growth of our business. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — General” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Indebtedness” for additional discussions.
The Company’s business, results of operations and financial condition have been adversely affected and could in the future be materially adversely affected by continuing uncertainty in the office leasing market; the marked increase in interest rates; turbulence in financing markets; the requirement to modify loans which interest rate is based in LIBOR to SOFR; and the ongoing global pandemic of the coronavirus. Leasing activity and occupancy in the LACBD have not caught up to pre-pandemic levels as businesses consider how to best implement return-to-office plans and transition to hybrid or remote work policies. Office tenants are still active in the leasing markets but are more selective in making rental decisions, and relocating and renewing tenants are pursuing space efficiencies which are often accompanied by size reduction and a focus on highest quality assets. We expect the residual effect of COVID-19 to continue adversely affecting our financial results and the LACBD Class A office leasing market in general. In addition, since the second quarter of 2022, uncertainty in the overall economy has returned due to the Federal Reserve materially raising interest rates to fight inflation and the impact of the war in the Ukraine. The increase and volatility in interest rates, not only increase the cost of our floating rate debt and the rates or spread on any new financing we may seek, but it also materially increased the cost of interest rate protection agreements. See “Risk Factors—We may be adversely affected by trends in the office real estate industry” below, “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Indebtedness” for additional information.
If interest rates remain high or further increase and uncertainty in the overall economy continues, a slowdown in economic growth could be seen in the near-term which could adversely affect leasing activity and adversely affect our ability to refinance our secured debt as it becomes due. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — General” for additional discussions.
We may be adversely affected by trends in the office real estate industry. Since the onset of the COVID-19 pandemic, some businesses increasingly permit employees to work from home, flexible work schedules, open workplaces, videoconferences and teleconferences. There is also an increasing trend of businesses utilizing shared office and co-working spaces. These practices enable businesses to reduce their space requirements. These trends could over time erode the overall demand for office space and, in turn, place downward pressure on occupancy, rental rates and property valuations. Reduced demand for office space could have an adverse impact on our business, cash flows, operating results and financial condition.
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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; 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; inflation; competition from other properties; the need to periodically renovate, repair and re-lease space and the costs thereof; 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, debt 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 Los Angeles and 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, the continuing decrease in the demand for 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 include the present 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, including the recent significant increase in real estate transfer taxes in Los Angeles that goes into effect on April 1 of this year; costs of complying with state, local and federal government regulations or increased regulation and other factors. In addition, the State of California is generally regarded as more litigious and more highly regulated and taxed than many other U.S. states, which may adversely impact the market, including the demand for, office space in California. There can be no assurance as to the growth of the Southern California or the national economy or our future growth rate.
U.S. economic conditions are uncertain; Volatility in the Banking Sector. 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. The recent problems with, and failure of, several U.S. mid-size banks has resulted in increased concern over the health of the banking sector in general and could have an outsized impact on conditions in the State of California. As banks are important suppliers of debt to the Company, these concerns, coupled with increased focus and concerns with the quality of the banking sector assets (particularly their portfolio of real estate loans) may make it harder for the Company to refinance or extend its debt, find alternative financing or workout its loan defaults.
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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; Inability to finance tenant improvements. 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. New leases or the extension of existing leases often require us to finance in whole or in part improvements to be made to the tenant’s space. The Company’s limited liquidity and limited sources of cash may make it difficult or impossible to provide this financing for tenants in certain of our assets which would adversely affect our ability to enter into new or extend existing leases or result in lower rental payments for these assets.
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.
Brookfield DTLA could be adversely impacted by tenant defaults, bankruptcies or insolvencies. Brookfield DTLA owns, operates and manages commercial office and retail properties in the LACBD and receives its income primarily from lease income generated from tenants of those properties. Tenants of our properties may experience a downturn in their business, which could cause the loss of tenants or weaken their financial condition and result in the tenants’ inability to make lease payments when due or require rent concessions. 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 lease payments from tenants and costs of re-leasing would adversely affect our cash flows, operating results and financial condition. In addition, the loss of a significant tenant could cause harm to our reputation. In the event of a significant number of lease defaults and/or tenant bankruptcies, it may be difficult, costly and time consuming to attract new tenants and lease the space for the rent and on terms as favorable as the previous leases or at all. The loss of lease payments from tenants and costs of re-leasing would adversely affect our operating results and financial condition, and our cash flows may not be sufficient to meet all of our obligations and liabilities.
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The alteration or discontinuation of LIBOR may adversely affect our borrowing costs. The chief executive of the United Kingdom Financial Conduct Authority (“FCA”), which regulates LIBOR, previously announced that the FCA intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In response, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to USD-LIBOR in derivatives and other financial contracts. In November 2020, the Intercontinental Exchange (“ICE”) Benchmark Administration Limited, the benchmark administrator for USD-LIBOR rates, proposed extending the publication of certain commonly-used USD-LIBOR settings until June 30, 2023 and the FCA issued a statement supporting such proposal. In connection with this proposal, certain U.S. banking regulators issued guidance strongly encouraging banks to generally cease entering into new contracts referencing USD-LIBOR as soon as practicable and in any event by December 31, 2021.
We have outstanding variable debt and interest rate protection agreements that are indexed to LIBOR. The Company is required to change the interest rates on our debt which is indexed to USD-LIBOR to SOFR, which may adversely affect interest expense and hedging costs and may result in interest obligations and interest rate protection agreements which are more than the payments that would have been made on such debt and interest rate protection agreements if USD-LIBOR was available in its current form. All of the Company’s variable debt contracts contain fallback language that lays out the process through which a replacement rate can be identified or used when LIBOR is not available. The LIBOR interest rate index for the debt secured by Wells Fargo Center–North Tower and Wells Fargo Center–South Tower was replaced by SOFR in October 2022 and November 2022, respectively. The Company will continue to track the exposure as of each reporting period and to assess the impact as the reference rate transition occurs through the cessation of LIBOR.
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 indebtedness on such properties. Any of these events could adversely impact the Company’s business, financial condition and results of operations.
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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. Environmental laws and regulations can change rapidly and compliance with more stringent environmental laws and regulations could have an adverse effect on our business, financial condition or results of operations.
Regulations under building codes and human rights codes generally require that public buildings, including office buildings, be made accessible to disabled persons. Non-compliance could result in the imposition of fines by the government or the award of damages to private litigants. If we are required to make substantial alterations and capital expenditures in one or more of our properties to comply with these codes, it could adversely affect our financial condition and results of operations.
We may also incur significant costs complying with other regulations. Our properties are subject to various federal, state, provincial and local regulatory requirements, such as state, and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. Existing requirements may change and compliance with future requirements may require significant unanticipated expenditures that could affect our cash flows 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 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.
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 located in Downtown Los Angeles and may be perceived as more likely terrorist targets than similar, less recognizable properties. To the extent that future terrorist attacks impact our tenants, their businesses similarly could be adversely affected, including their ability to continue to honor their lease obligations.
Climate change may adversely impact our operations and markets. Climate change, including the impact of global warming, creates physical and financial risks. 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 fires, floods and earthquakes (whether or not caused by climate change), could cause considerable damage to our properties, disrupt our operations or the operations of our tenants 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.
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.
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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. Furthermore, the ordinance, Measure United to House L.A. (“Measure ULA”), which was passed in November 2022, reduces the net sales proceeds from our potential asset dispositions. This ordinance increases real estate transfer taxes in the City of Los Angeles effective April 1, 2023. Such real estate transfer taxes are levied when a property is sold, and usually paid by the seller. Prior to the effective date of this ordinance, the City of Los Angeles taxed all real estate transactions at 0.45% applied to the fair value of the property net of debt encumbering the property. This ordinance implements a new progressive structure for the transfer tax, which taxes real estate sales transactions valued at $10.0 million and above at 5.5% on the gross fair value of the property without regard to debt encumbering the property, resulting in a reduction in net cash proceeds from potential asset dispositions.
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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. However, under current law and through 2025, individual taxpayers may be entitled to claim a deduction in determining their taxable income of 20% of “ordinary” REIT dividends (i.e., dividends other than capital gain dividends and qualified dividend income), which temporarily reduces the effective tax rate on such dividends.
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 the Company’s 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.
22
GENERAL RISK FACTORS
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.
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 a 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. For example, major health issues and pandemics, such as COVID–19, may adversely affect trade and global and local economies. 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.
The failure of our information technology systems, or an act of deliberate cyber terrorism, could adversely impact our reputation and financial performance. We operate in businesses that are dependent on information systems and technology. Our information systems and technology may not continue to be able to accommodate our growth, and the cost of maintaining such systems may increase from its current level, either of which could have a material adverse effect on us. We rely on third-party service providers to manage certain aspects of our business, including for certain information systems and technology, data processing systems, and the secure processing, storage and transmission of information. Any interruption or deterioration in the performance of these third parties or failures of their information systems and technology could impair the quality of our operations and could adversely affect our business and reputation. We rely on certain information technology systems which may be subject to cyber terrorism intended to obtain unauthorized access to our proprietary information, destroy data or disable, degrade or sabotage our systems, through the introduction of computer viruses, cyber-attacks and other means, and could originate from a variety of sources including our own employees or unknown third parties. Any such breach or compromise could also go undetected for an extended period. There can be no assurance that measures implemented to protect the integrity of our systems will provide adequate protection or enable us to detect and remedy any such breaches or compromises in a timely manner or at all. If our information systems are compromised, we could suffer a disruption in one or more of our businesses. This could have a negative impact on our financial condition and results of operations or result in reputational damage.
Item 1B. Unresolved Staff Comments.
Not applicable.
23
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 shorter or 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 net or modified gross leases. 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 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 the percentage leased, annualized rent, and annualized rent per rentable square foot of executed leases at Brookfield DTLA’s properties as of the dates indicated:
| Percentage Leased | Annualized Rent (1) | Annualized Rent $/RSF (2) | |||||||||||||||
| December 31, 2020 | 79.1 | % | $ | 165,568,312 | $ | 27.62 | |||||||||||
| December 31, 2021 | 77.2 | % | $ | 167,310,265 | $ | 28.57 | |||||||||||
| December 31, 2022 | 77.3 | % | $ | 170,613,809 | $ | 29.13 | |||||||||||
__________
(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. Total abatements for executed leases as of December 31, 2022 for the twelve months ending December 31, 2023 are approximately $15.4 million, or $2.62 per leased square foot. Total abatements for executed leases as of December 31, 2021 for the twelve months ended December 31, 2022 were approximately $13.8 million, or $2.35 per leased square foot. Total abatements for executed leases as of December 31, 2020 for the twelve months ended December 31, 2021 were approximately $6.1 million, or $1.02 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.
Leasing Activity
The following table summarizes leasing activity at Brookfield DTLA’s properties for the year ended December 31, 2022:
| Leasing Activity | Percentage Leased | ||||||||||
| Leased square feet as of December 31, 2021 | 5,855,604 | 77.2 | % | ||||||||
| Contractual expirations and early terminations | (646,293) | (8.4) | % | ||||||||
| New leases | 297,351 | 3.9 | % | ||||||||
| Renewals | 351,109 | 4.6 | % | ||||||||
| Remeasurement adjustments | (77) | — | % | ||||||||
| Leased square feet as of December 31, 2022 | 5,857,694 | 77.3 | % | ||||||||
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Property Statistics
The following table presents leasing information for executed leases at Brookfield DTLA’s properties as of December 31, 2022:
| Square Feet | ||||||||||||||||||||||||||
| Property | Number of Buildings | Number of Tenants | Year Acquired/ Constructed | Net Building Rentable | % of Net Rentable | % Leased | Annualized Rent (1) | Annualized Rent $/RSF (2) | ||||||||||||||||||
| BOA Plaza | 1 | 26 | 2006 | 1,405,428 | 18.5 | % | 90.5 | % | $ | 37,221,739 | $ | 29.27 | ||||||||||||||
| Wells Fargo Center–North Tower | 1 | 40 | 2013 | 1,399,795 | 18.5 | % | 80.4 | % | 34,455,904 | 30.61 | ||||||||||||||||
| Gas Company Tower | 1 | 25 | 2013 | 1,345,163 | 17.8 | % | 72.8 | % | 27,735,956 | 28.31 | ||||||||||||||||
| EY Plaza | 1 | 39 | 2006 | 963,682 | 12.7 | % | 76.6 | % | 21,567,786 | 29.21 | ||||||||||||||||
| FIGat7th | 1 | 32 | 2013 | 316,250 | 4.2 | % | 89.8 | % | 7,268,181 | 25.60 | ||||||||||||||||
| Wells Fargo Center–South Tower | 1 | 25 | 2013 | 1,124,960 | 14.8 | % | 63.0 | % | 21,751,783 | 30.68 | ||||||||||||||||
| 777 Tower | 1 | 45 | 2013 | 1,024,835 | 13.5 | % | 73.1 | % | 20,612,460 | 27.51 | ||||||||||||||||
| 7 | 232 | 7,580,113 | 100.0 | % | 77.3 | % | $ | 170,613,809 | $ | 29.13 | ||||||||||||||||
__________
(1)Annualized rent represents the annualized monthly contractual rent under executed leases as of December 31, 2022. This amount reflects total base rent before any rent abatements as of December 31, 2022. Total abatements for executed leases as of December 31, 2022 for the twelve months ending December 31, 2023 are approximately $15.4 million, or $2.62 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, 2022.
Tenant Information
As of December 31, 2022, Brookfield DTLA’s properties were leased to 232 tenants. The following table sets forth the annualized rent and leased square feet of our ten largest tenants as of December 31, 2022:
| Tenant | Property | Annualized Rent (1) | % of Total Annualized Rent | Leased Square Feet | % of Total Leased Square Feet | Year of Expiry | ||||||||||||||||||||||||||||||||
| 1 | The Capital Group Companies | BOA Plaza | $ | 10,601,864 | 6.2 | % | 350,231 | 5.9 | % | 2033 | ||||||||||||||||||||||||||||
| 2 | Southern California Gas Company | Gas Company Tower | 8,817,062 | 5.2 | % | 351,211 | 6.0 | % | 2026 | |||||||||||||||||||||||||||||
| 3 | Latham & Watkins LLP | Wells Fargo Center–South Tower; Gas Company Tower | 8,635,960 | 5.1 | % | 245,206 | 4.2 | % | Various | |||||||||||||||||||||||||||||
| 4 | Bank of America N.A. | BOA Plaza | 7,333,558 | 4.3 | % | 209,310 | 3.6 | % | 2029 | |||||||||||||||||||||||||||||
| 5 | Gibson, Dunn & Crutcher LLP | Wells Fargo Center–North Tower | 7,315,270 | 4.3 | % | 215,155 | 3.7 | % | 2035 | |||||||||||||||||||||||||||||
| 6 | Wells Fargo Bank National Association | Wells Fargo Center–North Tower; BOA Plaza | 6,243,999 | 3.7 | % | 242,003 | 4.1 | % | Various | |||||||||||||||||||||||||||||
| 7 | Oaktree Capital Management, L.P. | Wells Fargo Center–North Tower | 6,143,538 | 3.6 | % | 207,959 | 3.6 | % | 2030 | |||||||||||||||||||||||||||||
| 8 | Sheppard, Mullin, Richter | BOA Plaza | 5,083,470 | 3.0 | % | 173,959 | 3.0 | % | 2025 | |||||||||||||||||||||||||||||
| 9 | Sidley Austin (CA) LLP | Gas Company Tower | 3,902,725 | 2.2 | % | 135,798 | 2.3 | % | 2024 | |||||||||||||||||||||||||||||
| 10 | Ernst & Young U.S. LLP | EY Plaza | 3,504,563 | 2.0 | % | 127,613 | 2.2 | % | 2032 | |||||||||||||||||||||||||||||
| $ | 67,582,009 | 39.6 | % | 2,258,445 | 38.6 | % | ||||||||||||||||||||||||||||||||
__________
(1)Annualized rent represents the annualized monthly contractual rent under executed leases as of December 31, 2022. This amount reflects total base rent before any rent abatements as of December 31, 2022. 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.
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The following table sets forth information of our ten largest tenants regarding lease expirations in leased square feet by year as of December 31, 2022:
| Tenant | Property | 2023 | 2024 | 2025 | 2026 | 2027 | Beyond | Total | Year of Final Expiry | |||||||||||||||||||||||||||||||||||||||||||||||
| 1 | The Capital Group Companies | BOA Plaza | — | — | — | — | — | 350,231 | 350,231 | 2033 | ||||||||||||||||||||||||||||||||||||||||||||||
| 2 | Southern California Gas Company | Gas Company Tower | — | — | — | 351,211 | — | — | 351,211 | 2026 | ||||||||||||||||||||||||||||||||||||||||||||||
| 3 | Latham & Watkins LLP | Wells Fargo Center–South Tower; Gas Company Tower | — | — | 162,326 | — | — | 82,880 | 245,206 | 2031 | ||||||||||||||||||||||||||||||||||||||||||||||
| 4 | Bank of America N.A. | BOA Plaza | — | — | — | — | — | 209,310 | 209,310 | 2029 | ||||||||||||||||||||||||||||||||||||||||||||||
| 5 | Gibson, Dunn & Crutcher LLP | Wells Fargo Center–North Tower | — | — | — | — | — | 215,155 | 215,155 | 2035 | ||||||||||||||||||||||||||||||||||||||||||||||
| 6 | Wells Fargo Bank National Association | Wells Fargo Center–North Tower; BOA Plaza | 50,596 | — | — | 191,407 | — | — | 242,003 | 2026 | ||||||||||||||||||||||||||||||||||||||||||||||
| 7 | Oaktree Capital Management, L.P. | Wells Fargo Center–North Tower | — | — | — | — | — | 207,959 | 207,959 | 2030 | ||||||||||||||||||||||||||||||||||||||||||||||
| 8 | Sheppard, Mullin, Richter | BOA Plaza | — | — | 173,959 | — | — | — | 173,959 | 2025 | ||||||||||||||||||||||||||||||||||||||||||||||
| 9 | Sidley Austin (CA) LLP | Gas Company Tower | — | 135,798 | — | — | — | — | 135,798 | 2024 | ||||||||||||||||||||||||||||||||||||||||||||||
| 10 | Ernst & Young U.S. LLP | EY Plaza | — | — | — | — | — | 127,613 | 127,613 | 2032 | ||||||||||||||||||||||||||||||||||||||||||||||
| Leased square feet expiring by year | 50,596 | 135,798 | 336,285 | 542,618 | — | 1,193,148 | 2,258,445 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Percentage of leased square feet expiring by year | 0.9% | 2.3% | 5.7% | 9.3% | —% | 20.4% | 38.6% | |||||||||||||||||||||||||||||||||||||||||||||||||
Lease Expirations
The following table presents a summary of lease expirations at Brookfield DTLA’s properties for executed leases as of December 31, 2022, plus currently available space, for future periods. 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) | ||||||||||||||||||||||||||||||||
| 2023 | 643,135 | 11.0 | % | $ | 18,818,130 | 11.0 | % | $ | 29.26 | $ | 29.41 | |||||||||||||||||||||||||||
| 2024 | 681,570 | 11.6 | % | 18,300,155 | 10.7 | % | 26.85 | 27.98 | ||||||||||||||||||||||||||||||
| 2025 | 743,895 | 12.7 | % | 22,725,992 | 13.3 | % | 30.55 | 32.23 | ||||||||||||||||||||||||||||||
| 2026 | 795,918 | 13.6 | % | 20,765,501 | 12.2 | % | 26.09 | 28.61 | ||||||||||||||||||||||||||||||
| 2027 | 299,580 | 5.1 | % | 9,307,951 | 5.5 | % | 31.07 | 35.74 | ||||||||||||||||||||||||||||||
| 2028 | 126,016 | 2.2 | % | 4,172,390 | 2.4 | % | 33.11 | 40.05 | ||||||||||||||||||||||||||||||
| 2029 | 302,989 | 5.2 | % | 10,068,324 | 5.9 | % | 33.23 | 42.05 | ||||||||||||||||||||||||||||||
| 2030 | 330,076 | 5.6 | % | 10,390,792 | 6.1 | % | 31.48 | 39.73 | ||||||||||||||||||||||||||||||
| 2031 | 358,684 | 6.1 | % | 10,721,065 | 6.3 | % | 29.89 | 39.40 | ||||||||||||||||||||||||||||||
| 2032 | 200,448 | 3.4 | % | 5,648,625 | 3.3 | % | 28.18 | 40.43 | ||||||||||||||||||||||||||||||
| Thereafter | 1,375,383 | 23.5 | % | 39,694,884 | 23.3 | % | 28.86 | 42.10 | ||||||||||||||||||||||||||||||
| Total expiring leases | 5,857,694 | 100.0 | % | $ | 170,613,809 | 100.0 | % | $ | 29.13 | $ | 35.25 | |||||||||||||||||||||||||||
| Currently available | 1,722,419 | |||||||||||||||||||||||||||||||||||||
| Total rentable square feet | 7,580,113 | |||||||||||||||||||||||||||||||||||||
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(1)Annualized rent represents the annualized monthly contractual rent under executed leases as of December 31, 2022. This amount reflects total base rent before any rent abatements as of December 31, 2022. Total abatements for executed leases as of December 31, 2022 for the twelve months ending December 31, 2023 are approximately $15.4 million, or $2.62 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, 2022.
(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.
Indebtedness
As of December 31, 2022 and the issuance date of this Annual Report, Brookfield DTLA’s secured debt was comprised of mortgage and mezzanine loans secured by seven properties. A summary of our secured debt as of the issuance date of this Annual Report is as follows, with both the 777 Tower Loans and Gas Company Tower Loans included in debt in default:
| Principal Amount | Percent of Total Debt | Effective Interest Rate | Weighted Average Term to Maturity | ||||||||||||||||||||
| Fixed-rate (3) | $ | 458,500 | 20 | % | 4.03 | % | 1.5 years | ||||||||||||||||
| Variable-rate (1) | 1,070,447 | 47 | % | 5.98 | % | 0.8 years | |||||||||||||||||
| Total secured debt, excluding debt in default | 1,528,947 | 67 | % | 5.40 | % | 1.0 year | |||||||||||||||||
| Debt in default (2) | 753,939 | 33 | % | 6.69 | % | ||||||||||||||||||
| Total secured debt | $ | 2,282,886 | 100 | % | 5.82 | % | |||||||||||||||||
__________
(1)As of December 31, 2022 and through the date of this report, a future advance amount of $24.6 million is available under the Wells Fargo Center–South Tower mortgage loan that can be drawn to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements.
(2)Includes $288.9 million outstanding under the 777 Tower Loans and $465.0 million outstanding under the Gas Company Tower Loans as of December 31, 2022. The Company did not exercise the option to extend the maturity of the loans secured by Gas Company Tower and therefore on February 9, 2023, the Gas Company Tower Loans matured and, since this loan has not been repaid, an event of default has occurred and is continuing. Accordingly, the Gas Company Tower Loans are included as “Debt in default” in this table presented as of the issuance date of this Annual Report, but because these loans were not in default as of December 31, 2022, they are excluded as “Debt in default” in the tables presented as of December 31, 2022 in Part II, Item 8. “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 5—Secured Debt, Net.”
(3)Includes $58.5 million outstanding under the loan secured by FIGat7th. In March 2023, the lender of this loan granted a short-term extension of the maturity date from March 1, 2023 to April 3, 2023.
See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness” and Part II, Item 8. “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 5—Secured Debt, Net.”
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 (all of which are privately owned and are not traded on a public market) are held by DTLA Holdings.
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.
| Item 6. | [RESERVED] | |||||||||||||
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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 our Forward-Looking Statements disclaimer, and the consolidated financial statements and related notes thereto that appear in Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions, and financial trends that may affect the Company’s future plans of operations, business strategy, results of operations, and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to, those described under Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K. We do not undertake any responsibility to update any of these factors or to announce publicly any revisions to any of the forward-looking statements contained in this or any document, whether as a result of new information, future events, or otherwise.
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, 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. (“BPY”), an exempted limited partnership under the Laws of Bermuda, which in turn is the flagship commercial property entity wholly-owned by Brookfield Corporation, a corporation under the laws of Ontario, and the primary vehicle through which Brookfield Corporation invests in real estate on a global basis. On December 9, 2022, Brookfield Asset Management Inc. (“BAM”) completed a distribution and listing of 25% of its asset management business — Brookfield Asset Management Ltd. The global alternative asset management business is now owned and operated through Brookfield Asset Management ULC. BAM is now known as Brookfield Corporation.
