How Brookfield made $2B in defaults disappear

In Looney Tunes, you’ve got Acme, the supercorporation that controls everything. In Kurt Vonnegut’s novels, there’s RAMJAC and in prestige TV, there’s Waystar Royco. 

In real life, that company is Brookfield.

Headquartered in Toronto and led by a dead-eyed accountant from Manitoba, Brookfield Corporation controls $825 billion in assets. It owns wind turbines in Nebraska and railroads in Australia. It also owns some of the most valuable commercial real estate around the world, such as London’s Canary Wharf and New York City’s Manhattan West. And it’s that latter category which has led to a flurry of unwelcome headlines for the firm, particularly in the once-coveted office market of Downtown Los Angeles. 

Since the start of the year, Brookfield has defaulted on over $1 billion in loans connected to its DTLA properties, according to public filings, with another $763 million in defaults looming. It walked away from a dozen suburban office assets in the Washington, D.C.-area, and has stopped making payments on $886 million in loans tied to 10 retail properties. 

But as Brookfield tells it, those defaults are water under a bridge. 

“It’s small and not relevant to the overall business,” Brookfield Corporation CEO Bruce Flatt said in February, stressing that “the negative things get exaggerated.”

Flatt did the rounds of the financial TV shows, arguing that the lion’s share of Brookfield’s $130 billion in real estate was top tier. The bad assets, he said, were just a fraction of a fraction of the total pie, and he noted that the defaulted loans were all non-recourse: Brookfield could simply walk away from the buildings.

He invoked Dickens, calling the company’s portfolio “a tale of two cities.” It’s a narrative the company has been pushing hard as it launches a $15 billion real estate fund.

The tale, however, is difficult to verify because of the way Brookfield