29
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Brookfield DTLA owns and manages six Class A office properties and a retail center, consisting of 7,580,113 rentable square feet in total. Additionally, Brookfield DTLA also has an indirect noncontrolling interest in an unconsolidated real estate joint venture that owns a multifamily residential development property. All of these properties are located in the Los Angeles Central Business District (the “LACBD”) in Downtown Los Angeles, which has long been a major office district for law firms, accounting firms and government agencies. The following table sets forth information regarding these eight properties as of December 31, 2022:
| Name | Property Type | Rentable Square Feet | Ownership Percentage | Percentage Leased (1) | Weighted-Average Remaining Lease Term (Years) (2) | |||||||||||||||||||||||||||
Bank of America Plaza (“BOA Plaza”) | Office (4) | 1,405,428 | 100% | 90.5% | 6.1 | |||||||||||||||||||||||||||
| Wells Fargo Center–North Tower | Office (4) | 1,399,795 | 100% | 80.4% | 7.1 | |||||||||||||||||||||||||||
| Gas Company Tower | Office (4) | 1,345,163 | 100% | 72.8% | 4.7 | |||||||||||||||||||||||||||
| EY Plaza | Office (4) | 963,682 | 100% | 76.6% | 6.3 | |||||||||||||||||||||||||||
| Wells Fargo Center–South Tower | Office (4) | 1,124,960 | 100% | 63.0% | 4.9 | |||||||||||||||||||||||||||
| 777 Tower | Office (4) | 1,024,835 | 100% | 73.1% | 4.1 | |||||||||||||||||||||||||||
| FIGat7th | Retail | 316,250 | 100% | 89.8% | 6.2 | |||||||||||||||||||||||||||
| Beaudry (previously known as 755 South Figueroa) | Multifamily (3) | N/A | 22.1% | N/A | N/A | |||||||||||||||||||||||||||
| Total | 7,580,113 | 77.3% | 5.7 | |||||||||||||||||||||||||||||
(1) Represents properties’ leased square feet over total rentable square feet for executed leases as of December 31, 2022.
(2) Represents weighted-average of the period remaining (denominated in years) for executed lease as of December 31, 2022, excluding tenant lease extension options.
(3) Under development as of December 31, 2022.
(4) Classified as Class A office properties as they are centrally-located buildings that are professionally managed and maintained, attract high-quality tenants and command upper-tier rental rates, and that are modern structures or have been modernized to compete with newer buildings.
Brookfield DTLA primarily receives its income from lease income, including tenant reimbursements, generated from the operations of its office and retail properties, and to a lesser extent, revenue from its parking garages.
30
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Current Year Highlights
In general, LACBD market conditions have not changed materially since our last Form 10-Q which was filed on November 10, 2022.
Leasing Activity
Leasing activity improved since June 2021 with new and renewal leases totaling 648,460 square feet within our portfolio in 2022, compared to 492,367 square feet in 2021, an increase of 32% year over year. Contractual expirations and early terminations of leases totaled 646,293 square feet in 2022, compared to 632,280 square feet in 2021, an increase of 2% year over year. As a result of the positive net absorption, leased space increased slightly from 77.2% in 2021 to 77.3% in 2022. See “Liquidity and Capital Resource — Leasing Activity” for details.
Capital Improvements
The atrium development project at Wells Fargo Center was completed in 2020 and the construction of the various food vendor spaces is in progress and expected to be completed in 2023.
Expenditures for real estate improvements increased from $13.2 million in the 2021 to $50.4 million for the same period in 2022, an increase of $37.2 million or 282% year over year, mainly for tenant improvements and landlord works in Wells Fargo Center, 777 Tower and EY Plaza, mainly due to substantial completion of tenant improvement projects for several existing and new tenants during 2022.
Beaudry Development
The 755 South Figueroa multifamily site is held by an unconsolidated real estate joint venture in which the Company had an ownership interest of 22.1% as of December 31, 2022. In April 2022, vertical concrete construction for the development site was completed and a ceremony for the topping out of the project was held with the residential building officially named “Beaudry”. Interior work continued and has been substantially completed in the first quarter of 2023. The property will accommodate 785 residential rental units, approximately 5,300 square feet of retail space and 800 parking spaces. As the development progresses towards substantial completion by the first quarter of 2023, $176.9 million was capitalized as development cost during 2022, compared to $172.3 million in 2021. As such, during 2022, additional capital contributions of $70.0 million, compared to $39.8 million during 2021, were made by DTLA FP IV Holdings to fund development costs.
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
The following table presents the major sources of Brookfield DTLA’s liquidity as of December 31, 2022 and 2021:
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash and cash equivalents | $ | 23,523 | $ | 38,901 | |||||||
Restricted cash (1) | 35,206 | 49,322 | |||||||||
Unused capital contribution commitments available on Series B preferred interest (2) | 88,614 | 21,178 | |||||||||
Availability under secured debt to fund approved leasing costs | 24,553 | 72,804 | |||||||||
| Total Liquidity | $ | 171,896 | $ | 182,205 | |||||||
__________
(1)See “Unrestricted and Restricted Cash” for detailed discussion of the nature and purposes of restricted cash.
(2)During the three months ended March 31, 2023, $8.1 million was contributed from DTLA Holdings to Brookfield DTLA under the Series B preferred interest, which resulted in $80.6 million unused capital contribution commitments available as of March 31, 2023.
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 investing and financing activities, including upcoming debt obligations, leasing costs and capital expenditures, without issuing additional debt or equity, resulting in “negative cash burn,” and there can be no assurance that the amount of Brookfield DTLA’s negative cash burn will decrease. If Brookfield DTLA’s operating cash flows 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. Given the uncertainty in the economy, current office leasing volume and volatile financial markets created by the continued rise in interest rates and the Company’s upcoming debt maturities, management believes that access to liquidity will be challenging and is planning accordingly. We are also working to proactively address challenges to our long-term liquidity position. However, if uncertainty in the economy and financial and leasing markets do not improve, or the Company is not able to find additional sources of liquidity, the property-owning subsidiary debt obligors may not be able to successfully refinance the debt obligations when they fall due, which could result in foreclosure on the encumbered properties.
The following are our expected actual and potential sources of liquidity:
•Cash generated from operating activities, see “Discussion of Consolidated Cash Flows — Operating Activities” ;
•Contributions from noncontrolling interests, see “Discussion of Consolidated Cash Flows — Financing Activities”
32
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
These sources are essential to our liquidity and financial position, and we cannot assure you that we will be able to successfully access them (particularly in light of the current conditions discussed elsewhere). If we are unable to generate adequate cash from these sources, we will have liquidity-related shortfalls and will be exposed to significant risks.
The following are our uses of liquidity:
•Cash used in operating activities, see “Discussion of Consolidated Cash Flows — Operating Activities”;
•Payments in connection with secured debt, such as debt service, principal payment obligations and acquisition of interest rate protection agreements, see “Indebtedness” and
Liquidity and Going Concern
The consolidated financial statements have been prepared in accordance with GAAP on the basis that the Company will continue as a going concern. The going concern basis assumes that the Company will be able to meet its obligations and continue its operations one year from the date of the issuance of the Annual Report which is dependent upon the Company’s ability to effectively implement plans related to the secured debt currently in default and the secured debt that matures within one year after the date of the issuance of the Annual Report, as discussed below (together, the “Maturing Loans”).
As of the issuance date of this Annual Report, the Company had $2.3 billion of total consolidated debt, including $1,128.9 million and $400.0 million maturing in 2023 and 2024, respectively. Our substantial indebtedness requires us to use a material portion of our cash flow to service interest on our debt. Additionally, our consolidated debt also includes $288.9 million of mortgage and mezzanine debt secured by 777 Tower and $465.0 million of mortgage and mezzanine debt secured by Gas Company Tower that is in default. The Company has experienced a decline in occupancy since the onset of the COVID-19 pandemic as tenant leases expire which has resulted in a decrease in cash flow from operations and has negatively impacted the market values of the properties. Additionally, in order to attract or retain tenants needed to increase occupancy and sustain operations, the Company will need to spend a substantial amount on capital leasing costs (such as tenant improvements), however, the Company has limited amounts of liquidity to make these capital commitments. Furthermore, since the second quarter of 2022, uncertainty in the overall economy has increased due to the Federal Reserve materially raising interest rates to fight inflation. The increase and volatility in interest rates, not only increase the cost of our floating rate debt and the rates or spread on any refinancing we may seek, but it also materially increased the cost of interest rate protection agreements and interest rate risk hedging. We are required to obtain interest rate protection agreements with respect to the Company’s existing floating rate secured loans (and which we expect will be required to obtain for refinancing our maturing debt).
33
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The Company may be unable to extend or refinance the upcoming loan maturities at current terms and may be required to paydown a portion of the maturing debt in order to extend or refinance the loans. With the Company’s limited amount of unrestricted cash on hand, the Company’s ability to make any loan paydowns is limited without the sale of real estate assets, and we do not have any contracts to sell our properties as of the issuance date of this Annual Report. Nevertheless, if one or more of the properties securing our Maturing Loans were to be foreclosed upon by the lenders, as these secured debt obligations are not cross-collateralized with other properties in the portfolio, we believe we will have sufficient cash from our remaining properties and our Series B financings to meet our obligations to continue our operations within one year after the date of the issuance of the Annual Report. While these conditions and events raise substantial doubt about the Company’s ability to continue as a going concern, for the reasons stated in this paragraph and the further discussion below, management has determined that it is probable that the conditions and events raising substantial doubt about the entity’s ability to continue as a going concern have been alleviated, and that the Company will continue as a going concern during one year from the date of the issuance of the Annual Report.
The Company’s ability to continue as a going concern is dependent upon the Company’s ability to effectively implement plans related to the Maturing Loans.
Debt Maturing within One Year From the Date of the Issuance of the Annual Report:
FIGat7th — In March 2023, the lender granted a short-term extension of the maturity date from March 1, 2023 to April 3, 2023. Brookfield DTLA is currently engaged in discussions with the lender to extend the debt secured by FIGat7th for three years. As of the issuance date of this Annual Report, we currently do not have a commitment from the lenders to extend the maturity dates of this loan for three years. If we are unable to extend the FIGat7th loan, then the lender would have the right to exercise its
34
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
remedies under the FIGat7th loan, including, but not limited to, declaring the debt to be immediately payable and foreclosing on FIGat7th.
Wells Fargo Center — South Tower — As of December 31, 2022, and the issuance date of this Annual Report, wholly-owned subsidiaries of the Company had and continue to have a secured mortgage loan of $265.4 million on Wells Fargo Center—South Tower (the “Wells Fargo Center South Loan”) that matures on November 4, 2023. We currently plan to operate the property and pay debt service on the loan through maturity. We will attempt to extend the Wells Fargo Center South Loan with the current lenders or refinance the loan with different lenders. As of the issuance date of this Annual Report, we currently do not have a commitment from the lenders to extend the maturity dates of this loan. Additionally, we do not know what paydown may be required upon any refinancing of this loan, and therefore are not certain if we will have sufficient unrestricted cash on hand to make any such paydown. We do not currently have any commitment for additional capital to the extent any paydown requires cash in excess of the unrestricted cash on hand that we would be able or willing to allocate to such paydown. If we are unable to negotiate a loan modification with the current lenders or refinance the Well Fargo Center South Loan, then the lenders would have the right to exercise the remedies under the WFC South Loan, including, but not limited to, declaring the debt to be immediately payable and foreclosing on Wells Fargo Center – South Tower.
Wells Fargo Center — North Tower Loans — As of December 31, 2022, and the issuance date of this Annual Report, wholly-owned subsidiaries of the Company (the “WFC North Borrowers”) had and continue to have secured loans of $500.0 million on Wells Fargo Center — North Tower, comprised of a $400.0 million mortgage loan, a $65.0 million mezzanine loan, and a $35.0 million junior mezzanine loan (collectively, the “WFC North Loans”). The maturity date of the WFC North Loans is October 9, 2023. In March 2023, the lender of the junior mezzanine loan agreed, subject to certain conditions, to forbear from exercising any remedy as a result of non-payment of the monthly debt service payment for March due on the junior mezzanine loan. The amount of cash the property currently generates from its operations is not sufficient to cover the upcoming debt obligations, leasing costs and capital expenditures with respect to Wells Fargo Center – North Tower. The WFC North Borrowers will not have sufficient available cash to make the interest payments on the WFC North Loans. The WFC North Borrowers will attempt to negotiate favorable amendments to the WFC North Loans and/or interest payment forbearances from the current lenders. If WFC North Borrowers are unsuccessful, the forbearance agreement with any lender lapses, and the interest payments are not made on the due date or if the mechanics liens currently existing on the asset are not timely discharged, then the lenders would have the right to exercise the remedies under the WFC North Loans, including, but not limited to, declaring the debt to be immediately payable and foreclosing on Wells Fargo Center – North Tower.
35
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
EY Plaza — As of December 31, 2022, and the issuance date of this Annual Report, wholly-owned subsidiaries of the Company (the “EY Borrowers”) have secured loans of $305.0 million on EY Plaza, comprised of a $275.0 million mortgage loan and a $30.0 million mezzanine loan (collectively, the “EY Plaza Loans”). The maturity date of the EY Plaza Loans is October 9, 2023, with two one-year extension options. The EY Borrowers have received notices from certain tenants of EY Plaza stating that they are not in compliance with the terms of their respective lease agreements. The amount of cash the EY Borrowers currently generate from operations is not sufficient to cover its upcoming debt obligations, leasing costs and capital expenditures with respect to EY Plaza. It is unlikely that they will be able to obtain additional sources of liquidity or negotiate favorable amendments to the EY Plaza Loans or interest payment forbearances from the lenders in time. In this case, the EY Borrowers will not have sufficient operating cash flow to cure the non-compliance with the leases or discharge mechanics liens currently existing on the asset or make the April 2023 interest payments on the EY Plaza Loans. If the lenders send the EY Borrowers a notice of default to cure the non-compliance with the leases and the EY Borrowers are unsuccessful in curing the defaults during the available cure period or discharging the mechanics liens within the time required under the EY Plaza Loans, or the interest payment is not made on the due date of April 7, 2023, then the lenders would have the right to exercise the remedies under the EY Plaza Loans, including, but not limited to, declaring the debt to be immediately payable and foreclosing on EY Plaza.
Debt in Default:
777 Tower Loans — As previously disclosed in our public filings, wholly-owned subsidiaries of the Company (the “777 Borrowers”) have secured loans of $318.6 million on 777 Tower, comprised of a $268.6 million mortgage loan and a $50.0 million mezzanine loan (collectively, the “777 Tower Loans”). There was $288.9 million outstanding under the 777 Tower Loans as of December 31, 2022 and the issuance date of this Annual Report. In November 2022, the 777 Borrowers did not obtain an Interest Rate Protection Agreement (as defined in the underlying loan agreements) which constitutes an Event of Default (as defined in the underlying loan agreements). Wells Fargo Bank, National Association, as Administrative Agent for the lenders under the mortgage loan, and Mesa West Core Lending Fund, LLC, have notified the 777 Borrowers that defaults and potential defaults have occurred under the loan and that the lenders have the right to exercise their remedies under the 777 Tower Loans, including, without limitation, declaring the debt to be immediately due and payable and foreclosing on 777 Tower. As a result of the default under the mortgage loan, an Event of Default (as defined in the underlying loan agreements) has occurred and is continuing under the mezzanine loan. As of the issuance date of this Annual Report, the lenders have not exercised any of their remedies under the 777 Tower Loans. In addition, as of the issuance date of this Annual Report, the 777 Borrowers have not paid the March 2023 interest expense accrued on the mezzanine loan and currently do not intend to pay this or the future interest expense accrued on the 777 Tower Loans. Certain mechanics’ liens have also been filed against the asset, and if the 777 Borrowers do not discharge such liens within the time required under the 777 Tower Loans, an additional Event of Default on these loans will occur.
36
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Gas Company Tower Loans — As previously disclosed in our public filings, wholly-owned subsidiaries of the Company (the “Gas Company Borrowers”) have secured loans of $465.0 million on Gas Company Tower, comprised of a $350.0 million mortgage loan, a $65.0 million mezzanine loan and a $50.0 million junior mezzanine loan (collectively, the “Gas Company Tower Loans”). There was $465.0 million outstanding under the Gas Company Tower Loans as of December 31, 2022 and the issuance date of this Annual Report. The initial maturity date of the Gas Company Tower Loans was February 9, 2023, with three one-year extension options. Gas Company Borrowers did not exercise the option to extend the maturity of the loans and therefore, subsequent to the current year-end period, on February 9, 2023, the Gas Company Tower Loans matured, and an Event of Default (as defined in the underlying loan agreements) has occurred and is continuing. The lenders may exercise their remedies under the loans, including foreclosing on Gas Company Tower. As of the issuance date of this Annual Report, the lenders have not exercised any of their remedies under the Gas Company Tower Loans, and have transferred these loans to a special servicer. In addition, as of the issuance date of this Annual Report, the Gas Company Borrowers have not paid the March 2023 interest expense accrued on the mezzanine loan and currently do not intend to pay this or the future interest expense accrued on the Gas Company Tower Loans.
There are several potential outcomes with respect to 777 Tower Loans and Gas Company Tower Loans, including negotiating a modification to the loans, refinancing the loans, or consensual short sales. However, there is no assurance that we will be successful in achieving any of these potential outcomes. If unsuccessful, the lenders would retain their right to exercise the remedies under the loans including, but not limited to, declaring the debt to be immediately payable and foreclosing on the assets.
Unrestricted and Restricted Cash
A summary of our cash position is as follows:
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Restricted cash: | |||||||||||
| Leasing costs, tenant improvements and capital expenditure reserves | $ | 7,120 | $ | 23,511 | |||||||
| Tax and insurance reserves | 8,445 | 7,881 | |||||||||
| Cash trigger reserves | 11,904 | 7,813 | |||||||||
| Other collateral reserves | 7,737 | 10,117 | |||||||||
| Total restricted cash | $ | 35,206 | $ | 49,322 | |||||||
| Unrestricted cash and cash equivalents | $ | 23,523 | $ | 38,901 | |||||||
| Total restricted cash and unrestricted cash and cash equivalents | $ | 58,729 | $ | 88,223 | |||||||
The leasing costs, tenant improvements and capital expenditure, tax, insurance and other working capital reserves are held in restricted accounts by our lenders in accordance with the terms of our secured debt agreements. The other working capital reserves mainly include reserves for free rent and discounted parking. The cash trigger reserves represent cash accounts controlled by loan administrative agents or lenders pursuant to cash sweep events associated with the loans secured by the Wells Fargo Center–North Tower and South Tower. See “Indebtedness” below for more information regarding the cash sweep events.
37
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Capital Expenditures and Leasing Costs
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 and type of lease, the involvement of external leasing agents and overall market conditions.
As of December 31, 2022, the Company had $25.4 million in tenant-related commitments, including tenant improvements, tenant inducements and leasing commissions, which are based on executed leases. As of December 31, 2022, $16.4 million of our tenant-related commitments were expected to be paid during 2023 and $6.7 million in 2024.
Brookfield DTLA expects that capital improvements and leasing activities at its properties will require material amounts of cash for at least several years. The expected capital improvements include, but are not limited to, renovations and physical capital upgrades to Brookfield DTLA’s properties, elevator modernization, replacement of transformers and boilers, and upgrades to emergency generators.
See “Indebtedness” below for more information regarding future advance amounts available as of December 31, 2022 under the loans secured by the Wells Fargo Center–South Tower office property that can be drawn to fund approved leasing costs, including tenant improvements and inducements and leasing commissions, and, in the case of Wells Fargo Center–South Tower, common area improvements.
Distributions to Mezzanine Equity Holders
Other than as required under the “Distribution Waterfall” as described in Item 8. Financial Statements — Note 8 — “Mezzanine Equity”, there is no commitment or obligation on the part of Brookfield DTLA or DTLA Holdings to redeem or make distributions to the Series A preferred stock, Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest (collectively, the “Preferred Interests”). If we are unable to obtain sufficient sources of liquidity, including through asset sales above their secured debt balances, or through contributions from stockholders or from affiliates that hold interests in our subsidiaries, and the Company makes or is required to make distributions under the “Distribution Waterfall”, it is unlikely that we would be able to make distributions to the Preferred Interests in amounts equal to their redemption values, especially as the Series A preferred stock ranks junior to Series B preferred interest. Moreover, given our current valuations, as well as our obligations and liabilities, there can be no assurance that there would be any cash available for distributions to holders of the Series A preferred stock after the Company satisfies its debt obligations and makes the distributions to the Series B preferred interest holders to which they are entitled.
38
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Indebtedness
As of December 31, 2022 and the issuance date of this Annual Report, Brookfield DTLA’s secured debt was comprised of mortgage and mezzanine loans secured by seven properties. A summary of our secured debt as of the issuance date of this Annual Report is as follows, with both the 777 Tower Loans and Gas Company Tower Loans included in debt in default:
| Principal Amount | Percent of Total Debt | Effective Interest Rate | Weighted Average Term to Maturity | ||||||||||||||||||||
| Fixed-rate (3) | $ | 458,500 | 20 | % | 4.03 | % | 1.5 years | ||||||||||||||||
| Variable-rate (1) | 1,070,447 | 47 | % | 5.98 | % | 0.8 years | |||||||||||||||||
| Total secured debt, excluding debt in default | 1,528,947 | 67 | % | 5.40 | % | 1.0 year | |||||||||||||||||
| Debt in default (2) | 753,939 | 33 | % | 6.69 | % | ||||||||||||||||||
| Total secured debt | $ | 2,282,886 | 100 | % | 5.82 | % | |||||||||||||||||
__________
(1)As of December 31, 2022 and through the date of this Report, a future advance amount of $24.6 million is available under the Wells Fargo Center–South Tower mortgage loan that can be drawn to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements.
(2)Includes $288.9 million outstanding under the 777 Tower Loans and $465.0 million outstanding under the Gas Company Tower Loans as of December 31, 2022. The Company did not exercise the option to extend the maturity of the loans secured by Gas Company Tower and therefore on February 9, 2023, the Gas Company Tower Loans matured and, since this loan has not been repaid, an event of default has occurred and is continuing. Accordingly, the Gas Company Tower Loans are included as “Debt in default” in this table presented as of the issuance date of this Annual Report, but because these loans were not in default as of December 31, 2022, they are excluded as “Debt in default” in the tables presented as of December 31, 2022 in Part II, Item 8. “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 5—Secured Debt, Net.” See “Liquidity and Capital Resources — Liquidity and Going Concern ” for additional discussion of debt in potential default.
(3)Includes $58.5 million outstanding under the loan secured by FIGat7th. In March 2023, the lender of this loan granted a short-term extension of the maturity date from March 1, 2023 to April 3, 2023.
The following table provides information with respect to Brookfield DTLA’s commitments as of December 31, 2022, including any guaranteed or minimum commitments under contractual obligations related to secured debt, and excluding 777 Tower Loans and Gas Company Tower Loans that are in default as of the issuance date of this Annual Report.
| 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | |||||||||||||||||||||||||||||||||||
| Principal payments on secured debt (1) | $ | 1,128,947 | $ | 400,000 | $ | — | $ | — | $ | — | $ | — | $ | 1,528,947 | |||||||||||||||||||||||||||
| Interest payments – | |||||||||||||||||||||||||||||||||||||||||
| Fixed-rate debt (2) | 17,011 | 11,025 | — | — | — | — | 28,036 | ||||||||||||||||||||||||||||||||||
| Variable-rate debt (3) | 51,028 | — | — | — | — | — | 51,028 | ||||||||||||||||||||||||||||||||||
| $ | 1,196,986 | $ | 411,025 | $ | — | $ | — | $ | — | $ | — | $ | 1,608,011 | ||||||||||||||||||||||||||||
__________
(1)Brookfield Corporation owns a significant interest in a company whose subsidiary is the lender of the $35.0 million mezzanine loan secured by Wells Fargo Center–North Tower, which matures in October 2023. See Item 8. “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 13—Related Party Transactions.”
(2)Interest payments on fixed-rate debt are calculated based on the maturity dates and contractual interest rates.
39
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(3)Interest payments on variable-rate debt are calculated based on the maturity dates (after the impact of extension options that the Company controls, if applicable) and the one-month LIBOR/SOFR rate in place on the debt as of December 31, 2022 plus the contractual spread per the loan agreements. Interest payments due to the related party lender of the loan described in (1) above total $2.3 million for 2023.
Management currently intends to have discussions with lenders to extend or refinance the existing loans not currently in default on or before their maturity. Given the current values of the Company’s assets and the condition in the financing markets, it is likely that some of these refinancings will not be successfully accomplished, particularly as the resulting leverage ratio necessary to refinance some of the Company’s properties may be significantly above leverage ratios acceptable in the market. Where we cannot successfully complete a refinancing, we may convey certain properties to the lenders to satisfy the related debt obligations or the lender may exercise its remedies, including foreclosure of the related property. See “Liquidity and Capital Resources — Liquidity and Going Concern” for management plans regarding the existing loans maturing within the next twelve months from the issuance date of this Annual Report.
Debt Compliance
Mortgage and Mezzanine Debt in Default
See “Liquidity and Capital Resources — Liquidity and Going Concern” for the detailed discussion of 777 Tower Loans and Gas Company Tower Loans that are in default as of the date of this Report.
Certain loan agreements held by Brookfield DTLA contain debt yield and debt service coverage ratios. As of December 31, 2022, excluding the secured debt that is in default as of the issuance date of this Annual Report (the 777 Tower Loans and Gas Company Tower Loans), Brookfield DTLA was meeting or exceeding these financial ratios, with the exception of the loans secured by Wells Fargo Center—South Tower and Wells Fargo Center—North Tower that did not meet their respective minimum debt yield ratio. Given the decline in the Company’s (and its subsidiaries) operating cash flows, net operating income and fair value of the properties, accentuated by continued increases in interest rates, DTLA Holdings and the property-owning subsidiary debt obligors may face challenges in meeting the material financial covenants contained in the loan agreements as the guarantor and the borrowers, respectively, which could result in events of default that could potentially allow lenders to exercise their remedies under the loans, including accelerating such debt and foreclosing on the asset.
40
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 —
Pursuant to the terms of the Wells Fargo Center–South Tower mortgage loan agreement, effective September 2020, a cash sweep event commenced as the borrower’s debt yield ratio was under the minimum debt yield ratio. While this does not constitute an Event of Default under the terms of the mortgage loan agreement, any excess operating cash flows are currently swept to a cash account controlled by the loan administrative agent. Funds within this account shall be applied to the borrower's approved operating expenses, capital expenditures and leasing costs; property taxes and insurance; interest and any other amounts due and payable under the loan and interest rate cap contracts; and fees and expenses due to the loan administrative agent.
Wells Fargo Center–North Tower —
As of December 31, 2022, the borrower’s debt yield ratio was under the minimum debt yield ratio. While this does not constitute an Event of Default under the terms of the mortgage loan agreement, following the occurrence of such debt yield event, any excess operating cash flows are to be swept to a cash account controlled by the loan administrative agent. Funds within this account shall be applied to the borrower's approved operating expenses; tenant improvement costs and leasing commissions (capped at the leasing reserve deposit amount as specified in the loan agreements); property taxes and insurance; interest and any other amounts due and payable under the loan and interest rate cap contracts; reserve accounts; and fees and expenses due to the loan administrative agent. The cash sweep started in January 2022.
Leasing Activity
The following table summarizes leasing activity at Brookfield DTLA’s properties for the year ended December 31, 2022:
| Leasing Activity | Percentage Leased | ||||||||||
| Leased square feet as of December 31, 2021 | 5,855,604 | 77.2 | % | ||||||||
| Contractual expirations and early terminations | (646,293) | (8.4) | % | ||||||||
| New leases | 297,351 | 3.9 | % | ||||||||
| Renewals | 351,109 | 4.6 | % | ||||||||
| Remeasurement adjustments | (77) | — | % | ||||||||
| Leased square feet as of December 31, 2022 | 5,857,694 | 77.3 | % | ||||||||
41
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Lease contractual expirations and early terminations. The following table summarizes the large contractual expiries (greater than 20,000 leased square feet) and early terminations at Brookfield DTLA’s properties during the year ended December 31, 2022:
| Tenant | Property | Leased Square Feet | ||||||||||||
| Wells Fargo Bank National Association (1) | Wells Fargo Center–North Tower, BOA Plaza | 293,383 | ||||||||||||
| Orrick, Herrington & Sutcliffe | 777 Tower | 75,627 | ||||||||||||
| The Capital Group Companies | Wells Fargo Center–South Tower | 53,316 | ||||||||||||
| City Storage Systems (2) | 777 Tower | 44,958 | ||||||||||||
| HSBC Bank USA National Association | EY Plaza | 20,523 | ||||||||||||
| Total | 487,807 | |||||||||||||
(1) Out of the expired 293,383 square feet, 242,003 square feet were renewed during the year ended December 31, 2022.
(2) Out of the expired 44,958 square feet, 39,291 square feet were renewed during the year ended December 31, 2022.
Occupancy remained stable during the year ended December 31, 2022. Office tenants are still active in the leasing markets but are being more selective in making real estate decisions. LACBD remained tenant favorable. Lease concessions, particularly tenant improvement allowances, continue to remain high as landlords continued to market increased vacant space in the slow-recovering LACBD leasing market.
Rental rates. The following table presents leasing information for executed leases at Brookfield DTLA’s properties as of December 31, 2022:
| Square Feet | ||||||||||||||||||||||||||||||||
| Property | Net Building Rentable | % of Net Rentable | % Leased | Annualized Rent (1) | Annualized Rent $/RSF (2) | |||||||||||||||||||||||||||
| BOA Plaza | 1,405,428 | 18.5 | % | 90.5 | % | $ | 37,221,739 | $ | 29.27 | |||||||||||||||||||||||
| Wells Fargo Center–North Tower | 1,399,795 | 18.5 | % | 80.4 | % | 34,455,904 | 30.61 | |||||||||||||||||||||||||
| Gas Company Tower | 1,345,163 | 17.8 | % | 72.8 | % | 27,735,956 | 28.31 | |||||||||||||||||||||||||
| EY Plaza | 963,682 | 12.7 | % | 76.6 | % | 21,567,786 | 29.21 | |||||||||||||||||||||||||
| FIGat7th | 316,250 | 4.2 | % | 89.8 | % | 7,268,181 | 25.60 | |||||||||||||||||||||||||
| Wells Fargo Center–South Tower | 1,124,960 | 14.8 | % | 63.0 | % | 21,751,783 | 30.68 | |||||||||||||||||||||||||
| 777 Tower | 1,024,835 | 13.5 | % | 73.1 | % | 20,612,460 | 27.51 | |||||||||||||||||||||||||
| 7,580,113 | 100.0 | % | 77.3 | % | $ | 170,613,809 | $ | 29.13 | ||||||||||||||||||||||||
__________
(1)Annualized rent represents the annualized monthly contractual rent under executed leases as of December 31, 2022. This amount reflects total base rent before any rent abatements as of December 31, 2022. Total abatements for executed leases as of December 31, 2022 for the twelve months ending December 31, 2023 are approximately $15.4 million, or $2.62 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, 2022.
42
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Average asking net effective rents in the LACBD declined during the year ended December 31, 2022, mainly attributable to increased leasing concessions granted in the tenant-favorable LACBD office leasing market. Management believes that on average our current rents approximate market in the LACBD.
The following table presents a summary of lease expirations at Brookfield DTLA’s properties for executed leases as of December 31, 2022, plus currently available space, for future periods. 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) | ||||||||||||||||||||||||||||||||
| 2023 | 643,135 | 11.0 | % | $ | 18,818,130 | 11.0 | % | $ | 29.26 | $ | 29.41 | |||||||||||||||||||||||||||
| 2024 | 681,570 | 11.6 | % | 18,300,155 | 10.7 | % | 26.85 | 27.98 | ||||||||||||||||||||||||||||||
| 2025 | 743,895 | 12.7 | % | 22,725,992 | 13.3 | % | 30.55 | 32.23 | ||||||||||||||||||||||||||||||
| 2026 | 795,918 | 13.6 | % | 20,765,501 | 12.2 | % | 26.09 | 28.61 | ||||||||||||||||||||||||||||||
| 2027 | 299,580 | 5.1 | % | 9,307,951 | 5.5 | % | 31.07 | 35.74 | ||||||||||||||||||||||||||||||
| 2028 | 126,016 | 2.2 | % | 4,172,390 | 2.4 | % | 33.11 | 40.05 | ||||||||||||||||||||||||||||||
| 2029 | 302,989 | 5.2 | % | 10,068,324 | 5.9 | % | 33.23 | 42.05 | ||||||||||||||||||||||||||||||
| 2030 | 330,076 | 5.6 | % | 10,390,792 | 6.1 | % | 31.48 | 39.73 | ||||||||||||||||||||||||||||||
| 2031 | 358,684 | 6.1 | % | 10,721,065 | 6.3 | % | 29.89 | 39.40 | ||||||||||||||||||||||||||||||
| 2032 | 200,448 | 3.4 | % | 5,648,625 | 3.3 | % | 28.18 | 40.43 | ||||||||||||||||||||||||||||||
| Thereafter | 1,375,383 | 23.5 | % | 39,694,884 | 23.3 | % | 28.86 | 42.10 | ||||||||||||||||||||||||||||||
| Total expiring leases | 5,857,694 | 100.0 | % | $ | 170,613,809 | 100.0 | % | $ | 29.13 | $ | 35.25 | |||||||||||||||||||||||||||
| Currently available | 1,722,419 | |||||||||||||||||||||||||||||||||||||
| Total rentable square feet | 7,580,113 | |||||||||||||||||||||||||||||||||||||
__________
(1)Annualized rent represents the annualized monthly contractual rent under executed leases as of December 31, 2022. This amount reflects total base rent before any rent abatements as of December 31, 2022. Total abatements for executed leases as of December 31, 2022 for the twelve months ending December 31, 2023 are approximately $15.4 million, or $2.62 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, 2022.
(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.
43
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
The following discussion of Brookfield DTLA’s cash flows 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 flows for the periods presented below.
A summary of changes in Brookfield DTLA’s cash flows is as follows:
| For the Year Ended December 31, | Dollar Change | ||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Net cash provided by operating activities | $ | 39,827 | $ | 61,652 | $ | (21,825) | |||||||||||
| Net cash used in investing activities | $ | (64,660) | $ | (23,836) | $ | (40,824) | |||||||||||
| Net cash used in financing activities | $ | (4,661) | $ | (33,076) | $ | 28,415 | |||||||||||
Operating Activities
Brookfield DTLA’s cash flows from operating activities are primarily dependent upon (1) the leasing activity of its portfolio, (2) the rental rates achieved on its leases, (3) the collectibility of rent and other amounts billed to tenants, (4) changes in working capital, and (5) interest payments. The decrease in cash provided by operating activities is primarily attributable to increases in interest payments on secured debt of $23.6 million due to the rising interest rate environment in 2022, as well as increases in rental property operating and maintenance expense by $11.3 million as a result of increased physical occupancy. The decrease in cash provided by operating activities was partially offset by cash inflows from working capital changes of $8.7 million, as well as increases in lease income by $3.8 million and net parking income by $2.7 million. Working capital changes are subject to variability period over period as a result of timing differences, including with respect to the collection of tenant receivables and payments of accounts and tenant payables.
Investing Activities
Brookfield DTLA’s cash flows from investing activities are generally impacted by the amount of capital expenditures and tenant improvement activities for its properties. The increase in net cash used in investing activities was mainly due to increases in tenant improvement expenditures at Wells Fargo Center and 777 Tower.
Financing Activities
Brookfield DTLA’s cash flows from financing activities are generally impacted by its loan activity, and contributions from and distributions to its equity holders, if any. During the year ended December 31, 2022, proceeds from drawings on loans secured by 777 Tower and Wells Fargo Center–South Tower of $13.9 million and $4.7 million, respectively, as well as net proceeds from the issuance of Series B preferred interest of $47.6 million was the main source of cash provided by financing activities. Cash outflows were mainly driven by repurchases of and distributions to Series B preferred interest of $47.0 million and $9.8 million, respectively, using the excess operating cash flows generated from properties. In addition, as required by various mortgage and mezzanine loan agreements, the Company paid $12.0 million related to purchases of interest rate protection agreements.
44
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
In comparison, during the same period in 2021, net proceeds from the refinancing of the loans secured by the Gas Company Tower and the issuance of Series B preferred interest of $25.5 million were the main source of cash provided by financing activities. All proceeds from the new secured loans were used to pay off the original $450.0 million encumbrance and to satisfy the new loans’ required reserves. As Brookfield DTLA had excess cash from operating activities generated from properties, it repurchased $45.3 million of the Series B preferred interest and made distributions of $17.8 million to the Series B preferred interest.
Comparison of the Year Ended December 31, 2021 to December 31, 2020
See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Discussion of Consolidated Cash Flows” in Brookfield DTLA’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission ("SEC") on March 24, 2022 for a discussion of Brookfield DTLA’s consolidated cash flows for the year ended December 31, 2021 compared to the year ended December 31, 2020.
45
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, 2022 to December 31, 2021
Consolidated Statements of Operations Information
(In millions, except percentage amounts)
| For the Year Ended December 31, | Increase/ (Decrease) | % Change | |||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Lease income | $ | 264.1 | $ | 257.4 | $ | 6.7 | 3 | % | |||||||||||||||
| Parking | 30.7 | 25.4 | 5.3 | 21 | % | ||||||||||||||||||
| Interest and other | 1.1 | 1.0 | 0.1 | 10 | % | ||||||||||||||||||
| Total revenue | 295.9 | 283.8 | 12.1 | 4 | % | ||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Rental property operating and maintenance | 108.7 | 97.4 | 11.3 | 12 | % | ||||||||||||||||||
| Real estate taxes | 39.7 | 39.7 | — | — | % | ||||||||||||||||||
| Parking | 11.1 | 8.6 | 2.5 | 29 | % | ||||||||||||||||||
| Other expenses | 10.5 | 8.6 | 1.9 | 22 | % | ||||||||||||||||||
| Depreciation and amortization | 101.3 | 104.0 | (2.7) | (3) | % | ||||||||||||||||||
| Interest | 101.8 | 79.7 | 22.1 | 28 | % | ||||||||||||||||||
| Impairment of real estate and intangible assets | 112.1 | — | 112.1 | 100 | % | ||||||||||||||||||
| Total expenses | 485.2 | 338.0 | 147.2 | 44 | % | ||||||||||||||||||
| Other Income: | |||||||||||||||||||||||
| Equity in earning of unconsolidated real estate joint venture | 1.2 | 0.8 | 0.4 | 50 | % | ||||||||||||||||||
| Total other income | 1.2 | 0.8 | 0.4 | 50 | % | ||||||||||||||||||
| Net loss | $ | (188.1) | $ | (53.4) | $ | (134.7) | 252 | % | |||||||||||||||
Lease income and parking revenue
The increase in lease income during the year ended December 31, 2022 was mainly due to higher recoveries, driven by increased operating and maintenance expenses as a result of higher physical occupancy as discussed in “Current Year Highlights”. The increase in parking revenue was also due to higher physical occupancy.
46
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Rental Property Operating and Maintenance Expense
Rental property operating and maintenance expense mainly includes janitorial, repairs and maintenance, utilities, insurance, and various other recurring expenses. With the higher physical occupancy since the Reopening in June 2021, rental property operating and maintenance expense increased.
Interest Expense
An increase in interest expense on secured debt by $22.1 million was primarily due to the rise in interest rates during 2022. Such an increase was partially offset by the $4.6 million nonrecurring loss on early extinguishment of the debt secured by Gas Company Tower in February 2021.
Impairment of Real Estate and Intangible Assets
During the year ended December 31, 2022, upon our review of the current market conditions, the Company recognized impairment charges on Wells Fargo Center – South Tower’s investments in real estate of $111.1 million and intangible assets associated with this property of $1.0 million to reduce their carrying amounts to their estimated fair value. Wells Fargo Center – South Tower’s estimated fair value and impairment charges reflect the impact of the 5.5% transfer tax that will be levied on real estate sales transactions in the City of Los Angeles valued at $10.0 million and above effective April 1, 2023. While there were no impairment charges on other properties in our portfolio during the year ended December 31, 2022, in light of the evolving office rental business environment and the slowdown in economic growth in the near term because of rising interest rates, decreases in our property valuations may lead to additional impairment charges in our portfolio in the near future. No impairment loss was recorded in the same period in 2021 on any of the Company’s properties.
Comparison of the Year Ended December 31, 2021 to December 31, 2020
See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Discussion of Results of Operations” in Brookfield DTLA’s Annual Report on Form 10-K filed with the SEC on March 24, 2022 for a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020.
47
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Related Party Transactions
See Item 8. “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 13—Related Party Transactions” of this Annual Report on Form 10-K.
Litigation
Critical Accounting Estimates
Critical accounting estimates are defined as accounting estimates or assumptions made in accordance with generally accepted accounting principles in the United States of America, which involve a significant level of estimation uncertainty or subjectivity and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Our significant accounting policies, which utilize these critical accounting estimates, are described in Item 8. “Financial Statements and Supplementary Data —Notes to Consolidated Financial Statements—Note 2—Basis of Presentation and Summary of Significant Accounting Policies”. Our critical accounting estimates are described below.
Impairment of Long-lived Assets
Impairment of investments in real estate
Investments in long-lived assets, including our investments in real estate, are individually reviewed for impairment quarterly or if events or changes in circumstances indicate that the carrying amount of the long-lived assets might not be recoverable, which is referred to as a “triggering event” or an “impairment indicator.” Indicators of potential impairment include the following:
•Change in strategy resulting in an increased or decreased holding period;
•Lower stabilized occupancy levels;
•Deterioration of the rental market as evidenced by rent decreases, record-high capital expense obligations, and/or elevated concessions such as tenant improvement, over numerous quarters;
•Properties with recent impairment issues that are adjacent to or located in the same submarket;
•Significant decrease in properties’ market price;
•Tenant financial problems; and/or
•Comparable market barriers of competitors in the same submarket.
The carrying amount of long-lived assets to be held and used is deemed not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the asset. Triggering events or impairment indicators for long-lived assets to be held and used are assessed by property and include significant fluctuations in estimated net operating income, changes in leasing activity, significant near-term lease expirations, current and historical operating and/or cash flow losses, rental rates, and other market factors.
48
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
When conducting the impairment review of our investments in real estate, we assessed the expected undiscounted cash flows based upon numerous factors. These factors include, but are not limited to, the credit quality of our tenants, available market information, known trends, current market/economic conditions that may affect the asset, and historical and forecasted financial and operating information relating to the property, such as net operating income, leasing activity statistics, vacancy projections, renewal percentage, and rent collection rates. If the undiscounted cash flows expected to be generated by a property are less than its carrying amount, the Company determines the fair value of the property and an impairment loss would be recorded to write down the carrying amount of such property to its fair value.
As of December 31, 2022, the carrying amounts of our investments in real estate aggregated $2.2 billion, or approximately 87% of our total assets. During the year ended December 31, 2022, the Company recognized impairment charges on Wells Fargo Center–South Tower’s investments in real estate of $111.1 million and intangible assets associated with this property of $1.0 million to reduce their carrying amounts to their estimated fair value. There were no impairment charges on other properties in our portfolio during the same period. In comparison, during the year ended December 31, 2021, none of Brookfield DTLA’s real estate properties were impaired.
Impairment of an investment in unconsolidated real estate joint venture
Our investment in the unconsolidated real estate joint venture, Brookfield DTLA Fund Properties IV LLC, is reviewed for impairment quarterly or when conditions exist that may indicate that the decrease in the carrying amount of the investment has occurred and is other than temporary. Triggering events or impairment indicators for the Company’s unconsolidated real estate joint venture include its recurring operating losses, and other events such as significant changes in construction costs, estimated completion dates, intended holding periods, and other factors related to the development property owned by the real estate joint venture. Upon determination that an other-than-temporary impairment has occurred, a write-down is recognized to reduce the carrying amount of the investment to its estimated fair value.
As of December 31, 2022, the carrying amount of our investment in the unconsolidated real estate joint venture was $44.4 million, or approximately 2% of our total assets. During the years ended December 31, 2022 and 2021, no other-than-temporary impairments related to our unconsolidated real estate joint venture were identified.
Recently Issued Accounting Literature
Please refer to Item 8. “Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 2—Basis of Presentation and Summary of Significant Accounting Policies” of this Annual Report on Form 10-K for information regarding the impact of the adoption of new accounting pronouncements during the year ended December 31, 2022.
49
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Excluding the debt in default secured by the 777 Tower and Gas Company Tower, $1.1 billion, or 47%, of Brookfield DTLA’s debt bears interest at variable rates based on one‑month LIBOR or SOFR as of December 31, 2022. Brookfield DTLA does not trade in financial instruments for speculative purposes. The primary market risk to which we believe we may be exposed is interest rate risk, which results from many factors, including government monetary and tax policies, economic considerations, and other factors that are beyond our control.
We utilize interest rate cap contracts to manage the interest rate risk of our outstanding debt and to limit the effects of interest rate risks on our operations. The use of interest rate cap contracts to hedge a portion of our exposure to changes in interest rates may carry additional risks, such as counterparty credit risk.
Brookfield DTLA’s interest rate protection agreements in place as of December 31, 2022 are as follows:
| Notional Value | Strike Rate (1) | Effective Date | Expiration Date | ||||||||||||||||||||||||||
| Wells Fargo Center–North Tower | $ | 400,000 | 3.40 | % | (1) | 10/15/2022 | 10/15/2023 | ||||||||||||||||||||||
| Wells Fargo Center–North Tower | 65,000 | 3.40 | % | (1) | 10/15/2022 | 10/15/2023 | |||||||||||||||||||||||
| Wells Fargo Center–North Tower | 35,000 | 3.40 | % | (1) | 10/15/2022 | 10/15/2023 | |||||||||||||||||||||||
| Wells Fargo Center–South Tower | 263,219 | 2.87 | % | (1) | 11/4/2022 | 11/4/2023 | |||||||||||||||||||||||
| EY Plaza | 275,000 | 6.02 | % | (2) | 10/15/2022 | 10/15/2023 | |||||||||||||||||||||||
| EY Plaza | 30,000 | 6.02 | % | (2) | 10/15/2022 | 10/15/2023 | |||||||||||||||||||||||
| Gas Company Tower (3) | 350,000 | 4.00 | % | (2) | 2/3/2021 | 2/15/2023 | |||||||||||||||||||||||
| Gas Company Tower (3) | 65,000 | 4.00 | % | (2) | 2/3/2021 | 2/15/2023 | |||||||||||||||||||||||
| Gas Company Tower (3) | 50,000 | 4.00 | % | (2) | 2/3/2021 | 2/15/2023 | |||||||||||||||||||||||
| Total | $ | 1,533,219 | |||||||||||||||||||||||||||
__________
(1)The index used for these derivative financial instruments is 1-Month SOFR.
(2)The index used for these derivative financial instruments is 1-Month LIBOR.
(3)As of the issuance date of this Annual Report, debt secured by Gas Company Tower is in maturity default and the related interest rate cap contracts expired.
Interest Rate Sensitivity
Our future earnings and fair value relating to our outstanding debt are primarily dependent upon prevalent market interest rates. The following table illustrates the effect of a 1% change in interest rates on our fixed- and variable-rate debt as of December 31, 2022:
| Fair Value of | |||||||||||
| Effect on Future Interest Expense due to Variable-rate Debt: | Secured Debt | ||||||||||
| Rate increase of 1% | $ | 3,092 | $ | (9,914) | |||||||
| Rate decrease of 1% | $ | (7,807) | $ | 9,824 | |||||||
50
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.
51
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
| Page | |||||
52
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, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
53
Liquidity and Going Concern — Refer to Note 2 to the financial statements
Critical Audit Matter Description
As of December 31, 2022, the Company had $2.3 billion of total consolidated debt, including $1,128.9 million and $400.0 million maturing in 2023 and 2024, respectively. The Company’s substantial indebtedness requires the Company to use a material portion of cash flow to service interest on the debt outstanding. Additionally, the consolidated debt also included $288.9 million of mortgage and mezzanine debt secured by 777 Tower and $465.0 million of mortgage and mezzanine debt secured by Gas Company Tower that is in default. Additionally, in order to attract or retain tenants needed to increase occupancy and sustain operations, the Company will need to spend a substantial amount on capital leasing costs (such as tenant improvements), however, the Company has limited amounts of liquidity to make these capital commitments. The Company may be unable to extend or refinance the upcoming loan maturities at current terms and may be required to paydown a portion of the maturing debt in order to extend or refinance the loans. With the Company’s limited amount of unrestricted cash on hand the Company’s ability to make any loan paydowns is limited. These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern.
We identified the Company’s liquidity and going concern disclosure as a critical audit matter because of the significant judgments in management’s plans to fund its debt in default, upcoming debt maturities and future tenant improvements within one year after the date the financial statements are issued. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate management’s conclusion that it is probable the Company’s plan will be effectively implemented within one year after the date the financial statements are issued and will provide the necessary cash flows to fund the Company’s debt maturities and future tenant improvements.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s liquidity and going concern disclosure included the following, among others:
•We evaluated conditions and events that raise substantial doubt regarding the Company’s ability to continue as a going concern.
•We tested management’s plan and its key assumptions including, but not limited to:
◦Projected revenues and property operating expenses by comparing such assumptions to underlying lease agreements and historical operating costs.
◦Estimates relating to future tenant improvements by comparing to underlying lease agreements.
•We engaged in discussions with management and evaluated the Company’s intent and ability to exercise extensions of its debt where available, foreclose certain properties collateralizing its loans, etc. and addressed the feasibility of the plan.
•We evaluated management’s disclosure in the notes to the financial statements to ensure it is in accordance with the appropriate guidance.
•We evaluated management’s plans in the context of other audit evidence and analyzed external filings and press releases to determine whether it supported or contradicted the conclusion reached by management.
54
Impairment Review — Refer to Note 2 to the financial statements
Critical Audit Matter Description
The Company’s investments in long-lived assets, including investments in real estate, are individually reviewed for impairment quarterly or if events or changes in circumstances indicate that the carrying amount of the long-lived assets might not be recoverable, which is referred to as a "triggering event" or an "impairment indicator." The carrying amount of long-lived assets to be held and used is deemed not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the asset. Triggering events or impairment indicators for long-lived assets to be held and used are assessed by property and include significant fluctuations in estimated net operating income, changes in occupancy, significant near-term lease expirations, current and historical operating and/or cash flow losses, rental rates, and other market factors.
When conducting the impairment review of the investments in real estate, the Company assessed the expected undiscounted cash flows based on numerous factors, but are not limited to, the credit quality of their tenants, available market information, known trends, current market/economic conditions that may affect the asset, and historical and forecasted financial and operating information relating to the property, such as net operating income, occupancy statistics, vacancy projections, renewal percentage, and rent collection rates. If the undiscounted cash flows expected to be generated by a property are less than its carrying amount, the Company determines the fair value of the property and an impairment loss would be recorded to write down the carrying amount of such property to its fair value.
During the year 2022, the Company recognized impairment charges on investments in real estate and intangible assets of $112.1 million, which are included in “Impairment of real estate and intangible assets” within the consolidated statements of operations.
We identified the impairment of investments in real estate properties as a critical audit matter because of the significant estimates and assumptions related to future market rental rates, capitalization rates and discount rates. Performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of investments in real estate for possible indicators of impairment included the following, among others:
•We evaluated the Company’s assessment of impairment indicators and estimate of future operating performance of the assets by evaluating the following:
◦Inquired with management, read minutes of executive committee and Board of Directors meetings and identified any indicators that it is likely a long-lived investment in real estate will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
◦Tested investments in real estate for possible indicators of impairment, including searching for adverse real-estate-specific and/or market conditions.
55
•Compared the carrying value of the assets to their respective fair values to assess whether any properties had a carrying value in excess of the fair value which could be an indicator of impairment. Further, we evaluated the reasonableness of the cash flow assumptions (future market rental rates, capitalization rates, and discount rates) utilized in the fair value analysis by testing management’s ability to forecast future cash flows by comparing actual results to management’s historical forecasts. In addition, we utilized independent market data focusing on geographical location and property type to test management’s assumption.
•With the assistance of our fair value specialists, on a sample basis, we evaluated certain key assumptions utilized by management to determine the fair value of the investments in real estate such as the (1) valuation methodology utilized by management; (2) the discount rate, rental rates, growth rates, and capitalization rates; and (3) mathematical accuracy of the calculation by developing a range of independent estimates and comparing our estimates to those used by management.
•We evaluated whether the assumptions were consistent with evidence obtained in other areas of the audit.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 31, 2023
We have served as the Company’s auditor since 2013.
56
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| ASSETS | |||||||||||
| Investments in Real Estate: | |||||||||||
| Land | $ | 216,982 | $ | 222,555 | |||||||
| Buildings and improvements | 2,145,830 | 2,308,836 | |||||||||
| Tenant improvements | 420,010 | 418,460 | |||||||||
| Investments in real estate, gross | 2,782,822 | 2,949,851 | |||||||||
| Less: accumulated depreciation | 561,382 | 580,403 | |||||||||
| Investments in real estate, net | 2,221,440 | 2,369,448 | |||||||||
| Investment in unconsolidated real estate joint venture | 44,421 | 43,191 | |||||||||
| Cash and cash equivalents | 23,523 | 38,901 | |||||||||
| Restricted cash | 35,206 | 49,322 | |||||||||
| Rents, deferred rents and other receivables, net | 135,447 | 125,625 | |||||||||
| Intangible assets, net | 10,067 | 16,023 | |||||||||
| Deferred charges, net | 54,877 | 57,529 | |||||||||
| Due from affiliates | 6,823 | 10,062 | |||||||||
| Prepaid and other assets, net | 12,365 | 12,377 | |||||||||
| Total assets | $ | 2,544,169 | $ | 2,722,478 | |||||||
| LIABILITIES AND DEFICIT | |||||||||||
| Liabilities: | |||||||||||
| Secured debt, net | $ | 2,279,573 | $ | 2,255,921 | |||||||
| Accounts payable and other liabilities | 71,029 | 77,612 | |||||||||
| Due to affiliates | 5,553 | 1,782 | |||||||||
| Intangible liabilities, net | 2,905 | 4,455 | |||||||||
| Total liabilities | 2,359,060 | 2,339,770 | |||||||||
See accompanying notes to consolidated financial statements.
57
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands, except share amounts)
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| LIABILITIES AND DEFICIT (continued) | |||||||||||
| 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, 2022 and 2021 | $ | 484,126 | $ | 465,577 | |||||||
| Noncontrolling Interests: | |||||||||||
| Series A-1 preferred interest | 469,666 | 452,454 | |||||||||
| Senior participating preferred interest | 11,677 | 21,191 | |||||||||
| Series B preferred interest | 182,486 | 177,290 | |||||||||
| Total mezzanine equity | 1,147,955 | 1,116,512 | |||||||||
| Stockholders’ Deficit: | |||||||||||
Common stock, $0.01 par value, 1,000 shares issued and outstanding as of December 31, 2022 and 2021 | — | — | |||||||||
| Additional paid-in capital | 204,369 | 203,369 | |||||||||
| Accumulated deficit | (1,167,270) | (865,927) | |||||||||
| Noncontrolling interests | 55 | (71,246) | |||||||||
| Total stockholders’ deficit | (962,846) | (733,804) | |||||||||
| Total liabilities and deficit | $ | 2,544,169 | $ | 2,722,478 | |||||||
See accompanying notes to consolidated financial statements.
58
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Revenue: | |||||||||||||||||
| Lease income | $ | 264,090 | $ | 257,352 | $ | 256,733 | |||||||||||
| Parking | 30,725 | 25,426 | 27,775 | ||||||||||||||
| Interest and other | 1,085 | 1,020 | 1,040 | ||||||||||||||
| Total revenue | 295,900 | 283,798 | 285,548 | ||||||||||||||
| Expenses: | |||||||||||||||||
| Rental property operating and maintenance | 108,719 | 97,444 | 96,347 | ||||||||||||||
| Real estate taxes | 39,719 | 39,702 | 39,292 | ||||||||||||||
| Parking | 11,128 | 8,570 | 10,648 | ||||||||||||||
| Other expenses | 10,535 | 8,604 | 13,952 | ||||||||||||||
| Depreciation and amortization | 101,252 | 104,047 | 104,920 | ||||||||||||||
| Interest | 101,801 | 79,739 | 82,808 | ||||||||||||||
| Impairment of real estate and intangible assets | 112,073 | — | — | ||||||||||||||
| Total expenses | 485,227 | 338,106 | 347,967 | ||||||||||||||
| Other Income (Expense): | |||||||||||||||||
| Equity in earning (loss) of unconsolidated real estate joint venture | 1,230 | 796 | (525) | ||||||||||||||
| Total other income (expense) | 1,230 | 796 | (525) | ||||||||||||||
| Net loss | (188,097) | (53,512) | (62,944) | ||||||||||||||
| Net income (loss) attributable to noncontrolling interests: | |||||||||||||||||
| Series A-1 preferred interest returns | 17,212 | 17,212 | 17,213 | ||||||||||||||
| Senior participating preferred interest redemption measurement adjustments | (8,248) | 1,028 | (1,580) | ||||||||||||||
| Series B preferred interest returns | 14,432 | 16,063 | 17,708 | ||||||||||||||
| Series B common interest – allocation of net income | 71,301 | 33,194 | 111,743 | ||||||||||||||
| Net loss attributable to Brookfield DTLA | (282,794) | (121,009) | (208,028) | ||||||||||||||
| Series A preferred stock dividends | 18,549 | 18,549 | 18,548 | ||||||||||||||
| Net loss attributable to common interest holders of Brookfield DTLA | $ | (301,343) | $ | (139,558) | $ | (226,576) | |||||||||||
See accompanying notes to consolidated financial statements.
59
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Net loss | $ | (188,097) | $ | (53,512) | $ | (62,944) | |||||||||||
| Other comprehensive income: | |||||||||||||||||
| Interest rate swap contracts designated as cash flow hedges: | |||||||||||||||||
| Unrealized derivative holding gains | — | — | 562 | ||||||||||||||
| Reclassification adjustment for realized loss included in net loss | — | — | 1,779 | ||||||||||||||
| Total other comprehensive income | — | — | 2,341 | ||||||||||||||
| Comprehensive loss | (188,097) | (53,512) | (60,603) | ||||||||||||||
| Less: comprehensive income attributable to noncontrolling interests | 94,697 | 67,497 | 145,084 | ||||||||||||||
| Comprehensive loss attributable to common interest holders of Brookfield DTLA | $ | (282,794) | $ | (121,009) | $ | (205,687) | |||||||||||
See accompanying notes to consolidated financial statements.
60
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 Interests | Total Stockholders’ Deficit | ||||||||||||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 1,000 | $ | — | $ | 197,535 | $ | (499,793) | $ | (2,341) | $ | (216,183) | $ | (520,782) | |||||||||||||||||||||||||||||||
| Net (loss) income | (208,028) | 145,084 | (62,944) | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 2,341 | — | 2,341 | |||||||||||||||||||||||||||||||||||||||||
| Contributions | 4,834 | 4,834 | ||||||||||||||||||||||||||||||||||||||||||
| Dividends, preferred returns and redemption measurement adjustments on mezzanine equity | (18,548) | (33,341) | (51,889) | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 1,000 | — | 202,369 | (726,369) | — | (104,440) | (628,440) | |||||||||||||||||||||||||||||||||||||
| Net (loss) income | (121,009) | 67,497 | (53,512) | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Contributions | 1,000 | 1,000 | ||||||||||||||||||||||||||||||||||||||||||
| Dividends, preferred returns and redemption measurement adjustments on mezzanine equity | (18,549) | (34,303) | (52,852) | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 1,000 | — | 203,369 | (865,927) | — | (71,246) | (733,804) | |||||||||||||||||||||||||||||||||||||
| Net (loss) income | (282,794) | 94,697 | (188,097) | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Contributions | 1,000 | 1,000 | ||||||||||||||||||||||||||||||||||||||||||
| Dividends, preferred returns and redemption measurement adjustments on mezzanine equity | (18,549) | (23,396) | (41,945) | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | 1,000 | $ | — | $ | 204,369 | $ | (1,167,270) | $ | — | $ | 55 | $ | (962,846) | |||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
61
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net loss | $ | (188,097) | $ | (53,512) | $ | (62,944) | |||||||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 101,252 | 104,047 | 104,920 | ||||||||||||||
| Equity in (earning) loss of unconsolidated real estate joint venture | (1,230) | (796) | 525 | ||||||||||||||
| (Recovery) write-off of lease receivables previously deemed uncollectible | (196) | (1,136) | 8,400 | ||||||||||||||
| Provision for loan losses | — | — | 2,653 | ||||||||||||||
| Amortization of acquired below-market leases, net of acquired above-market leases | (141) | 206 | 1,331 | ||||||||||||||
| Straight-line rent amortization | (3,655) | (1,413) | 1,441 | ||||||||||||||
| Amortization of tenant inducements | 2,529 | 3,803 | 3,897 | ||||||||||||||
| Amortization and write-off of debt financing costs | 6,763 | 7,825 | 5,471 | ||||||||||||||
| Impairment of real estate and intangible assets | 112,073 | — | — | ||||||||||||||
| Loss on early extinguishment of debt | — | 4,575 | — | ||||||||||||||
| Unrealized loss (gain) on interest rate cap contracts | 1,832 | (41) | 127 | ||||||||||||||
| Realized loss on interest rate swap contracts | — | — | 1,779 | ||||||||||||||
| Changes in assets and liabilities: | |||||||||||||||||
| Rents, deferred rents and other receivables, net | (6,282) | 6,383 | (4,496) | ||||||||||||||
| Deferred charges, net | (8,965) | (9,446) | (7,053) | ||||||||||||||
| Due from affiliates, net | 1,324 | 1,043 | (647) | ||||||||||||||
| Prepaid and other assets, net | 10,157 | (1,726) | (1,019) | ||||||||||||||
| Accounts payable and other liabilities | 8,692 | 1,758 | (1,570) | ||||||||||||||
| Due to affiliates | 3,771 | 82 | 134 | ||||||||||||||
| Net cash provided by operating activities | 39,827 | 61,652 | 52,949 | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Expenditures for real estate improvements | (64,660) | (23,836) | (58,062) | ||||||||||||||
| Net cash used in investing activities | (64,660) | (23,836) | (58,062) | ||||||||||||||
See accompanying notes to consolidated financial statements.
62
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Proceeds from secured debt | $ | 18,590 | $ | 465,000 | $ | 305,000 | |||||||||||
| Principal payments on secured debt | — | (450,000) | (265,000) | ||||||||||||||
| Proceeds from Series B preferred interest | 47,564 | 25,500 | 47,850 | ||||||||||||||
| Proceeds from senior participating preferred interest | 288 | 629 | 777 | ||||||||||||||
| Distributions to Series B preferred interest | (9,825) | (17,794) | (17,865) | ||||||||||||||
| Repurchases of Series B preferred interest | (46,975) | (45,306) | (34,218) | ||||||||||||||
| Distributions to senior participating preferred interest | (1,554) | (879) | (1,146) | ||||||||||||||
| Contributions to additional paid-in capital | 1,000 | 1,000 | 1,000 | ||||||||||||||
| Purchase of interest rate cap contracts | (12,048) | (107) | (130) | ||||||||||||||
Payment for early extinguishment of debt and termination of interest rate swap contracts | — | (4,575) | (849) | ||||||||||||||
| Debt financing costs paid | (1,701) | (6,544) | (5,811) | ||||||||||||||
| Net cash (used in) provided by financing activities | (4,661) | (33,076) | 29,608 | ||||||||||||||
| Net change in cash, cash equivalents and restricted cash | (29,494) | 4,740 | 24,495 | ||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of year | 88,223 | 83,483 | 58,988 | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 58,729 | $ | 88,223 | $ | 83,483 | |||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||||||||
| Cash paid for interest | $ | 91,596 | $ | 67,976 | $ | 76,873 | |||||||||||
| Cash paid for income taxes | $ | 473 | $ | 1,723 | $ | 792 | |||||||||||
See accompanying notes to consolidated financial statements.
63
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Supplemental disclosure of non-cash investing and financing activities: | |||||||||||||||||
| Accrual for current-year additions to real estate investments | $ | 15,946 | $ | 12,818 | $ | 53,760 | |||||||||||
| Increase in fair value of interest rate swaps | $ | — | $ | — | $ | 562 | |||||||||||
| Writeoff of fully depreciated investments in real estate | $ | 24,008 | $ | 24,233 | $ | 36,613 | |||||||||||
| Writeoff of fully amortized intangible assets | $ | 6,322 | $ | 8,634 | $ | 14,414 | |||||||||||
| Writeoff of fully amortized intangible liabilities | $ | 14,746 | $ | 13,529 | $ | 6,850 | |||||||||||
| Noncash contributions to additional paid-in capital | $ | — | $ | — | $ | 3,834 | |||||||||||
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, 2022, 2021 and 2020:
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash and cash equivalents at beginning of year | $ | 38,901 | $ | 37,394 | $ | 33,964 | |||||||||||
| Restricted cash at beginning of year | 49,322 | 46,089 | 25,024 | ||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of year | $ | 88,223 | $ | 83,483 | $ | 58,988 | |||||||||||
| Cash and cash equivalents at end of year | $ | 23,523 | $ | 38,901 | $ | 37,394 | |||||||||||
| Restricted cash at end of year | 35,206 | 49,322 | 46,089 | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 58,729 | $ | 88,223 | $ | 83,483 | |||||||||||
See accompanying notes to consolidated financial statements.
64
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, 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. (“BPY”), an exempted limited partnership under the Laws of Bermuda, which in turn is the flagship commercial property entity wholly-owned by Brookfield Corporation, a corporation under the laws of Ontario, and the primary vehicle through which Brookfield Corporation invests in real estate on a global basis. On December 9, 2022, Brookfield Asset Management Inc. (“BAM”) completed a distribution and listing of 25% of its asset management business — Brookfield Asset Management Ltd. The global alternative asset management business is now owned and operated through Brookfield Asset Management ULC. BAM is now known as Brookfield Corporation.
As of December 31, 2022 and 2021, Brookfield DTLA owned Bank of America Plaza (“BOA Plaza”), EY Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower and 777 Tower, which are Class A office properties, and FIGat7th, a retail center nestled between EY Plaza and 777 Tower. Additionally, Brookfield DTLA Fund Properties II LLC (“Fund II”) has a noncontrolling interest in an unconsolidated real estate joint venture with Brookfield DTLA FP IV Holdings LLC (“DTLA FP IV Holdings”), a wholly‑owned subsidiary of DTLA Holdings, which owns Beaudry (previously known as 755 South Figueroa), a residential development property. All of these properties are located in the Los Angeles Central Business District (the “LACBD”) in Downtown Los Angeles, which has long been a major office district for law firms, accounting firms and government agencies.
Brookfield DTLA primarily receives its income from lease income, including tenant reimbursements, generated from the operations of its office and retail properties, and to a lesser extent, revenue from its parking garages.
65
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 2—Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements and related notes have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The consolidated balance sheets as of December 31, 2022 and 2021 include the accounts of Brookfield DTLA and subsidiaries in which it has a controlling financial interest. All material intercompany transactions have been eliminated in consolidation as of and for the years ended December 31, 2022, 2021 and 2020.
Liquidity and Going Concern
The consolidated financial statements have been prepared in accordance with GAAP on the basis that the Company will continue as a going concern. The going concern basis assumes that the Company will be able to meet its obligations and continue its operations one year from the date of the issuance of the Annual Report, which is dependent upon the Company’s ability to effectively implement plans related to the secured debt currently in default and the secured debt that matures within one year after the date of the issuance of the Annual Report, as discussed below (together, the “Maturing Loans”).
As of the issuance date of this Annual Report, the Company had $2.3 billion of total consolidated debt, including $1,128.9 million and $400.0 million maturing in 2023 and 2024, respectively. Our substantial indebtedness requires us to use a material portion of our cash flow to service interest on our debt. Additionally, our consolidated debt also includes $288.9 million of mortgage and mezzanine debt secured by 777 Tower and $465.0 million of mortgage and mezzanine debt secured by Gas Company Tower that is in default. The Company has experienced a decline in occupancy since the onset of the COVID-19 pandemic as tenant leases expire which has resulted in a decrease in cash flow from operations and has negatively impacted the market values of the properties. Additionally, in order to attract or retain tenants needed to increase occupancy and sustain operations, the Company will need to spend a substantial amount on capital leasing costs (such as tenant improvements), however, the Company has limited amounts of liquidity to make these capital commitments. Furthermore, since the second quarter of 2022, uncertainty in the overall economy has increased due to the Federal Reserve materially raising interest rates to fight inflation. The increase and volatility in interest rates, not only increase the cost of our floating rate debt and the rates or spread on any refinancing we may seek, but it also materially increased the cost of interest rate protection agreements and interest rate risk hedging. We are required to obtain interest rate protection agreements with respect to the Company’s existing floating rate secured loans (and which we expect will be required to obtain for refinancing our maturing debt).
66
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company may be unable to extend or refinance the upcoming loan maturities at current terms and may be required to paydown a portion of the maturing debt in order to extend or refinance the loans. With the Company’s limited amount of unrestricted cash on hand, the Company’s ability to make any loan paydowns is limited without the sale of real estate assets, and we do not have any contracts to sell our properties as of the issuance date of this Annual Report. Nevertheless, if one or more of the properties securing our Maturing Loans were to be foreclosed upon by the lenders, as these secured debt obligations are not cross-collateralized with other properties in the portfolio, we believe we will have sufficient cash from our remaining properties and our Series B financings to meet our obligations to continue our operations within one year after the date of the issuance of the Annual Report. While these conditions and events raise substantial doubt about the Company’s ability to continue as a going concern, for the reasons stated in this paragraph and the further discussion below, management has determined that it is probable that the conditions and events raising substantial doubt about the entity’s ability to continue as a going concern have been alleviated, and that the Company will continue as a going concern during one year from the date of the issuance of the Annual Report.
The Company’s ability to continue as a going concern is dependent upon the Company’s ability to effectively implement plans related to the Maturing Loans.
Debt Maturing within One Year From the Date of the Issuance of the Annual Report:
FIGat7th — In March 2023, the lender granted a short-term extension of the maturity date from March 1, 2023 to April 3, 2023. Brookfield DTLA is currently engaged in discussions with the lender to extend the debt secured by FIGat7th for three years. As of the issuance date of this Annual Report, we currently do not have a commitment from the lenders to extend the maturity dates of this loan for three years. If we are unable to extend the FIGat7th loan, then the lender would have the right to exercise its remedies under the FIGat7th loan, including, but not limited to, declaring the debt to be immediately payable and foreclosing on FIGat7th.
Wells Fargo Center — South Tower — As of December 31, 2022, and the issuance date of this Annual Report, wholly-owned subsidiaries of the Company had and continue to have a secured mortgage loan of $265.4 million on Wells Fargo Center—South Tower (the “Wells Fargo Center South Loan”) that matures on November 4, 2023. We currently plan to operate the property and pay debt service on the loan through maturity. We will attempt to extend the Wells Fargo Center South Loan with the current lenders or refinance the loan with different lenders. As of the issuance date of this Annual Report, we currently do not have a commitment from the lenders to extend the maturity dates of this loan. Additionally, we do not know what paydown may be required upon any refinancing of this loan, and therefore are not certain if we will have sufficient unrestricted cash on hand to make any such paydown. We do not currently have any commitment for additional capital to the extent any paydown requires cash in excess of the unrestricted cash on hand that we would be able or willing to allocate to such paydown. If we are unable to negotiate a loan modification with the current lenders or refinance the Well Fargo Center South Loan, then the lenders would have the right to exercise the remedies under the WFC South Loan, including, but not limited to, declaring the debt to be immediately payable and foreclosing on Wells Fargo Center – South Tower.
Wells Fargo Center — North Tower Loans — As of December 31, 2022, and the issuance date of this Annual Report, wholly-owned subsidiaries of the Company (the “WFC North Borrowers”) had and continue to have secured loans of $500.0 million on Wells Fargo Center — North Tower, comprised of a $400.0 million mortgage loan, a $65.0 million mezzanine loan, and a $35.0 million junior mezzanine loan (collectively, the “WFC North Loans”). The maturity date of the WFC North Loans is October 9, 2023.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In March 2023, the lender of the junior mezzanine loan agreed, subject to certain conditions, to forbear from exercising any remedy as a result of non-payment of the monthly debt service payment for March due on the junior mezzanine loan. The amount of cash the property currently generates from its operations is not sufficient to cover the upcoming debt obligations, leasing costs and capital expenditures with respect to Wells Fargo Center – North Tower. The WFC North Borrowers will not have sufficient available cash to make the interest payments on the WFC North Loans. The WFC North Borrowers will attempt to negotiate favorable amendments to the WFC North Loans and/or interest payment forbearances from the current lenders. If WFC North Borrowers are unsuccessful, the forbearance agreement with any lender lapses, and the interest payments are not made on the due date or if the mechanics liens currently existing on the asset are not timely discharged, then the lenders would have the right to exercise the remedies under the WFC North Loans, including, but not limited to, declaring the debt to be immediately payable and foreclosing on Wells Fargo Center – North Tower.
EY Plaza — As of December 31, 2022, and the issuance date of this Annual Report, wholly-owned subsidiaries of the Company (the “EY Borrowers”) have secured loans of $305.0 million on EY Plaza, comprised of a $275.0 million mortgage loan and a $30.0 million mezzanine loan (collectively, the “EY Plaza Loans”). The maturity date of the EY Plaza Loans is October 9, 2023, with two one-year extension options. The EY Borrowers have received notices from certain tenants of EY Plaza stating that they are not in compliance with the terms of their respective lease agreements. The amount of cash the EY Borrowers currently generate from operations is not sufficient to cover its upcoming debt obligations, leasing costs and capital expenditures with respect to EY Plaza. It is unlikely that they will be able to obtain additional sources of liquidity or negotiate favorable amendments to the EY Plaza Loans or interest payment forbearances from the lenders in time. In this case, the EY Borrowers will not have sufficient operating cash flow to cure the non-compliance with the leases or discharge mechanics liens currently existing on the asset or make the April 2023 interest payments on the EY Plaza Loans. If the lenders send the EY Borrowers a notice of default to cure the non-compliance with the leases and the EY Borrowers are unsuccessful in curing the defaults during the available cure period or discharging the mechanics liens within the time required under the EY Plaza Loans, or the interest payment is not made on the due date of April 7, 2023, then the lenders would have the right to exercise the remedies under the EY Plaza Loans, including, but not limited to, declaring the debt to be immediately payable and foreclosing on EY Plaza.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Debt in Default:
777 Tower Loans — As previously disclosed in our public filings, wholly-owned subsidiaries of the Company (the “777 Borrowers”) have secured loans of $318.6 million on 777 Tower, comprised of a $268.6 million mortgage loan and a $50.0 million mezzanine loan (collectively, the “777 Tower Loans”). There was $288.9 million outstanding under the 777 Tower Loans as of December 31, 2022 and the issuance date of this Annual Report. In November 2022, the 777 Borrowers did not obtain an Interest Rate Protection Agreement (as defined in the underlying loan agreements) which constitutes an Event of Default (as defined in the underlying loan agreements). Wells Fargo Bank, National Association, as Administrative Agent for the lenders under the mortgage loan, and Mesa West Core Lending Fund, LLC, have notified the 777 Borrowers that defaults and potential defaults have occurred under the loan and that the lenders have the right to exercise their remedies under the 777 Tower Loans, including, without limitation, declaring the debt to be immediately due and payable and foreclosing on 777 Tower. As a result of the default under the mortgage loan, an Event of Default (as defined in the underlying loan agreements) has occurred and is continuing under the mezzanine loan. As of the issuance date of this Annual Report, the lenders have not exercised any of their remedies under the 777 Tower Loans. In addition, as of the issuance date of this Annual Report, the 777 Borrowers have not paid the March 2023 interest expense accrued on the mezzanine loan and currently do not intend to pay this or the future interest expense accrued on the 777 Tower Loans. Certain mechanics’ liens have also been filed against the asset, and if the 777 Borrowers do not discharge such liens within the time required under the 777 Tower Loans, an additional Event of Default on these loans will occur.
Gas Company Tower Loans — As previously disclosed in our public filings, wholly-owned subsidiaries of the Company (the “Gas Company Borrowers”) have secured loans of $465.0 million on Gas Company Tower, comprised of a $350.0 million mortgage loan, a $65.0 million mezzanine loan and a $50.0 million junior mezzanine loan (collectively, the “Gas Company Tower Loans”). There was $465.0 million outstanding under the Gas Company Tower Loans as of December 31, 2022 and the issuance date of this Annual Report. The initial maturity date of the Gas Company Tower Loans was February 9, 2023, with three one-year extension options. Gas Company Borrowers did not exercise the option to extend the maturity of the loans and therefore, subsequent to the current year-end period, on February 9, 2023, the Gas Company Tower Loans matured, and an Event of Default (as defined in the underlying loan agreements) has occurred and is continuing. The lenders may exercise their remedies under the loans, including foreclosing on Gas Company Tower. As of the issuance date of this Annual Report, the lenders have not exercised any of their remedies under the Gas Company Tower Loans, and have transferred these loans to a special servicer. In addition, as of the issuance date of this Annual Report, the Gas Company Borrowers have not paid the March 2023 interest expense accrued on the mezzanine loan and currently do not intend to pay this or the future interest expense accrued on the Gas Company Tower Loans.
There are several potential outcomes with respect to 777 Tower Loans and Gas Company Tower Loans, including negotiating a modification to the loans, refinancing the loans, or consensual short sales. However, there is no assurance that we will be successful in achieving any of these potential outcomes. If unsuccessful, the lenders would retain their right to exercise the remedies under the loans including, but not limited to, declaring the debt to be immediately payable and foreclosing on the assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Determination of Controlling Financial Interest
We consolidate entities in which Brookfield DTLA is considered to be the primary beneficiary of a variable interest entity (“VIE”) or has a majority of the voting interest in the entity. We are deemed to be the primary beneficiary of a VIE when we have (i) the power to direct the activities of the VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. We do not consolidate entities in which the other parties have substantive kick-out rights to remove the Company’s power to direct the activities, and most significantly impacting the economic performance, of the VIE. In determining whether we are the primary beneficiary, we consider factors such as ownership interest, management representation, authority to control decisions, and contractual and substantive participating rights of each party.
Brookfield DTLA Fund Properties II LLC. The Company earns a return through an indirect investment in Fund II. DTLA Holdings, the parent of Brookfield DTLA, owns all of the common interest in Fund II. Brookfield DTLA has an indirect preferred stock interest in Fund II and its wholly-owned subsidiary is the managing member of Fund II. The Company determined that Fund II is a VIE. As a result of having the power to direct the significant activities of Fund II that impact Fund II’s economic performance, and the obligation to absorb losses of, or the right to receive benefits from, Fund II that could potentially be significant to the Fund II, Brookfield DTLA meets the two conditions for being the primary beneficiary of Fund II.
We consolidate entities through which we conduct substantially all of our business, and own, directly and through subsidiaries, substantially all of our assets. As of December 31, 2022, these consolidated VIEs had in aggregate total consolidated assets of $2.5 billion (of which $2.2 billion is related to investments in real estate) and total consolidated liabilities of $2.4 billion (of which $2.3 billion is related to non-recourse debt secured by our office and retail properties). The Company is obligated to repay substantially all of the liabilities of our consolidated VIEs, except for the non-recourse secured debt.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Investment in Unconsolidated Real Estate Joint Venture. Fund II has a noncontrolling interest in a joint venture, Brookfield DTLA Fund Properties IV LLC (“Fund IV”), with DTLA FP IV Holdings. The Company determined that the joint venture is a VIE mainly because its equity investment at risk is insufficient to finance the joint venture’s activities without additional subordinated financial support. While the joint venture meets the definition of a VIE, Brookfield DTLA is not its primary beneficiary as the Company lacks the power through voting or similar rights to direct the activities that most significantly impact the joint venture’s economic performance. Therefore, the Company accounts for its ownership interest in the joint venture under the equity method. Under the equity method of accounting, we initially recognize Fund II’s investment in the joint venture at the fair value of the assets contributed, and subsequently adjust the joint venture’s carrying amount for Fund II’s share of the joint venture’s redemption value and other-than-temporary impairments (if any). The redemption value represents the amount to be distributed to Fund II in the event of termination or liquidation of the joint venture. Adjustments to the joint venture’s carrying amount to its redemption value are recorded in the consolidated statements of operations as equity in earning (loss) of unconsolidated real estate joint venture. As of December 31, 2022, the Company’s ownership interest in the unconsolidated real estate joint venture was 22.1%, a decrease from 33.6% as of December 31, 2021 as a result of additional capital contributed by DTLA FP IV Holdings during the year ended December 31, 2022.
The liabilities of the joint venture may only be settled using the Beaudry assets and are not recourse to the Company. Brookfield DTLA’s exposure to its investment in the joint venture is limited to its investment balance and the Company has no obligation to make future contributions to the joint venture. Pursuant to the operating agreement of the joint venture, DTLA FP IV Holdings may be required to fund additional amounts for the Beaudry development, routine operating costs, and guaranties or commitments of the joint venture.
Impact of COVID-19 pandemic
Leasing activity and occupancy in the LACBD has not caught up to pre-pandemic levels as businesses consider how to best implement return-to-office plans and transition to hybrid or remote work policies. Office tenants are still active in the leasing markets but are more selective in making real estate decisions. Relocating and renewing tenants are pursuing space efficiencies which are often accompanied by size reduction and a focus on highest quality assets. Retail tenants have continued to benefit from higher visitor traffic since COVID mandates throughout California were lifted in June 2021 (the “Reopening”) but short of pre-pandemic levels. During the years ended December 31, 2022 and 2021, the Company recorded favorable lease income adjustments of $0.2 million and $1.1 million, respectively, as a result of the Reopening with various retail tenants benefited from higher visitor traffic, as well as office employees returning to offices. In contrast, during the year ended December 31, 2020, due to the uncertainties posed to our retail and office tenants by the restrictions implemented to combat the spread of COVID-19 pandemic, adjustments of $8.4 million were recognized to lower our lease income related to certain leases where we determined that the collection of future lease payments was not probable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods presented. The Company bases its estimates on historical experience and on various other assumptions that it considers to be reasonable under the circumstances, including the impact of events such as COVID-19 pandemic and the measures taken to combat the spread of the pandemic. For example, estimates and assumptions have been made with respect to 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.
Significant Accounting Policies
Investments in Real Estate, Net—
Land is carried at cost. Buildings are recorded at historical cost and are depreciated on a straight‑line basis over their estimated useful lives of 60 years. Building improvements are recorded at historical cost and are depreciated on a straight-line basis over their estimated useful lives, ranging from 5 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 and amortized on a straight‑line basis over the shorter of their estimated useful life or the applicable lease term, with the related amortization reported as part of depreciation and amortization expense in the consolidated statements of operations.
Depreciation expense related to investments in real estate during the years ended December 31, 2022, 2021 and 2020 totaled $87.3 million, $87.3 million and $87.5 million, respectively, and is reported as part of depreciation and amortization expense in the consolidated statements of operations.
The Company capitalizes costs associated with capital expenditures and tenant improvements. Capitalization of costs is required while activities are ongoing to prepare an asset for their intended use. Costs incurred after the capital expenditures and tenant improvement projects are substantially complete and ready for its intended use are expensed as incurred. Expenditures for repairs and maintenance, real estate taxes and insurance are expensed as incurred.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Impairment Review—
Investments in long-lived assets, including our investments in real estate, are individually reviewed for impairment quarterly or if events or changes in circumstances indicate that the carrying amount of the long-lived assets might not be recoverable, which is referred to as a “triggering event” or an “impairment indicator.” Indicators of potential impairment include the following:
•Change in strategy resulting in an increased or decreased holding period;
•Lower stabilized occupancy levels;
•Deterioration of the rental market as evidenced by rent decreases, record-high capital expense obligations, and/or elevated concessions such as tenant improvement, over numerous quarters;
•Properties with recent impairment issues that are adjacent to or located in the same submarket;
•Significant decrease in properties’ market price;
•Tenant financial problems; and/or
•Comparable market barriers of competitors in the same submarket.
The carrying amount of long-lived assets to be held and used is deemed not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the asset. Triggering events or impairment indicators for long-lived assets to be held and used are assessed by property and include significant fluctuations in estimated net operating income, changes in leasing activity, significant near-term lease expirations, current and historical operating and/or cash flow losses, rental rates, and other market factors.
When conducting the impairment review of our investments in real estate, we assessed the expected undiscounted cash flows based upon numerous factors. These factors include, but are not limited to, the credit quality of our tenants, available market information, known trends, current market/economic conditions that may affect the asset, and historical and forecasted financial and operating information relating to the property, such as net operating income, leasing activity statistics, vacancy projections, renewal percentage, and rent collection rates. If the undiscounted cash flows expected to be generated by a property are less than its carrying amount, the Company determines the fair value of the property and an impairment loss would be recorded to write down the carrying amount of such property to its fair value. During the year ended December 31, 2022, the Company recognized on Wells Fargo Center–South Tower’s investments in real estate of $111.1 million and intangible assets associated with this property of $1.0 million to reduce their carrying amounts to their estimated fair value. While there were no impairment charges on other properties in our portfolio during the year ended December 31, 2022, in light of the evolving office rental business environment and the slowdown in economic growth in the near term because of rising interest rates, decreases in our property valuations may lead to additional impairment charges in our portfolio in the near future. In comparison, during the same period in 2021, none of Brookfield DTLA’s real estate properties were impaired. See “Note 12 - Fair Value Measurements” for a detailed discussion of the factors that were considered when determining the fair value of Wells Fargo Center–South Tower.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company’s investment in its unconsolidated real estate joint venture is also reviewed for impairment quarterly or when conditions exist that may indicate that the decrease in the carrying amount of the investment has occurred and is other than temporary. Triggering events or impairment indicators for the Company’s unconsolidated real estate joint venture include its recurring operating losses, and other events such as significant changes in construction costs, estimated completion dates, intended holding periods, and other factors related to the Beaudry development. Upon determination that an other-than-temporary impairment has occurred, a write-down is recognized to reduce the carrying amount of the investment to its estimated fair value. Based on its review, management concluded that Brookfield DTLA’s investment in its unconsolidated real estate joint venture was not impaired as of December 31, 2022 and 2021.
Cash and Cash Equivalents—
Cash and cash equivalents include cash, deposits with major commercial banks, and short-term investments with an original maturity of three months or less.
Restricted Cash—
Restricted cash consists primarily of deposits for leasing costs, tenant improvements and capital expenditures; real estate taxes and insurance reserves, debt service reserves and other items as required by certain of the Company’s secured debt agreements. It also includes cash accounts controlled by loan administrative agents or lenders pursuant to cash sweep events associated with the loans secured by certain properties. See Note 5 — Secured Debts, Net for details.
Rents, Deferred Rents and Other Receivables, Net —
Deferred rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. The Company offers various types of lease incentives to induce tenants to sign a lease, including free rent lease periods, and various allowances such as cash paid to tenants and for tenant improvements that are the assets of the tenants. The Company records these allowances as tenant inducements, which are included in rents, deferred rents and other receivables in the consolidated balance sheets and amortized as a reduction to lease income on a straight-line basis over the term of the related lease. See Note 3—“Rents, Deferred Rents and Other Receivables, Net.”
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Under ASC Topic 842, Leases, Brookfield DTLA must assess on an individual lease basis whether it is probable that the Company will collect the future lease payments throughout the term of the lease. The Company considers the tenant’s payment history and current credit status when assessing collectibility. If the collectibility of the lease payments is probable at lease commencement, the Company recognizes lease income over the term of the lease on a straight-line basis. During the term of the lease, Brookfield DTLA monitors the credit quality and any related material changes of our tenants by (i) reviewing financial statements of the tenants that are publicly available or that are required to be delivered to us pursuant to the applicable lease, (ii) monitoring news reports regarding our tenants and their respective businesses, (iii) monitoring the tenant’s payment history and current credit status, and (iv) analyzing current economic trends, and reasonable and supportable forecasts of future economic conditions. When collectibility is not deemed probable at the lease commencement date, the Company’s lease income is constrained to the lesser of (i) the income that would have been recognized if collection were probable, or (ii) the lease payments that have been collected from the lessee. If the collectibility assessment changes to probable after the lease commencement date, any difference between the lease income that would have been recognized if collectibility had always been assessed as probable and the lease income recognized to date is recognized as a current-period adjustment to lease income. If the collectibility assessment changes to not probable after the lease commencement date, lease income is reversed to the extent that the lease payments that have been collected from the lessee are less than the lease income recognized to date. Changes to the collectibility of operating leases are recorded as adjustments to lease income in the consolidated statements of operations. As the result of our assessment of the collectibility of amounts due under leases with our tenants, the Company recognized a recovery (reduction) of lease income totaling $0.2 million, $1.1 million and $(8.4) million, respectively, during the years ended December 31, 2022, 2021 and 2020.
Intangible Assets and Liabilities, Net—
Brookfield DTLA evaluates each acquisition of real estate to determine whether the integrated set of assets and activities meets the definition of a business and needs to be accounted for as a business combination. An acquisition of an integrated set of assets and activities that does not meet the definition of a business is accounted for as an asset acquisition. For acquisitions of real estates that are accounted for as business combinations, the Company allocates the acquisition consideration (excluding acquisition costs) to the assets acquired, liabilities assumed, noncontrolling interests, and any previously existing ownership interests at fair value as of the acquisition date. Acquired assets include tangible real estate assets consisting primarily of land, buildings, and tenant improvements, as well as identifiable intangible assets and liabilities, consisting primarily of acquired above- and below-market leases, in-place leases and tenant relationships.
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. Loans assumed in an acquisition are analyzed using current market terms for similar debt.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The value of acquired above- 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 lease income in the consolidated statements of operations over the remaining terms of the associated leases. The value of tenant relationships is amortized as an expense 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 as part of depreciation and amortization in the consolidated statements of operations.
Deferred Charges, Net—
Deferred charges mainly include initial direct costs, primarily commissions related to the leasing of the Company’s office properties, and are stated net of accumulated amortization of $52.0 million as of both December 31, 2022 and 2021.
All leasing commissions paid for new or renewed leases are capitalized and deferred. Deferred leasing costs are amortized on a straight‑line basis over the initial fixed terms of the related leases as part of depreciation and amortization expense in the consolidated statements of operations. Costs to negotiate or arrange a lease, regardless of its outcome, such as tax or legal advice to negotiate lease terms, and lessor costs related to advertising or soliciting potential tenants, are expensed as incurred.
Due From/To Affiliates—
Amounts due from/to affiliates consist of related party receivables from and payables due to affiliates of BPY and Brookfield Corporation, primarily related to lease income, parking revenue, and fees for property, development and asset management and other services. See Note 13—“Related Party Transactions.”
Prepaid and Other Assets, Net—
Prepaid and other assets, net, mainly include interest rate cap contracts.
Secured Debt, Net—
Debt secured by our properties is presented in the consolidated balance sheets net of unamortized debt financing costs.
Debt financing costs totaling $6.8 million, $7.5 million and $5.4 million were amortized during the years ended December 31, 2022, 2021 and 2020, respectively, over the terms of the related loans using the effective interest method and are included as part of interest expense in the consolidated statements of operations. Any unamortized amounts remaining upon early repayment of debt are written off, and the related costs and accumulated amortization are removed from the consolidated balance sheets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Mezzanine Equity—
Mezzanine equity in the consolidated balance sheets 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 as 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 each reporting period. Adjustments to increase or decrease the carrying amount to redemption value are recorded in the consolidated statements of operations as redemption measurement adjustments.
Revenue Recognition—
Lease Income—
Brookfield DTLA’s lease income primarily represents revenue related to agreements for rental of our investments in real estate, subject to ASC Topic 842, Leases. All of the leases in which the Company is the lessor are classified as operating leases. The Company’s leases do not have guarantees of residual value of the underlying assets. We manage risk associated with the residual value of our leased assets by carefully selecting our tenants and monitoring their credit quality throughout their respective lease terms. Upon the expiration or termination of a lease, the Company often has the ability to re-lease the space with an existing tenant or to a new tenant within a reasonable amount of time.
The Company’s lease income is comprised of variable payments including fixed and contingent rental payments and tenant recoveries. Fixed contractual payments from the Company’s leases are recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of lease income recognized during the period. Straight-line rental revenue is commenced when the tenant assumes control of the leased premises.
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 as lease income in the consolidated statements of operations only after the tenant sales thresholds have been achieved.
Tenant recoveries, including reimbursements of utilities, repairs and maintenance, common area expenses, real estate taxes and insurance, and other operating expenses, are recognized as part of lease income in the consolidated statements of operations in the period when the applicable expenses are incurred and the tenant’s obligation to reimburse us arises.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Some of the Company’s leases have termination options that allow the tenant to terminate the lease prior to the end of the lease term under certain circumstances. Termination options generally become effective half way or further into the original lease term and require advance notification from the tenant and payment of a termination fee that reimburses the Company for a portion of the remaining rent under the original lease term and the undepreciated lease inception costs such as commissions, tenant improvements and lease incentives. Termination fees are recognized as part of lease income in the consolidated statements of operations at the later of when the tenant has vacated the space or the lease has expired, a fully executed lease termination agreement has been delivered to the Company, the amount of the fee is determinable and collectability of the fee is reasonably assured.
Parking Revenue—
Parking revenue is recognized in accordance with ASC Topic 606, Revenue from Contracts with Customers, when the services are provided and the performance obligations are satisfied, which normally occurs at a point in time.
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, commencing with its tax period ended December 31, 2013. Brookfield DTLA conducts its operations with the intent 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 makes distributions to its stockholders, if any, that generally equal or exceed its taxable income.
Brookfield DTLA has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). A TRS is permitted to engage in activities that a REIT cannot engage in directly, such as performing non‑customary services for the Company’s tenants, holding assets that the Company cannot hold directly and conducting certain affiliate transactions. A TRS is subject to both federal and state income taxes. During the years ended December 31, 2022, 2021 and 2020, the Company’s various TRS recorded income tax expenses of $0.4 million, $0.4 million and $0.8 million respectively.
As of December 31, 2022 and 2021, Brookfield DTLA had net operating loss carryforwards (“NOLs”) totaling $474.0 million and $406.4 million, respectively. The NOLs generated prior to January 1, 2018 will begin to expire in 2033, while NOLs generated in tax years beginning January 1, 2018 or later have an indefinite carryforward period. Brookfield DTLA does not expect to utilize these NOLs and as a result, no deferred tax assets have been established as of December 31, 2022 and 2021.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2022 and 2021, and does not expect its unrecognized tax benefits balance to change during the next 12 months. As of December 31, 2022, Brookfield DTLA’s 2018, 2019, 2020 and 2021 tax years remain open under the normal statute of limitations and may be subject to examination by federal, state and/or local authorities.
Derivative Financial Instruments—
Brookfield DTLA uses interest rate swap and cap contracts to manage interest rate fluctuation risk by limiting the impact of changes in LIBOR and SOFR on certain of its debt. Interest rate swaps involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps involve the receipt of variable-rate amounts beyond a specified strike price over the life of the agreements without exchange of the underlying principal amount. The Company believes these 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 as part of interest expense in the consolidated statements 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 statements 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 the consolidated statement of operations in the period the determination is made. Interest rate swap assets 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 sheets. In September 2020, in conjunction with the extinguishment of our loans that previously encumbered EY Plaza, the Company terminated the related LIBOR-based interest rate swap contracts.
Additionally, Brookfield DTLA uses interest rate cap contracts to limit impact of changes in LIBOR on certain of its debt. The Company does not elect hedge accounting for these contracts, and as such, changes in fair value are recorded in the period of change as part of other expenses in the consolidated statements of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other Financial Instruments—
Brookfield DTLA’s other financial instruments that are exposed to concentrations of credit risk consist primarily of cash and lease receivables. Brookfield DTLA assesses collectibility of lease receivables by monitoring the credit quality and any related material changes of our tenants. This involves (i) reviewing financial statements of the tenants that are publicly available or that are required to be delivered to us pursuant to the applicable lease, (ii) monitoring news reports regarding our tenants and their respective businesses, (iii) monitoring the tenant’s payment history and current credit status, and (iv) analyzing current economic trends. As a consequence, management believes that its lease 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.
Fair Value Measurements—
Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis, such as interest rate swaps and cap contracts. In addition, the Company is required to measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired long-lived assets such as investments in real estate and unconsolidated real estate joint venture). Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date and, in many cases, requires management to make a number of significant judgments. Based on the observable inputs used in the valuation techniques, Brookfield DTLA classifies its assets and liabilities measured and disclosed at fair value in accordance with a three-level hierarchy (i.e., Level 1, Level 2 and Level 3) established under ASC Topic 820, Fair Value Measurement.
The Company estimates the fair value of its debt by calculating the credit-adjusted present value of principal and interest payments for each loan. The calculation incorporates observable market interest rates, which management considers to be Level 2 inputs, assumes that each loan will be outstanding until maturity, and excludes any options to extend the maturity date of the loan available per the terms of the loan agreement, if any. See Note 11—“Financial Instruments.”
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Recently Issued Accounting Literature
New Accounting Pronouncements Adopted
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides accounting relief from the future impact of the cessation of LIBOR by, among other things, providing optional expedients to treat contract modifications resulting from such reference rate reform as a continuation of the existing contract and for hedging relationships to not be de-designated resulting from such changes provided certain criteria are met. The guidance is effective beginning on March 12, 2020, and we may elect to apply the amendments prospectively through December 31, 2022 (the “sunset date”). In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which amends the scope of ASU 2020-04 to include derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. ASU 2021-01 became effective upon issuance and may be applied on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 or prospectively for contract modifications made on or before December 31, 2022 (the “sunset date”). The Company adopted ASU 2020-04 and ASU 2021-01 on a prospective basis on January 1, 2022. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which defers the sunset date of ASC 848, Reference Rate Reform, from December 31, 2022 to December 31, 2024. ASU 2022-06 is effective immediately for all entities. At the time of adoption, the guidance did not have a material impact on the Company’s consolidated financial statements. The Company will continue to track the exposure as of each reporting period and to assess the impact as the reference rate transition occurs through the cessation of LIBOR.
Accounting Pronouncements Issued But Not Yet Adopted
The Company does not anticipate any recently issued accounting standards pronouncements to have a significant impact on the consolidated financial position or results of operations in these or future consolidated financial statements.
Segment Reporting
Brookfield DTLA currently operates as one reportable segment, which includes the operation and management of its six commercial office properties and one retail property. Each of Brookfield DTLA’s 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 properties have similar economic characteristics and provide similar products and services to tenants. As a result, Brookfield DTLA’s properties are aggregated into a single reportable segment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Management also views the unconsolidated real estate joint venture, Fund IV, as a separate operating segment. This joint venture engages in the development of the multifamily residential real estate property, Beaudry, which has different economic characteristics compared to commercial office and retail properties described above. The progress of the development project, funding requirements, projected returns and other discrete financial information of the joint venture are regularly reviewed by management to assess performance. However, since this joint venture is not considered material to the overall results of the Company, it is not a reportable segment.
Note 3—Rents, Deferred Rents and Other Receivables, Net
Brookfield DTLA’s rents, deferred rents and other receivables are comprised of the following:
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Straight-line and other deferred rents | $ | 114,414 | $ | 108,913 | |||||||
| Tenant inducements receivable | 31,689 | 28,445 | |||||||||
| Tenant receivables | 2,406 | 3,316 | |||||||||
| Other receivables | 1,588 | 362 | |||||||||
| Rents, deferred rents and other receivables, gross | 150,097 | 141,036 | |||||||||
| Less: accumulated amortization of tenant inducements | 14,650 | 15,411 | |||||||||
| Rents, deferred rents and other receivables, net | $ | 135,447 | $ | 125,625 | |||||||
See Note 2 “Basis of Presentation and Summary of Significant Accounting Policies — Significant Accounting Policies — Rents, Deferred Rents and Other Receivables, Net” for a discussion of assessments regarding the collectibility of rents and deferred rent receivables and related adjustments made during the year ended December 31, 2022, 2021 and 2020.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 4—Intangible Assets and Liabilities
Brookfield DTLA’s intangible assets and liabilities are summarized as follows:
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Intangible Assets | |||||||||||
| In-place leases | $ | 32,678 | $ | 41,422 | |||||||
| Tenant relationships | 2,151 | 6,432 | |||||||||
| Above-market leases | 8,231 | 16,734 | |||||||||
| Intangible assets, gross | 43,060 | 64,588 | |||||||||
| Less: accumulated amortization | 32,993 | 48,565 | |||||||||
| Intangible assets, net | $ | 10,067 | $ | 16,023 | |||||||
| Intangible Liabilities | |||||||||||
| Below-market leases | $ | 18,670 | $ | 33,416 | |||||||
| Less: accumulated amortization | 15,765 | 28,961 | |||||||||
| Intangible liabilities, net | $ | 2,905 | $ | 4,455 | |||||||
A summary of the effect of amortization/accretion of intangible assets and liabilities reported in the consolidated financial statements is as follows:
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Lease income | $ | 141 | $ | (206) | $ | (1,331) | |||||||||||
| Depreciation and amortization expense | $ | 3,562 | $ | 4,267 | $ | 6,217 | |||||||||||
As of December 31, 2022, the estimated amortization/accretion of intangible assets and liabilities in future periods is as follows:
| In-Place Leases | Other Intangible Assets | Intangible Liabilities | |||||||||||||||
| 2023 | $ | 1,546 | $ | 1,800 | $ | 730 | |||||||||||
| 2024 | 920 | 1,752 | 280 | ||||||||||||||
| 2025 | 840 | 1,112 | 265 | ||||||||||||||
| 2026 | 585 | 443 | 246 | ||||||||||||||
| 2027 | 115 | 3 | 154 | ||||||||||||||
| Thereafter | 918 | 33 | 1,229 | ||||||||||||||
| Total future amortization/accretion of intangibles | $ | 4,924 | $ | 5,143 | $ | 2,905 | |||||||||||
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 5—Secured Debt, Net
Brookfield DTLA’s secured debt is as follows as of December 31, 2022:
| Maturity Date | Contractual Interest Rates | Principal Amount as of December 31, | |||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Variable-Rate Loans: | |||||||||||||||||||||||
| Wells Fargo Center–North Tower | 10/9/2023 | SOFR + 1.76% | $ | 400,000 | $ | 400,000 | |||||||||||||||||
| Wells Fargo Center–North Tower | 10/9/2023 | SOFR + 4.11% | 65,000 | 65,000 | |||||||||||||||||||
| Wells Fargo Center–North Tower (1) | 10/9/2023 | SOFR + 5.11% | 35,000 | 35,000 | |||||||||||||||||||
| Wells Fargo Center–South Tower (2) | 11/4/2023 | SOFR + 1.80% | 265,447 | 260,796 | |||||||||||||||||||
| EY Plaza | 10/9/2023 | LIBOR + 2.86% | 275,000 | 275,000 | |||||||||||||||||||
| EY Plaza | 10/9/2023 | LIBOR + 6.85% | 30,000 | 30,000 | |||||||||||||||||||
| Gas Company Tower (4) | 2/9/2023 | LIBOR + 1.89% | 350,000 | 350,000 | |||||||||||||||||||
| Gas Company Tower (4) | 2/9/2023 | LIBOR + 5.00% | 65,000 | 65,000 | |||||||||||||||||||
| Gas Company Tower (4) | 2/9/2023 | LIBOR + 7.75% | 50,000 | 50,000 | |||||||||||||||||||
| Total variable-rate loans | 1,535,447 | 1,530,796 | |||||||||||||||||||||
| Fixed-Rate Debt: | |||||||||||||||||||||||
| BOA Plaza | 9/1/2024 | 4.05% | 400,000 | 400,000 | |||||||||||||||||||
| FIGat7th (5) | 3/1/2023 | 3.88% | 58,500 | 58,500 | |||||||||||||||||||
| Total fixed-rate debt | 458,500 | 458,500 | |||||||||||||||||||||
| Total secured debt, excluding debt in default | 1,993,947 | 1,989,296 | |||||||||||||||||||||
| Debt in Default: | |||||||||||||||||||||||
| 777 Tower (3) | 12/30/2022 | LIBOR + 1.60% | 243,594 | 231,842 | |||||||||||||||||||
| 777 Tower (3) | 12/30/2022 | LIBOR + 4.15% | 45,345 | 43,158 | |||||||||||||||||||
| Total debt in default | 288,939 | 275,000 | |||||||||||||||||||||
| Total secured debt | 2,282,886 | 2,264,296 | |||||||||||||||||||||
| Less: unamortized debt financing costs | 3,313 | 8,375 | |||||||||||||||||||||
| Total secured debt, net | $ | 2,279,573 | $ | 2,255,921 | |||||||||||||||||||
__________
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(1)Brookfield Corporation owns a significant interest in a company whose subsidiary is the lender of this loan. See Note 13—“Related Party Transactions” for details.
(2)As of December 31, 2022, a future advance amount of $24.6 million is available under this loan that can be drawn to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements.
(3)Starting December 2022, the mortgage and mezzanine loans secured by 777 Tower were in default for failing to enter into interest rate cap contracts. The lender may accelerate the maturity date of the debt. See “Debt Compliance” below for details.
(4)The Company did not exercise the option to extend the maturity of the loans secured by Gas Company Tower and therefore on February 9, 2023, the Gas Company Tower Loans matured and, since this loan has not been repaid, an event of default has occurred and is continuing. See “Debt Compliance” below for details.
(5)In March 2023, the lender granted a short-term extension of the maturity date from March 1, 2023 to April 3, 2023.
The weighted average interest rate of the Company’s secured debt was 5.82% and 2.91% as of December 31, 2022 and 2021, respectively. As of December 31, 2022, the weighted average term to maturity of our debt (excluding debt in default as of December 31, 2022) was approximately one year.
Debt Maturities
The following table provides information regarding the Company’s minimum future principal payments due on the Company’s secured debt as of December 31, 2022:
2023 (2) | $ | 1,593,947 | |||
| 2024 | 400,000 | ||||
| Total | $ | 1,993,947 | |||
Principal loan balances with maturity date prior to December 31, 2022 (1) | 288,939 | ||||
| Total secured debt | $ | 2,282,886 | |||
(1) Represents the aggregate principal balance as of December 31, 2022 of the mortgage and mezzanine loans secured by 777 Tower, which are in default. See “Debt Compliance” below for details.
(2) Includes the aggregate principal balance of the mortgage and mezzanine loans secured by the Gas Company Tower of $465.0 million, which are in maturity default effective February 9, 2023. See “Debt Compliance” below for details.
Excluding the debt secured by 777 Tower that are in default, as of December 31, 2022, $1,593.9 million of the Company’s secured debt may be prepaid without penalty (including principal balance of the mortgage and mezzanine loans secured by the Gas Company Tower of $465.0 million, which are in maturity default effective February 9, 2023), and $400.0 million may be defeased (as defined in the underlying loan agreements).
Non-Recourse Carve Out Guarantees
All of our secured debt is subject to “non-recourse carve out” guarantees that expire upon elimination of the underlying loan obligations. In connection with 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, if certain triggering events (as defined in the loan agreements) occur.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Debt Compliance
Mortgage and Mezzanine Debt in Default
See Note 2 “Basis of Presentation and Summary of Significant Accounting Policies — Significant Accounting Policies — Liquidity and Going Concern” for detailed discussion of the 777 Tower and Gas Company Tower loans that are in currently default.
Certain loan agreements held by Brookfield DTLA contain debt yield and debt service coverage ratios. As of December 31, 2022, excluding the secured debt that are in default as of the issuance date of this Annual Report (the 777 Tower Loans and Gas Company Tower Loans), Brookfield DTLA was meeting or exceeding these financial ratios, with the exception of the loans secured by Wells Fargo Center—South Tower and Wells Fargo Center—North Tower that did not meet their respective minimum debt yield ratio.
Wells Fargo Center–South Tower —
Pursuant to the terms of the Wells Fargo Center–South Tower mortgage loan agreement, effective September 2020, a cash sweep event commenced as the borrower’s debt yield ratio was under the minimum debt yield ratio. While this does not constitute an Event of Default under the terms of the mortgage loan agreement, any excess operating cash flows are currently swept to a cash account controlled by the loan administrative agent. Funds within this account shall be applied to the borrower's approved operating expenses, capital expenditures and leasing costs; property taxes and insurance; interest and any other amounts due and payable under the loan and interest rate cap contracts; and fees and expenses due to the loan administrative agent.
Wells Fargo Center–North Tower —
As of December 31, 2022, the borrower’s debt yield ratio was under the minimum debt yield ratio. While this does not constitute an Event of Default under the terms of the mortgage loan agreement, following the occurrence of such debt yield event, any excess operating cash flows are to be swept to a cash account controlled by the loan administrative agent. Funds within this account shall be applied to the borrower's approved operating expenses; tenant improvement costs and leasing commissions (capped at the leasing reserve deposit amount as specified in the loan agreements); property taxes and insurance; interest and any other amounts due and payable under the loan and interest rate cap contracts; reserve accounts; and fees and expenses due to the loan administrative agent. The cash sweep started in January 2022.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
London Interbank Offered Rate (“LIBOR”) Transition
The chief executive of the United Kingdom Financial Conduct Authority (“FCA”), which regulates LIBOR, previously announced that the FCA intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In response, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee (“ARRC”) which identified the SOFR as its preferred alternative to USD-LIBOR in derivatives and other financial contracts. In November 2020, the Intercontinental Exchange (“ICE”) Benchmark Administration Limited, the benchmark administrator for USD-LIBOR rates, proposed extending the publication of certain commonly-used USD-LIBOR settings until June 30, 2023 and the FCA issued a statement supporting such proposal. In connection with this proposal, certain U.S. banking regulators issued guidance strongly encouraging banks to generally cease entering into new contracts referencing USD-LIBOR as soon as practicable and in any event by December 31, 2021.
As of December 31, 2022, we have outstanding variable debt and interest rate cap contracts that are indexed to LIBOR. All of the Company’s variable debt contracts contain fallback language that lay out the process through which a replacement rate can be identified or used when LIBOR is not available. The LIBOR interest rate index for the debt secured by Wells Fargo Center–North Tower and Wells Fargo Center–South Tower was replaced by SOFR in October 2022 and November 2022, respectively.
The discontinuation of LIBOR will not affect our ability to borrow or maintain already outstanding borrowings or interest rate caps, but if our contracts indexed to LIBOR are converted to SOFR, the differences between LIBOR and SOFR, plus the recommended spread adjustment, could result in interest costs that are higher than if LIBOR remained available.
Note 6—Accounts Payable and Other Liabilities
Brookfield DTLA’s accounts payable and other liabilities are comprised of the following:
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Tenant improvements and inducements payable | $ | 23,644 | $ | 32,973 | |||||||
| Unearned rent and tenant payables | 27,136 | 31,249 | |||||||||
| Accrued capital expenditures and leasing commissions | 6,162 | 7,422 | |||||||||
| Accrued expenses and other liabilities | 14,087 | 5,968 | |||||||||
| Accounts payable and other liabilities | $ | 71,029 | $ | 77,612 | |||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 7—Noncontrolling Interests
Mezzanine Equity Component
Mezzanine equity in the consolidated balance sheets is comprised of the following:
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, 2022 and 2021, 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.
Series A Preferred Interest. The Series A preferred interest in Fund II is indirectly held by the Company through wholly-owned subsidiaries (subject to certain REIT accommodation preferred interests).
Series A-1 Preferred Interest. The Series A-1 preferred interest is held by DTLA Holdings or wholly-owned subsidiaries of DTLA Holdings.
Senior Participating Preferred Interest. Brookfield DTLA Fund Properties III LLC (“Fund III”), a wholly-owned subsidiary of DTLA Holdings, issued a senior participating preferred interest to DTLA Holdings in connection with the formation of Brookfield DTLA and the MPG acquisition.
Series B Preferred Interest. 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 Fund II, which directly or indirectly owns the Brookfield DTLA properties. Pursuant to the amendments to the Limited Liability Company Agreement of Fund II effective November 2020, May 2022 and November 2022, such contribution commitment by DTLA Holdings increased by $50.0 million, $40.0 million and $75.0 million, respectively, to $425.0 million. As of December 31, 2022, $88.6 million is available to the Company under this commitment for future funding. The Series B preferred interest in Fund II held by DTLA Holdings is senior to the interest in Fund II indirectly held by the Company and has a priority on distributions senior to the equity securities of such subsidiaries held indirectly by the Company and, as a result, rank senior to the Series A preferred stock. The Series B preferred interest in Fund II may limit the amount of funds available to the Company for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest are held by a noncontrolling interest holder. Series A preferred stock, Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest are classified as 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. See Note 8—“Mezzanine Equity.”
Stockholders’ Deficit Component
Common interests held by DTLA Holdings are presented as “noncontrolling interests” as part of Stockholders’ Deficit in the consolidated balance sheets.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 8—Mezzanine Equity
A summary of the change in mezzanine equity is as follows:
| 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, 2019 | 9,730,370 | $ | 428,480 | $ | 418,029 | $ | 22,362 | $ | 185,352 | $ | 1,054,223 | |||||||||||||||||||||||||||
| Issuance of Series B preferred interest | 47,850 | 47,850 | ||||||||||||||||||||||||||||||||||||
| Dividends | 18,548 | 18,548 | ||||||||||||||||||||||||||||||||||||
| Preferred returns | 17,213 | 17,708 | 34,921 | |||||||||||||||||||||||||||||||||||
| Redemption measurement adjustments | (1,580) | (1,580) | ||||||||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | 777 | 777 | ||||||||||||||||||||||||||||||||||||
| Repurchases of noncontrolling interests | (34,218) | (34,218) | ||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (1,146) | (17,865) | (19,011) | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 9,730,370 | 447,028 | 435,242 | 20,413 | 198,827 | 1,101,510 | ||||||||||||||||||||||||||||||||
| Issuance of Series B preferred interest | 25,500 | 25,500 | ||||||||||||||||||||||||||||||||||||
| Dividends | 18,549 | 18,549 | ||||||||||||||||||||||||||||||||||||
| Preferred returns | 17,212 | 16,063 | 33,275 | |||||||||||||||||||||||||||||||||||
| Redemption measurement adjustments | 1,028 | 1,028 | ||||||||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | 629 | 629 | ||||||||||||||||||||||||||||||||||||
| Repurchases of noncontrolling interests | (45,306) | (45,306) | ||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (879) | (17,794) | (18,673) | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 9,730,370 | 465,577 | 452,454 | 21,191 | 177,290 | 1,116,512 | ||||||||||||||||||||||||||||||||
| Issuance of Series B preferred interest | 47,564 | 47,564 | ||||||||||||||||||||||||||||||||||||
| Dividends | 18,549 | 18,549 | ||||||||||||||||||||||||||||||||||||
| Preferred returns | 17,212 | 14,432 | 31,644 | |||||||||||||||||||||||||||||||||||
| Redemption measurement adjustments | (8,248) | (8,248) | ||||||||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | 288 | 288 | ||||||||||||||||||||||||||||||||||||
| Repurchases of noncontrolling interests | (46,975) | (46,975) | ||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (1,554) | (9,825) | (11,379) | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | 9,730,370 | $ | 484,126 | $ | 469,666 | $ | 11,677 | $ | 182,486 | $ | 1,147,955 | |||||||||||||||||||||||||||
Series A Preferred Stock
As of December 31, 2022, the Series A preferred stock is reported at its redemption value of $484.1 million calculated using the redemption price of $243.3 million plus $240.9 million of accumulated and unpaid dividends on such Series A preferred stock through December 31, 2022.
No dividends were declared on the Series A preferred stock during the years ended December 31, 2022, 2021 and 2020. Dividends on the Series A preferred stock are cumulative, and therefore, will continue to accrue at an annual rate of $1.90625 per share.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Series A preferred stock does not have a stated maturity and is not subject to any sinking fund or mandatory redemption provisions. We may, at our option, redeem the Series A preferred stock, in whole or in part, for $25.00 per share, plus all accumulated and unpaid dividends on such Series A preferred stock up to and including the redemption date. Other than as required under the “Distribution Waterfall” in this footnote, there is no commitment or obligation on the part of Brookfield DTLA or DTLA Holdings to redeem or make distributions to the Series A preferred stock. The Series A preferred stock is not convertible into or exchangeable for any other property or securities of Brookfield DTLA.
Noncontrolling Interests
There is no commitment or obligation on the part of Brookfield DTLA or DTLA Holdings to redeem the Preferred Interests.
Series A-1 Preferred Interest
As of December 31, 2022, the Series A-1 preferred interest is reported at its redemption value of $469.7 million calculated using its liquidation value of $225.7 million plus $243.9 million of unpaid interest through December 31, 2022. Interest earned on the Series A-1 preferred interest is cumulative and accrues at an annual rate of 7.625%.
Senior Participating Preferred Interest
As of December 31, 2022, the senior participating preferred interest is reported at its redemption value of $11.7 million using the 4.0% participating interest in the residual value of BOA Plaza, EY Plaza and FIGat7th upon disposition or liquidation.
Series B Preferred Interest
As of December 31, 2022, the Series B preferred interest is reported at its redemption value of $182.5 million calculated using its liquidation value of $175.4 million plus $7.1 million of unpaid preferred returns on such Series B preferred interest through December 31, 2022. Brookfield DTLA is entitled to receive a market rate of return on its contributions, currently 9.0% as of December 31, 2022.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Distribution Waterfall
Brookfield DTLA may, at its discretion, distribute all or a portion of its available cash (as defined in the limited liability company agreement of Fund II) in the following priority: (1)
| First to: | Series B preferred interest unpaid preferred return | ||||
| Second to: | Series B preferred interest unreturned preferred capital | ||||
| Third, proportionally in respect of unpaid preferred return to: | |||||
| Series A preferred interest unpaid preferred return (2) | |||||
| Series A-1 preferred interest unpaid preferred return (3) | |||||
| Fourth, proportionally in respect of unreturned capital to: (2) (4) | |||||
| Series A preferred interest unreturned capital | |||||
| Series A-1 preferred interest unreturned capital (3) | |||||
| And fifth to: | Common interests to Brookfield DTLA and DTLA Holdings (5) | ||||
__________
(1)Cash available to Fund II arises from its interests in its investments. Fund II owns indirectly all of the interests in Gas Company Tower, Wells Fargo Center–South Tower, Wells Fargo Center–North Tower, 777 Tower and an interest in the 755 South Figueroa development site which will decrease as capital is called to fund the development. See Note 1 “Organization and Description of Business”. In addition, Fund II owns 96% indirectly of the interests in EY Plaza, FIGat7th and BOA Plaza (the “Fund III Assets”). DTLA Holdings owns the remaining 4% interest in the Fund III Assets. The amounts due to DTLA Holdings on the senior participating preferred interest for its preferred return and unreturned capital in Fund III were fully paid as of December 31, 2015. All of Fund II’s interests in these assets are subject to certain REIT accommodation preferred interests. This waterfall may be effected by future equity issuances in respect of Fund II, Fund III, Fund IV, or their subsidiaries, and are subject to all of the indebtedness of the entities.
(2)The Fund II Series A preferred interest is comprised of two parts, one is a preferred component with the analogous economic terms as the Company’s Series A Preferred Stock and a common component, which is junior to the preferred component of the Series A interest on analogous terms to the relationship between the Company’s Series A Preferred Stock and Common Stock. The Series A preferred interest is junior to the Fund II Series B preferred interest. See Note 7 “Noncontrolling Interests — Series B Preferred Interest”. Amounts paid in respect of the Fund II’s Series A preferred interest are generally available upon distribution to the Company for further distribution in respect of the Company’s Series A Preferred Stock, and, when and if distributed in respect of the Series A Preferred Stock, will be distributed first to accumulated and unpaid dividends and to reduce its unreturned liquidation capital.
(3)DTLA Holdings in its capacity as the holder of the Series A-1 preferred interest can waive receipt of distributions that would otherwise be made to it in respect of the Series A-1 preferred interest and such amounts shall be paid instead to the Series A preferred interest or as otherwise provided by the subsequent provisions of the waterfall. Any amounts waived by DTLA Holdings shall not reduce the Series A-1 unpaid preferred return or unreturned capital.
(4)Applicable if distribution is (a) in connection with a liquidating event or redemption or (b) at the election of Brookfield DTLA.
(5)Based on the interests of the Series A and Series B interests of the Fund after repayment of the preferred capital portion of each of them, until the Senior A junior unreturned liquidation capital is reduced to zero.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 9—Stockholders’ Deficit
Common Stock
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, 2022 and 2021, 1,000 shares of common stock were issued and outstanding. No dividends were declared on the Company’s common stock during the years ended December 31, 2022, 2021 and 2020.
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.
Additional Paid-in Capital
During the years ended December 31, 2022, 2021 and 2020, Brookfield DTLA recorded contributions to additional paid-in capital totaling $1.0 million, $1.0 million and $4.8 million, respectively, from DTLA Holdings, which were used for general corporate purposes.
Note 10—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:
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Balance at beginning of year | $ | — | $ | — | $ | (2,341) | |||||||||||
| Net unrealized gains arising during the year | — | — | 562 | ||||||||||||||
| Reclassification of losses related to terminated interest rate swaps to other expenses included in net income | — | — | 1,779 | ||||||||||||||
| Net changes | — | — | 2,341 | ||||||||||||||
| Balance at end of year | $ | — | $ | — | $ | — | |||||||||||
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 11—Financial Instruments
Derivative Financial Instruments
The following table presents the interest rate cap contracts pursuant to the terms of certain of its loan agreements as of December 31, 2022:
| Notional Amount | Strike Rate (1) | Expiration Date | |||||||||||||||||||||
| Interest Rate Caps: | |||||||||||||||||||||||
| Wells Fargo Center–North Tower | $ | 400,000 | 3.40 | % | (1) | 10/15/2023 | |||||||||||||||||
| Wells Fargo Center–North Tower | 65,000 | 3.40 | % | (1) | 10/15/2023 | ||||||||||||||||||
| Wells Fargo Center–North Tower | 35,000 | 3.40 | % | (1) | 10/15/2023 | ||||||||||||||||||
| Wells Fargo Center–South Tower | 263,219 | 2.87 | % | (1) | 11/4/2023 | ||||||||||||||||||
| EY Plaza | 275,000 | 6.02 | % | (2) | 10/15/2023 | ||||||||||||||||||
| EY Plaza | 30,000 | 6.02 | % | (2) | 10/15/2023 | ||||||||||||||||||
| Gas Company Tower (3) | 350,000 | 4.00 | % | (2) | 2/15/2023 | ||||||||||||||||||
| Gas Company Tower (3) | 65,000 | 4.00 | % | (2) | 2/15/2023 | ||||||||||||||||||
| Gas Company Tower (3) | 50,000 | 4.00 | % | (2) | 2/15/2023 | ||||||||||||||||||
| Total derivatives not designated as cash flow hedging instruments | $ | 1,533,219 | |||||||||||||||||||||
__________
(1)The index used for these derivative financial instruments is 1-Month SOFR.
(2)The index used for these derivative financial instruments is 1-Month LIBOR.
(3)As of the issuance date of this Annual Report, debt secured by Gas Company Tower is in maturity default, and the related interest rate cap contracts expired. See Note 18 “Subsequent Event” for details.
A summary of the fair value of Brookfield DTLA’s derivative financial instruments is as follows:
| Fair Value as of December 31, | ||||||||||||||||||||
| Balance Sheet Location | 2022 | 2021 | ||||||||||||||||||
| Derivatives not designated as hedging instruments: Interest rate caps | Prepaid and other assets, net | $ | 10,262 | $ | 46 | |||||||||||||||
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the gain recorded on interest rate swaps for the year ended December 31, 2020:
| Gain Recognized in OCL | Loss Reclassified from AOCL to Consolidated Statements of Operations | |||||||||||||
| Derivatives designated as cash flow hedging instruments: | ||||||||||||||
| For the year ended: | ||||||||||||||
| December 31, 2020 | $ | 562 | $ | (1,779) | (1) | |||||||||
__________
(1)Included in other expenses in the consolidated statements of operations.
In September 2020, in conjunction with the extinguishment of our loans that previously encumbered EY Plaza, the Company terminated the related LIBOR-based interest rate swap contracts.
Unrealized (loss) gain on interest rate cap contracts recognized in the consolidated statements of operations during the years ended December 31, 2022, 2021 and 2020 were $(1,832) thousand, $41 thousand and $(127) thousand, respectively.
Other Financial Instruments
Brookfield DTLA’s other financial instruments that are exposed to concentrations of credit risk consist primarily of bank deposits and rents receivable. Brookfield DTLA places its bank deposits with major commercial banks. Cash balances with any one institution may at times be in excess of the Federal Deposit Insurance Corporation-insured limit of $250,000.
See Note 2 “Basis of Presentation and Summary of Significant Accounting Policies — Rents, Deferred Rents and Other Receivables, Net” for a discussion of assessments regarding the collectibility of rents and deferred rents receivable and related adjustments made during the year ended December 31, 2022, 2021 and 2020.
Note 12—Fair Value Measurements and Disclosures
ASC Topic 820, Fair Value Measurement, defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the “exit price”).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ASC Topic 820 established a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three categories:
| • | Level 1— | Quoted prices (unadjusted) in active markets that are accessible at the measurement date. | |||||||||
| • | Level 2— | Observable prices that are based on inputs not quoted in active markets but corroborated by market data. | |||||||||
| • | Level 3— | Unobservable prices that are used when little or no market data is available. | |||||||||
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. Brookfield DTLA utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible, as well as consider counterparty credit risk in its assessment of fair value.
Recurring Measurements—
The fair value of Brookfield DTLA’s interest rate swap contracts was determined using widely accepted valuation techniques, including discounted cash flow analyses 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. The Company has incorporated credit valuation adjustments to appropriately reflect both our and the respective counterparty’s non‑performance risk in the fair value measurements. The interest rate swap contracts were terminated in September 2020. See Note 11 “Financial Instruments.”
The fair value of interest rate cap contracts was $10,262 thousand and $46 thousand as of December 31, 2022 and 2021, respectively. The Company classified them as Level 2 in the fair value hierarchy.
Nonrecurring Measurements—
As of December 31, 2022, assets measured at fair value on a nonrecurring basis on our consolidated balance sheets consisted of real estate assets and their associated intangible assets that have been written down to estimated fair value for impairment losses. Such impairment losses of $112.1 million were related to Wells Fargo Center — South Tower. In comparison, as of December 31, 2021, the Company did not have any assets or liabilities that are measured at fair value on a nonrecurring basis. Refer to Note 2—“Basis of Presentation and Summary of Significant Accounting Policies—Impairment Review” for further discussion.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company uses the discounted cash flow method to assess the fair value of investments in real estate, including Wells Fargo Center — South Tower. All inputs used to value investments in real estate fall within Level 3 of the fair value hierarchy. Even if observable market data is available, such inputs are considered Level 3 if any significant data point used in the valuation process is not observable. When estimating the fair value of our investments in real estate, we assessed the expected undiscounted cash flows based upon numerous factors. These factors include, but are not limited to, available market information, known trends, current market/economic conditions that may affect the asset, and historical and forecasted financial and operating information relating to the property, such as net operating income, leasing activity statistics, vacancy projections, renewal percentage, and rent collection rates. Fair value is primarily determined by discounting the expected future cash flows, generally over a term of 10 years including a terminal value based on the application of a capitalization rate to estimated year 11 cash flows. The measurement of the fair value of the Company's investment is impacted by the discount rate and terminal capitalization rate utilized in the discounted cash flows model which are significant unobservable inputs. As of December 31, 2022, the discount and terminal capitalization rates used in the discounted cash flows model of Wells Fargo Center — South Tower, which was measured at fair value on a nonrecurring basis, were 9.3% and 5.8%, respectively.
The following table presents the carrying amounts of assets that were still held and had fair value adjustments measured on a nonrecurring basis as of December 31, 2022:
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||
| Investments in Real Estate Assets | $ | 311,066 | $ | — | $ | — | $ | 311,066 | ||||||||||||||||||
Disclosures about Fair Value of Financial Instruments—
Secured debt — The Company estimates the fair value of its debt by calculating the credit-adjusted present value of principal and interest payments for each loan. The calculation incorporates observable market interest rates (Level 2 inputs), assumes that each loan will be outstanding until maturity, and excludes any options to extend the maturity date of the loan available per the terms of the loan agreement, if any. The table below presents the estimated fair value and carrying value of the Company’s secured debt included in liabilities:
| As of December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Fair Value | $ | 2,265,201 | $ | 2,263,160 | ||||||||||
| Carrying value | $ | 2,279,573 | $ | 2,530,921 | ||||||||||
Other financial instruments — As of December 31, 2022 and 2021, the carrying values of cash and cash equivalents, restricted cash, tenant and other receivables, other assets, accounts payable and other liabilities, and balances with affiliates approximate fair value because of the short-term nature of these instruments.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 13—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. The following table presents the basis of fees incurred to the Manager and Brookfield affiliates during the years ended December 31, 2022, 2021 and 2020:
| Fee Type | Affiliate | Fee Description | ||||||
| Property management | The Manager | 2.75% of rents collected (as defined in the management agreements) | ||||||
| Asset management | BPY and Brookfield Corporation | 0.75% of DTLA Holdings’ invested equity in Brookfield DTLA’s properties | ||||||
| Leasing | The Manager and Brookfield affiliates | 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 | The Manager | 3.00% of hard and soft construction costs | ||||||
| Development management | Affiliate of the Manager | 3.00% of hard and soft construction costs | ||||||
| Entitlement | Affiliate of the Manager | 20.00% of the entitlement costs incurred by BOA Plaza, if the entitlement budget is less than $3,000,000 | ||||||
A summary of fees and costs incurred by the applicable Brookfield DTLA subsidiaries under these arrangements is as follows:
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Property management | $ | 8,045 | $ | 8,037 | $ | 8,035 | |||||||||||
| Asset management (2) | $ | 6,346 | $ | 6,166 | $ | 6,040 | |||||||||||
| Leasing | $ | 1,549 | $ | 1,607 | $ | 2,105 | |||||||||||
| Construction management | $ | 1,148 | $ | 400 | $ | 3,239 | |||||||||||
| Development management (1) | $ | 1,230 | $ | 1,881 | $ | 1,007 | |||||||||||
| Entitlement | $ | 111 | $ | 639 | $ | — | |||||||||||
| General, administrative and reimbursable expenses | $ | 3,904 | $ | 2,807 | $ | 2,492 | |||||||||||
__________
(1)Amounts presented are calculated by applying the Company’s ownership interest percentage in the unconsolidated real estate joint venture as of year end to the costs incurred during the year.
(2)As of December 31, 2022 and 2021, asset management fee payables totaled $3.2 million and $0.0 million, respectively.
Expenses incurred under these arrangements are included in rental property operating and maintenance expense in the consolidated statements of operations, with the exception of asset management fee which is included in other expenses. Leasing fees are capitalized as deferred charges, construction management and entitlement fees are capitalized as part of investments in real estate, and development management fees are capitalized and included in the investment in unconsolidated real estate joint venture in the consolidated balance sheets.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 a portfolio shared aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $500.0 million of earthquake insurance for California, and $350.0 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 properties located in the United States. 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. Brookfield DTLA reimburses the Manager for the amount of fees and expenses related to such policies that have been allocated to the Company’s properties as determined by the Manager in its reasonable discretion taking into consideration certain facts and circumstances, including the value of the Company’s properties.
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 statements of operations, is as follows:
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Insurance expense (1) | $ | 12,905 | $ | 12,473 | $ | 11,836 | |||||||||||
(1)An affiliate of Brookfield Corporation secures insurance policies for the Company through third-party brokers and insurance companies and charges the Company a fee for the services it provides. Fees charged vary but will not exceed 2.50% of the total net insurance premiums of the Company and its covered properties. Effective November 1, 2021, this affiliate of Brookfield Corporation ceased charging such fee. Fees incurred for these services totaled $244 thousand and $282 thousand during the years ended December 31, 2021 and 2020, respectively. Additionally, the Company’s terrorism insurance coverage is purchased through a captive facility that is an affiliate of BPY. Insurance premiums incurred totaled $127 thousand, $129 thousand and $149 thousand during the years ended December 31, 2022, 2021 and 2020, respectively.
Other Related Party Transactions with Brookfield Corporation Affiliates
A summary of the impact of other related party transactions with Brookfield Corporation affiliates on the Company’s consolidated statements of operations is as follows:
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Lease income (1) | $ | 14,315 | $ | 13,343 | $ | 11,443 | |||||||||||
| Parking revenue (1) | $ | 988 | $ | 1,001 | $ | 1,317 | |||||||||||
| Interest and other revenue | $ | — | $ | — | $ | 51 | |||||||||||
| Rental property operating and maintenance expense (2) | $ | — | $ | 318 | $ | 577 | |||||||||||
| Other expenses | $ | — | $ | — | $ | 90 | |||||||||||
| Interest expense (3)(4) | $ | 3,087 | $ | 2,201 | $ | 1,982 | |||||||||||
__________
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(1)In September 2019, Brookfield Corporation acquired a significant interest in Oaktree Capital Group, LLC (“Oaktree”), an existing tenant at Wells Fargo Center–North Tower. Lease income and parking revenue from Oaktree and its subsidiaries have been reported as related party transactions since the date of acquisition by Brookfield Corporation.
(2)Amounts presented are for purchases of chilled water for air conditioning at one of the Company’s properties supplied by an affiliate of Brookfield Corporation. In July 2021, such supplier was acquired by third parties.
(3)A subsidiary of Oaktree is the lender of the $35.0 million mezzanine loan secured by Wells Fargo Center–North Tower. Interest payable to the lender totaled $146 thousand and $84 thousand as of December 31, 2022 and 2021, respectively, and is reported as part of accounts payable and other liabilities in the consolidated balance sheets. See Note 5—“Secured Debt, Net.” Interest expense on this loan has been reported as a related party transaction since the date of acquisition by Brookfield Corporation.
(4)In February 2021, Brookfield Corporation purchased $18.2 million of commercial mortgage-backed securities (“CMBS”) secured by the Gas Company Tower loans in the open market. The CMBS are payable in monthly installments over a two-year period at a floating interest rate of one-month LIBOR + 2.35%. The transaction was conducted on an arm’s length basis at fair market value. In September 2021, this CMBS was sold to Brookfield Corporation Reinsurance Ltd., an affiliate of Brookfield Corporation. During the years ended December 31, 2022 and 2021, the Company incurred interest expense of $712 thousand and $391 thousand, respectively, on this CMBS to Brookfield Corporation.
The Manager or its affiliates may incur certain out-of-pocket expenses on behalf of the Company and pass through such expenses at cost to the Company.
Note 14—Future Minimum Base Rents
Brookfield DTLA leases space to tenants primarily under non-cancelable operating leases that generally contain provisions for payment of base rent plus reimbursement of certain operating expenses. The table below presents the undiscounted cash flows for future minimum base rents to be received from tenants under executed non-cancelable office and retail leases as of December 31, 2022:
| 2023 | $ | 151,283 | |||
| 2024 | 144,415 | ||||
| 2025 | 131,058 | ||||
| 2026 | 115,960 | ||||
| 2027 | 88,806 | ||||
| Thereafter | 471,023 | ||||
| Total future minimum base rents | $ | 1,102,545 | |||
Note 15—Commitments and Contingencies
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Concentration of Tenant Credit Risk
Credit risk arises from the possibility that tenants may be unable to fulfill their lease commitments. Brookfield DTLA’s properties are typically leased to high credit-rated tenants for lease terms ranging from to ten years, although we also enter into some shorter or 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.
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 may have a concentration of lease income from certain tenants within the concentration of the professional services sector, the inability of those tenants to make payments under their leases could have a material adverse effect on our results of operations, cash flows or financial condition.
Concentration of Lease Income Risk
During the years ended December 31, 2022, 2021 and 2020, BOA Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower, EY Plaza and 777 Tower each contributed more than 10% of Brookfield DTLA’s consolidated lease revenue. The revenue generated by these six properties totaled 96%, 95% and 97% of Brookfield DTLA’s consolidated revenue during the years ended December 31, 2022, 2021 and 2020, respectively.
Capital Commitments
As of December 31, 2022, the Company had $25.4 million in tenant-related commitments, including tenant improvements, tenant inducements and leasing commissions, which are based on executed leases. As of December 31, 2022, $16.4 million of our tenant-related commitments were expected to be paid in 2023 and $6.7 million in 2024.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 16—Quarterly Financial Information (Unaudited)
The following is a summary of consolidated financial information on a quarterly basis for 2022 and 2021:
| Quarter | |||||||||||||||||||||||
| First | Second | Third | Fourth | ||||||||||||||||||||
| 2022 | |||||||||||||||||||||||
| Total revenue | $ | 72,021 | $ | 73,722 | $ | 74,531 | $ | 75,626 | |||||||||||||||
| Total expenses | 82,631 | 86,611 | 191,050 | 124,935 | |||||||||||||||||||
| Total other income | 213 | 378 | 395 | 244 | |||||||||||||||||||
| Net loss | (10,397) | (12,511) | (116,124) | (49,065) | |||||||||||||||||||
| Net income (loss) attributable to noncontrolling interests: | |||||||||||||||||||||||
| Series A-1 preferred interest returns | 4,303 | 4,303 | 4,303 | 4,303 | |||||||||||||||||||
| Senior participating preferred interest redemption measurement adjustments | (201) | 142 | (4,016) | (4,173) | |||||||||||||||||||
| Series B preferred interest returns | 3,750 | 3,562 | 3,401 | 3,719 | |||||||||||||||||||
| Series B common interest – allocation of net (loss) income | (3,064) | (12,196) | 86,545 | 16 | |||||||||||||||||||
| Net loss attributable to Brookfield DTLA | (15,185) | (8,322) | (206,357) | (52,930) | |||||||||||||||||||
| Series A preferred stock dividends | 4,637 | 4,637 | 4,637 | 4,638 | |||||||||||||||||||
| Net loss attributable to common interest holders of Brookfield DTLA | $ | (19,822) | $ | (12,959) | $ | (210,994) | $ | (57,568) | |||||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| Quarter | |||||||||||||||||||||||
| First | Second | Third | Fourth | ||||||||||||||||||||
| 2021 | |||||||||||||||||||||||
| Total revenue | $ | 69,692 | $ | 69,210 | $ | 68,820 | $ | 76,076 | |||||||||||||||
| Total expenses | 87,625 | 82,925 | 83,486 | 84,070 | |||||||||||||||||||
| Total other income | 199 | 97 | 268 | 232 | |||||||||||||||||||
| Net loss | (17,734) | (13,618) | (14,398) | (7,762) | |||||||||||||||||||
| Net income (loss) attributable to noncontrolling interests: | |||||||||||||||||||||||
| Series A-1 preferred interest returns | 4,303 | 4,302 | 4,303 | 4,304 | |||||||||||||||||||
| Senior participating preferred interest redemption measurement adjustments | 601 | 299 | (325) | 453 | |||||||||||||||||||
| Series B preferred interest returns | 4,282 | 4,146 | 3,896 | 3,739 | |||||||||||||||||||
| Series B common interest – allocation of net income (loss) | 15,204 | (6,669) | 27,222 | (2,563) | |||||||||||||||||||
| Net loss attributable to Brookfield DTLA | (42,124) | (15,696) | (49,494) | (13,695) | |||||||||||||||||||
| Series A preferred stock dividends | 4,637 | 4,638 | 4,637 | 4,637 | |||||||||||||||||||
| Net loss attributable to common interest holders of Brookfield DTLA | $ | (46,761) | $ | (20,334) | $ | (54,131) | $ | (18,332) | |||||||||||||||
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 17—Investments in Real Estate
A summary of information related to Brookfield DTLA’s investments in real estate as of December 31, 2022 is as follows:
| Encum- brances | Initial Cost to Company | Costs Capitalized Subsequent to Acquisition | Gross Amount at Which Carried at Close of Period | Accum- ulated Depre- ciation (4) | Year Acquired or Con- structed (5) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Land | Buildings and Improve- ments | Buildings and Improve- ments | Land | Buildings and Improve- ments (1)(2) | Total (3) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Los Angeles, CA | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Wells Fargo Center– North Tower 333 S. Grand Avenue | $ | 500,000 | $ | 41,024 | $ | 448,562 | $ | 167,437 | $ | 41,024 | $ | 615,999 | $ | 657,023 | $ | 134,932 | 2013 A | ||||||||||||||||||||||||||||||||||||
BOA Plaza 333 S. Hope Street | 400,000 | 54,163 | 342,164 | 80,610 | 54,163 | 422,775 | 476,938 | 132,187 | 2006 A | ||||||||||||||||||||||||||||||||||||||||||||
Wells Fargo Center– South Tower 355 S. Grand Avenue | 265,447 | 21,231 | 388,761 | (93,353) | (6) | 15,658 | (6) | 295,408 | (6) | 311,066 | — | (7) | 2013 A | ||||||||||||||||||||||||||||||||||||||||
Gas Company Tower 525-555 W. Fifth Street | 465,000 | 20,742 | 392,650 | 76,249 | 20,742 | 468,898 | 489,640 | 102,965 | 2013 A | ||||||||||||||||||||||||||||||||||||||||||||
EY Plaza 725 S. Figueroa Street | 305,000 | 47,385 | 242,108 | 97,083 | 47,385 | 339,189 | 386,574 | 98,129 | 2006 A | ||||||||||||||||||||||||||||||||||||||||||||
777 Tower 777 S. Figueroa Street | 288,939 | 38,010 | 293,958 | 54,625 | 38,010 | 348,583 | 386,593 | 67,168 | 2013 A | ||||||||||||||||||||||||||||||||||||||||||||
FIGat7th 735 S. Figueroa Street | 58,500 | — | 44,743 | 30,244 | — | 74,988 | 74,988 | 26,001 | 2013 C | ||||||||||||||||||||||||||||||||||||||||||||
| $ | 2,282,886 | $ | 222,555 | $ | 2,152,946 | $ | 412,895 | $ | 216,982 | $ | 2,565,840 | $ | 2,782,822 | $ | 561,382 | ||||||||||||||||||||||||||||||||||||||
__________
(1)Land improvements are combined with building improvements for financial reporting purposes and are carried at cost.
(2)Includes tenant improvements.
(3)The aggregate gross cost of Brookfield DTLA’s investments in real estate for federal income tax purposes approximated $3.0 billion as of December 31, 2022.
(4)Depreciation in the consolidated statements of operations is computed on a straight-line basis over the following estimated useful lives: buildings (60 years), building improvements (ranging from 5 years to 25 years), and tenant improvements (the shorter of the useful life or the applicable lease term).
(5)Year represents either the year the property was acquired by the Company (“A”) or the year the property was placed in service by the Company after construction was completed (“C”).
(6)Includes reductions in costs of $187.8 million and $5.6 million related to Wells Fargo Center — South Tower’s buildings and improvements, and land, respectively, during the year ended December 31, 2022, due to impairment. See the table below for the cost rollforward of Brookfield DTLA’s investments in real estate.
(7)Includes reductions in accumulated depreciation of $82.3 million related to Wells Fargo Center — South Tower’s buildings and improvements during the year ended December 31, 2022 due to impairment. See the table below for the accumulated deprecation rollforward of Brookfield DTLA’s investments in real estate.
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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:
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Investments in Real Estate | |||||||||||||||||
| Balance at beginning of year | $ | 2,949,851 | $ | 2,967,431 | $ | 2,925,575 | |||||||||||
| Additions during the year: | |||||||||||||||||
| Improvements | 50,394 | 6,653 | 78,469 | ||||||||||||||
| Deductions during the year: | |||||||||||||||||
| Dispositions | — | — | — | ||||||||||||||
| Writeoff of fully depreciated investments in real estate | 24,008 | 24,233 | 36,613 | ||||||||||||||
| Impairment charges related to Wells Fargo Center — South Tower | 193,415 | — | — | ||||||||||||||
| Balance at end of year | $ | 2,782,822 | $ | 2,949,851 | $ | 2,967,431 | |||||||||||
The following is a reconciliation of Brookfield DTLA’s accumulated depreciation on its investments in real estate:
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Accumulated Depreciation | |||||||||||||||||
| Balance at beginning of year | $ | 580,403 | $ | 517,329 | $ | 466,405 | |||||||||||
| Additions during the year: | |||||||||||||||||
| Depreciation expense | 87,314 | 87,307 | 87,537 | ||||||||||||||
| Deductions during the year: | |||||||||||||||||
| Writeoff of fully depreciated investments in real estate | 24,008 | 24,233 | 36,613 | ||||||||||||||
| Impairment charges related to Wells Fargo Center — South Tower | 82,327 | — | — | ||||||||||||||
| Balance at end of year | $ | 561,382 | $ | 580,403 | $ | 517,329 | |||||||||||
.y
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 18—Subsequent Event
Gas Company Tower Loans and 777 Tower Loans Defaults— See Note 2 “Basis of Presentation and Summary of Significant Accounting Policies — Significant Accounting Policies — Liquidity and Going Concern” for detailed discussion.
FIGat7th Loan Extension — See Note 2 “Basis of Presentation and Summary of Significant Accounting Policies — Significant Accounting Policies — Liquidity and Going Concern” for detailed discussion.
Voluntary Delisting of Series A Preferred Stock — On March 31, 2023, Brookfield DTLA notified the New York Stock Exchange of its intention to voluntarily delist its Series A preferred stock from the New York Stock Exchange. See Part II, Item 9B. “Other Information.” for detailed discussion.
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| 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 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, 2022.
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, 2022.
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 three months ended December 31, 2022 that have materially affected, or that are reasonable likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal control over financial reporting due to the measures taken to combat the spread of the COVID-19 pandemic. We are continually monitoring and assessing the impact of the measures taken to combat the spread of the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.
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Item 9B. Other Information.
On March 31, 2023, Brookfield DTLA notified the New York Stock Exchange of its intention to voluntarily delist its Series A preferred stock from the New York Stock Exchange (the “NYSE”).
On or about April 10, 2023, the Company intends to file with the SEC a Form 25 Notification of Removal from Listing to delist and deregister the Series A preferred stock under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The delisting of the Series A preferred stock is expected to become effective on or about April 21, 2023. In connection with the foregoing, the Company also intends to file a Form 15 with the SEC to suspend its reporting obligations under the Exchange Act. It is expected that the last day of trading of the Series A preferred stock on the NYSE will be on or about April 20, 2023 and that the Company’s Series A preferred stock will be removed from listing and registration on the NYSE at the opening of the next business day. After the delisting and deregistration of the Series A preferred stock, Brookfield DTLA intends to continue to make unaudited annual and quarterly financial statements available to investors. Brookfield DTLA also will seek to have the Series A preferred stock quoted on the Pink Sheets Electronic Quotation Service (the “Pink Sheets”) in the OTC Pink Limited Information marketplace, although it cannot provide any assurance that any broker-dealer will make a market in the Series A preferred stock, which is a requirement for Pink Sheet quotation.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information about our Executive Officers
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 | 58 | Chairman of the Board and Principal Executive Officer of Brookfield DTLA (also a Managing Partner in Brookfield Corporation’s real estate group) | 2017 | |||||||||||||||||
| Bryan D. Smith | 52 | Chief Financial Officer of Brookfield DTLA (also a Managing Director in Brookfield Corporation’s real estate group) | 2018 | |||||||||||||||||
G. Mark Brown was appointed Chairman of the Board and Principal Executive Officer of Brookfield DTLA in 2017. He 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” or Brookfield Corporation effective December 2022)’s real estate group. He 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 in August 2018. Mr. Smith is a Managing Director in Brookfield Corporation’s real estate group, and has been employed by the Manager since March 2018. Prior to joining Brookfield, Mr. Smith was the Chief Financial Officer of the U.S. real estate business at a global private equity firm and also held various accounting roles in global accounting and financial services firms. The board of directors appointed Mr. Smith as Chief Financial Officer based on, among other factors, his experience in finance and commercial real estate.
Directors of the Registrant
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Our current board of directors is as follows:
| Name | Age | Position | Director Since | |||||||||||||||||
| G. Mark Brown | 58 | Director (also Chairman of the Board and Principal Executive Officer of Brookfield DTLA, and a Managing Partner in Brookfield Corporation’s real estate group) | 2013 | |||||||||||||||||
| Michelle L. Campbell | 52 | Director (also Senior Vice President, Secretary of Brookfield DTLA and Senior Vice President in Brookfield Corporation’s real estate group) | 2014 | |||||||||||||||||
| Andrew Dakos | 57 | Director | 2017 | |||||||||||||||||
| Murray Goldfarb | 48 | Director (also a Managing Partner in Brookfield Corporation’s real estate group) | 2018 | |||||||||||||||||
| Phillip Goldstein | 78 | Director | 2017 | |||||||||||||||||
| Ian Parker | 58 | Director | 2017 | |||||||||||||||||
| Robert L. Stelzl | 77 | Director | 2014 | |||||||||||||||||
Messrs. Brown and Goldfarb and Ms. Campbell are employed by the Manager. The Manager manages the Company’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 are the incumbent Preferred Directors and 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 2017. He is a Managing Partner in Brookfield Corporation’s real estate group. He 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.
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 2016 and as Vice President and Secretary of the Company since it was formed in 2013. Ms. Campbell is a Senior Vice President in Brookfield Corporation’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.
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Andrew Dakos has served on the board of directors since December 2017, following his election at a Special Meeting of holders of the Company’s Series A preferred stock. Mr. Dakos is a Principal of Bulldog Investors, LLP (“Bulldog Investors”), a U.S. Securities and Exchange Commission (the “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”). He co‑manages Bulldog Investors’ investment strategy. He also serves as President and Director of Special Opportunities Fund, CEO, President and Chairman of Swiss Helvetia Fund, Inc., and Trustee and President of the High Income Securities Fund. He previously served as Trustee of Crossroads Liquidating Trust (2015-2020).
Murray Goldfarb has served on the board of directors since August 2018. Mr. Goldfarb is a Managing Partner in Brookfield Corporation’s real estate group. He has been employed by the Manager since 2012. 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 the Company’s Series A preferred stock. Mr. Goldstein is a co‑founder and Principal of Bulldog Investors. He is the lead investment strategist for Bulldog Investors. He also serves as Chairman of The Mexico Equity and Income Fund, Inc., Chairman of Special Opportunities Fund, Director of Swiss Helvetia Fund, Inc., and Chairman and Secretary of the High Income Securities Fund. He previously served as Director of MVC Capital (2012-2020), and as Trustee of Crossroads Liquidating Trust (2016-2020).
Ian Parker has served on the board of directors since 2017. Prior to his retirement in July 2020, Mr. Parker served as the Chief Operating Officer of Brookfield DTLA and of Brookfield Properties in the Western U.S. and Canada. He was 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 also has served as a member of the board of directors of Brookfield Real Estate Income Trust Inc. since 2021 and Brookfield Residential Properties Inc. since 2011. Mr. Stelzl served on the Van Eck family of mutual funds’ board of trustees and chair of its Governance Committee from 2007 through 2021. Mr. Stelzl is a private real estate investor and investment manager. He currently serves as trustee of several private trusts which hold substantial real estate and other assets. In 2003 he retired from a private, global real estate equity fund manager after 14 years as 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 and finance.
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 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.
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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.
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 year ended December 31, 2022.
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 Brookfield Corporation, each applicable to the directors, officers and employees of Brookfield Corporation and its subsidiaries. The Company is an indirect subsidiary of Brookfield Corporation.
The Audit Committee Charter, Corporate Governance Guidelines and Code of Business Conduct and Ethics are available free of charge on the Company’s website at http://www.dtlaofficefund.com under the heading “Reports & Filings–Governance Documents” and are also 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.
We intend to disclose on the Company’s website, http://www.dtlaofficefund.com, under “Reports & Filings—Governance Documents” any amendment to, or waiver of, any provisions of Brookfield Corporation’s Code of Business Conduct and Ethics applicable to the directors and/or officers of the Company that would otherwise be required to be disclosed under the rules of the SEC or the NYSE.
Audit Committee
The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Mr. Stelzl is currently Chairman of the Audit Committee and Mr. Dakos is a member of the Audit Committee. Each of Messrs. Stelzl and Dakos is an independent director. 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. The composition of Audit Committee meets NYSE requirements for a special entity. As a special entity under the NYSE Rules, the Board is not required to determine whether any members of the Audit Committee qualify as an “audit committee financial expert” as defined by the SEC. The independent members of the Audit Committee also satisfy the enhanced independence standards applicable to audit committees set forth in Rule 10A‑3(b)(i) under the Exchange Act.
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Certifications
The Sarbanes-Oxley Act Section 302 certifications of our principal executive officer and principal financial officer are filed as Exhibit 31.1 and Exhibit 31.2, respectively, to this Annual Report on Form 10-K in Part IV, Item 15. “Exhibits, Financial Statement Schedules.”
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 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.
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Compensation of Directors
The following table summarizes the compensation earned by our non-management directors, Messrs. Dakos, Goldstein, Parker and Stelzl during the fiscal year ended December 31, 2022. Directors, Messrs. Brown, Goldfarb, and Ms. Campbell do not receive any additional compensation from the Company for his or her services as a director.
| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | ||||||||||||||||||||||||||||||||
Andrew Dakos (1) | $ | 70,000 | $ | — | $ | — | $ | — | $ | — | $ | 70,000 | ||||||||||||||||||||||||||
Phillip Goldstein (1) | $ | 60,000 | $ | — | $ | — | $ | — | $ | — | $ | 60,000 | ||||||||||||||||||||||||||
Robert L. Stelzl (1) | $ | 70,000 | $ | — | $ | — | $ | — | $ | — | $ | 70,000 | ||||||||||||||||||||||||||
Ian Parker (1) | $ | 60,000 | $ | — | $ | — | $ | — | $ | — | $ | 60,000 | ||||||||||||||||||||||||||
__________
(1) Consists of an annual retainer fee of $60,000 and, in case of Messrs. Dakos and Stelzl, an additional $10,000 annual Audit Committee fee.
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.
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COMPENSATION COMMITTEE REPORT
The board of directors of Brookfield DTLA Fund Office Trust Investor Inc. has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) (§229.402(b)) with management; and based on the review and discussions referred to in paragraph (e)(5)(i)(A) of this Item, the board of directors recommended that the Compensation Discussion and Analysis be included in the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
The Board of Directors
G. Mark Brown, Chairman
Michelle L. Campbell
Andrew Dakos
Murray Goldfarb
Phillip Goldstein
Ian Parker
Robert L. Stelzl
The information required by paragraph (e)(5) of this Item shall not be deemed to be “soliciting material,” or to be “filed” with the Commission or subject to Regulation 14A or 14C (17 CFR 240.14a-1 through 240.14b-2 or 240.14c-1 through 240.14c-101), other than as provided in this Item, or to the liabilities of section 18 of the Exchange Act (15 U.S.C. 78r), except to the extent that the registrant specifically requests that the information be treated as soliciting material or specifically incorporates it by reference into a document filed under the Securities Act or the Exchange Act.
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| Item 12. | Security Ownership of Certain Beneficial Owners and Management | |||||||||||||
| and Related Stockholder Matters. | ||||||||||||||
Principal Stockholders
Common Stock
As of March 24, 2023, DTLA Holdings owns 100% of the issued and outstanding shares of Brookfield DTLA’s common stock.
Security Ownership of our Directors and Executive Officers
Common Stock
As of March 24, 2023, none of Brookfield DTLA’s current directors or current executive officers owns any shares of the Company’s common stock.
Series A Preferred Stock
As of March 24, 2023, none of Brookfield DTLA’s current directors or current executive officers owns any shares of the Company’s Series A preferred stock.
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 Brookfield Corporation’s Code of Business Conduct and Ethics, officer and employee conflicts of interest are generally prohibited as a matter of Company policy.
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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. The following table presents the basis of fees incurred to the Manager and Brookfield affiliates during the years ended December 31, 2022, 2021 and 2020:
| Fee Type | Affiliate | Fee Description | ||||||
| Property management | The Manager | 2.75% of rents collected (as defined in the management agreements) | ||||||
| Asset management | BPY and Brookfield Corporation | 0.75% of DTLA Holdings’ invested equity in Brookfield DTLA’s properties | ||||||
| Leasing | The Manager and Brookfield affiliates | 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 | The Manager | 3.00% of hard and soft construction costs | ||||||
| Development management | Affiliate of the Manager | 3.00% of hard and soft construction costs | ||||||
| Entitlement | Affiliate of the Manager | 20.00% of the entitlement costs incurred by BOA Plaza, if the entitlement budget is less than $3,000,000 | ||||||
A summary of fees and costs incurred by the applicable Brookfield DTLA subsidiaries under these arrangements is as follows:
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Property management | $ | 8,045 | $ | 8,037 | $ | 8,035 | |||||||||||
| Asset management (2) | $ | 6,346 | $ | 6,166 | $ | 6,040 | |||||||||||
| Leasing | $ | 1,549 | $ | 1,607 | $ | 2,105 | |||||||||||
| Construction management | $ | 1,148 | $ | 400 | $ | 3,239 | |||||||||||
| Development management (1) | $ | 1,230 | $ | 1,881 | $ | 1,007 | |||||||||||
| Entitlement | $ | 111 | $ | 639 | $ | — | |||||||||||
| General, administrative and reimbursable expenses | $ | 3,904 | $ | 2,807 | $ | 2,492 | |||||||||||
__________
(1)Amounts presented are calculated by applying the Company’s ownership interest percentage in the unconsolidated real estate joint venture as of year end to the costs incurred during the year.
(2)As of December 31, 2022 and 2021, asset management fee payables totaled $3.2 million and $0.0 million, respectively.
Insurance Agreements
Properties held by certain Brookfield DTLA subsidiaries and affiliates are covered under insurance policies entered into by the Manager. Insurance premiums for Brookfield DTLA’s properties are paid by the Manager. Brookfield DTLA reimburses the Manager for the amount of fees and expenses related to such policies that have been allocated to the Company’s properties as determined by the Manager in its reasonable discretion taking into consideration certain facts and circumstances, including the value of the Company’s properties.
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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 statements of operations, is as follows:
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Insurance expense (1) | $ | 12,905 | $ | 12,473 | $ | 11,836 | |||||||||||
(1)An affiliate of Brookfield Corporation secures insurance policies for the Company through third-party brokers and insurance companies and charges the Company a fee for the services it provides. Fees charged vary but will not exceed 2.50% of the total net insurance premiums of the Company and its covered properties. Effective November 1, 2021, this affiliate of Brookfield Corporation ceased charging such fee. Fees incurred for these services totaled $244 thousand and $282 thousand during the years ended December 31, 2021 and 2020, respectively. Additionally, the Company’s terrorism insurance coverage is purchased through a captive facility that is an affiliate of BPY. Insurance premiums incurred totaled $127 thousand, $129 thousand and $149 thousand during the years ended December 31, 2022, 2021 and 2020, respectively.
Other Related Party Transactions with Brookfield Corporation Affiliates
A summary of the impact of other related party transactions with Brookfield Corporation affiliates on the Company’s consolidated statements of operations is as follows:
| For the Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Lease income (1) | $ | 14,315 | $ | 13,343 | $ | 11,443 | |||||||||||
| Parking revenue (1) | $ | 988 | $ | 1,001 | $ | 1,317 | |||||||||||
| Interest and other revenue | $ | — | $ | — | $ | 51 | |||||||||||
| Rental property operating and maintenance expense (2) | $ | — | $ | 318 | $ | 577 | |||||||||||
| Other expenses | $ | — | $ | — | $ | 90 | |||||||||||
| Interest expense (3)(4) | $ | 3,087 | $ | 2,201 | $ | 1,982 | |||||||||||
__________
(1)In September 2019, Brookfield Corporation acquired a significant interest in Oaktree Capital Group, LLC (“Oaktree”), an existing tenant at Wells Fargo Center–North Tower. Lease income and parking revenue from Oaktree and its subsidiaries have been reported as related party transactions since the date of acquisition by Brookfield Corporation.
(2)Amounts presented are for purchases of chilled water for air conditioning at one of the Company’s properties supplied by an affiliate of Brookfield Corporation. In July 2021, such supplier was acquired by third parties.
(3)A subsidiary of Oaktree is the lender of the $35.0 million mezzanine loan secured by Wells Fargo Center–North Tower. Interest payable to the lender totaled $146 thousand and $84 thousand as of December 31, 2022 and 2021, respectively, and is reported as part of accounts payable and other liabilities in the consolidated balance sheets. See Note 5—“Secured Debt, Net.” Interest expense on this loan has been reported as a related party transaction since the date of acquisition by Brookfield Corporation.
(4)In February 2021, Brookfield Corporation purchased $18.2 million of commercial mortgage-backed securities (“CMBS”) secured by the Gas Company Tower loans in the open market. The CMBS are payable in monthly installments over a two -year period at a floating interest rate of one-month LIBOR + 2.35%. The transaction was conducted on an arm’s length basis at fair market value. In September 2021, this CMBS was sold to Brookfield Corporation Reinsurance Ltd., an affiliate of Brookfield Corporation. During the years ended December 31, 2022 and 2021, the Company incurred interest expense of $712 thousand and $391 thousand, respectively, on this CMBS to Brookfield Corporation.
The Manager or its affiliates may incur certain out-of-pocket expenses on behalf of the Company and pass through such expenses at cost to the Company.
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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 the Company’s Corporate Governance Guidelines, which are also 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.” in Part III, Item 10. Directors, Executive Officers and Corporate Governance.
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 27, 2023, the board of directors affirmatively determined that each of the following directors is and was independent within the meaning of both the Company’s and the NYSE’s director independence standards, as then in effect:
Robert L. Stelzl
Andrew Dakos
Phillip Goldstein
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”) (PCAOB ID No. 34):
| Fees (1) | For the Year Ended December 31, | |||||||||||||
| 2022 | 2021 | |||||||||||||
| Audit fees (2) | $ | 822,970 | $ | 799,000 | ||||||||||
| Audit-related fees | — | — | ||||||||||||
| Tax fees | — | — | ||||||||||||
| All other fees | — | — | ||||||||||||
| $ | 822,970 | $ | 799,000 | |||||||||||
__________
(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 consolidated financial statements.
119
Pre-approval Policies and Procedures of the Audit Committee
Brookfield DTLA has adopted written policies, which require the Audit Committee or the Chair of the Audit Committee to pre‑approve all audit and non‑audit services to be performed for the Company by Deloitte in accordance with applicable law. 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 scheduled 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.
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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, 2022, 2021 and 2020 | |||||||||||||||||||
| All financial statement schedules are omitted because they are not applicable, or the | ||||||||||||||||||||
| required information is included in the consolidated financial statements or | ||||||||||||||||||||
notes thereto. See Part II, Item 8. “Financial Statements and Supplementary Data.” | ||||||||||||||||||||
| 3. | Exhibits (listed by number corresponding to Item 601 of Regulation S-K) | |||||||||||||||||||
| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||
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| 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 Non-Voting 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 Non-Voting Preferred Stock | S-4/A | 333-189273 | 4.4 | August 27, 2013 | ||||||||||||||||||||||||||||
| Form of Certificate of 7.625% Series A Cumulative Redeemable Preferred Stock of Brookfield DTLA Fund Office Trust Investor Inc. | 10-K | 001-36135 | 4.1 | April 8, 2014 | ||||||||||||||||||||||||||||
| Indemnification Agreement of Brookfield DTLA Fund Office Trust Investor Inc. | 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 | ||||||||||||||||||||||||||||
| First Amendment to the Limited Liability Company Agreement of Brookfield DTLA Fund Properties II LLC | 10-K | 001-36135 | 10.3 | March 25, 2021 | ||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||
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| 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”) | 10-K | 001-36135 | 10.5 | April 1, 2019 | ||||||||||||||||||||||||||||
| Mortgage Loan Agreement dated as of September 23, 2020 among EYP Realty, LLC, as Borrower, and Morgan Stanley Bank, N.A. and Wells Fargo Bank, National Association, collectively, as Lenders | 8-K | 001-36135 | 10.1 | March 25, 2021 | ||||||||||||||||||||||||||||
| Limited Recourse Guaranty, made as of September 23, 2020 by Brookfield DTLA Holdings LLC, as Guarantor, in favor of Morgan Stanley Bank, N.A. and Wells Fargo Bank, National Association, collectively, as Lender | 8-K | 001-36135 | 10.2 | March 25, 2021 | ||||||||||||||||||||||||||||
| Mezzanine Loan Agreement dated as of September 23, 2020 among EYP Mezzanine, LLC, as Borrower, and Morgan Stanley Mortgage Capital Holdings LLC and Wells Fargo Bank, National Association, collectively, as Lenders | 8-K | 001-36135 | 10.3 | March 25, 2021 | ||||||||||||||||||||||||||||
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| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||||||||||||||||||||||||
| Mezzanine Limited Recourse Guaranty, made as of September 23, 2020 by Brookfield DTLA Holdings LLC, as Guarantor, in favor of Morgan Stanley Mortgage Capital Holdings LLC and Wells Fargo Bank, National Association, collectively, as Lender | 8-K | 001-36135 | 10.4 | March 25, 2021 | ||||||||||||||||||||||||||||
| 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 | 10-K | 001-36135 | 10.10 | April 1, 2019 | ||||||||||||||||||||||||||||
| 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 Lender | 10-K | 001-36135 | 10.11 | April 1, 2019 | ||||||||||||||||||||||||||||
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| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||||||||||||||||||||||||
| 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 | 10-K | 001-36135 | 10.12 | April 1, 2019 | ||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||
| Mortgage Loan Agreement dated as of February 5, 2021 among Maguire Properties – 555 W. Fifth, LLC and Maguire Properties – 350 S. Figueroa, LLC, collectively, as Borrowers, and Citi Real Estate Funding Inc. and Morgan Stanley Bank, N.A., collectively, as Lenders | 8-K | 001-36135 | 10.5 | March 25, 2021 | ||||||||||||||||||||||||||||
| Limited Recourse Guaranty, made as of February 5, 2021, by Brookfield DTLA Holdings LLC, as Guarantor, in favor of Citi Real Estate Funding Inc. and Morgan Stanley Bank, N.A., collectively, as Lender | 8-K | 001-36135 | 10.6 | March 25, 2021 | ||||||||||||||||||||||||||||
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| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||||||||||||||||||||||||
| Mezzanine A Loan Agreement dated as of February 5, 2021 among Maguire Properties – 555 W. Fifth Mezz I, LLC, as Borrower, and Citigroup Global Markets Realty Corp. and Morgan Stanley Mortgage Capital Holdings LLC, collectively, as Lenders | 8-K | 001-36135 | 10.7 | March 25, 2021 | ||||||||||||||||||||||||||||
| Mezzanine A Limited Recourse Guaranty, made as of February 5, 2021, by Brookfield DTLA Holdings LLC, as Guarantor, in favor of Citigroup Global Markets Realty Corp. and Morgan Stanley Mortgage Capital Holdings LLC, collectively, as Lender | 8-K | 001-36135 | 10.8 | March 25, 2021 | ||||||||||||||||||||||||||||
| Mezzanine B Loan Agreement dated as of February 5, 2021 among Maguire Properties – 555 W. Fifth Mezz II, LLC, as Borrower, and SBAF Mortgage Fund I/Lender, LLC, as Lender | 8-K | 001-36135 | 10.9 | March 25, 2021 | ||||||||||||||||||||||||||||
| Mezzanine B Limited Recourse Guaranty, made as of February 5, 2021, by Brookfield DTLA Holdings LLC, as Guarantor, in favor of SBAF Mortgage Fund I/Lender, LLC, as Lender | 8-K | 001-36135 | 10.10 | March 25, 2021 | ||||||||||||||||||||||||||||
| Loan Agreement, dated as of October 31, 2019, by and among Maguire Properties – 777 Tower LLC, as Borrower, each of the financial institutions initially a signatory hereto together with their assignees, as Lenders, Wells Fargo Bank, National Association, as Administrative Agent, and Wells Fargo Securities LLC, as Sole Lead Arranger and Sole Bookrunner | 8-K | 001-36135 | 10.1 | March 26, 2020 | ||||||||||||||||||||||||||||
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| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||||||||||||||||||||||||
| Limited Guaranty, made as of October 31, 2019, by Brookfield DTLA Holdings LLC, as Guarantor, in favor of Wells Fargo Bank, National Association, as Administrative Agent on behalf of the Lenders and each of the Lenders party to the Loan Agreement | 8-K | 001-36135 | 10.2 | March 26, 2020 | ||||||||||||||||||||||||||||
| Mezzanine Loan Agreement, dated as of October 31, 2019, by and among, 777 Tower Mezzanine, LLC, as Borrower, and Mesa West Core Lending Fund, LLC, as Lender | 8-K | 001-36135 | 10.3 | March 26, 2020 | ||||||||||||||||||||||||||||
| Mezzanine Limited Guaranty, made as of October 31, 2019, by Brookfield DTLA Holdings LLC, as Guarantor, in favor of Mesa West Core Lending Fund, LLC, as Lender | 8-K | 001-36135 | 10.4 | March 26, 2020 | ||||||||||||||||||||||||||||
| Triggering Events that Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement | 8-K | 001-36135 | N/A | February 10, 2023 | ||||||||||||||||||||||||||||
| Loan Agreement dated as of November 5, 2018 by and among Maguire Properties–355 S. Grand, LLC, as Borrower, Landesbank Hessen-Thüringen Girozentrale, as Administrative Agent, Barclays Bank PLC, as Syndication Agent, Landesbank Hessen-Thüringen Girozentrale, Barclays Bank PLC and Natixis, New York Branch, as Joint Lead Arrangers. Landesbank Hessen-Thüringen 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 | ||||||||||||||||||||||||||||
127
| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||
128
| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||||||||||||||||||||||||
| 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, 2022 | ||||||||||||||||||||||||||||||||
| Certification of Principal Executive Officer dated March 31, 2023 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||||||||||||||||||||||||||
| Certification of Principal Financial Officer dated March 31, 2023 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||||||||||||||||||||||||||
| Certification of Principal Executive Officer and Principal Financial Officer dated March 31, 2023 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 will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. | |||||||||||||||||||
Item 16. Form 10-K Summary.
None.
129
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: | March 31, 2023 | ||||
| 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) | |||||||||||
130
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: | March 31, 2023 | By: | /s/ G. MARK BROWN | ||||||||
| G. Mark Brown Chairman of the Board (Principal executive officer) | |||||||||||
| March 31, 2023 | By: | /s/ BRYAN D. SMITH | |||||||||
| Bryan D. Smith Chief Financial Officer (Principal financial and accounting officer) | |||||||||||
| March 31, 2023 | By: | /s/ MICHELLE L. CAMPBELL | |||||||||
| Michelle L. Campbell Senior Vice President, Secretary and Director | |||||||||||
| March 31, 2023 | By: | /s/ ANDREW DAKOS | |||||||||
| Andrew Dakos Director | |||||||||||
| March 31, 2023 | By: | /s/ MURRAY GOLDFARB | |||||||||
| Murray Goldfarb Director | |||||||||||
| March 31, 2023 | By: | /s/ PHILLIP GOLDSTEIN | |||||||||
| Phillip Goldstein Director | |||||||||||
| March 31, 2023 | By: | /s/ IAN PARKER | |||||||||
| Ian Parker Director | |||||||||||
| March 31, 2023 | By: | /s/ ROBERT L. STELZL | |||||||||
| Robert L. Stelzl Director | |||||||||||
131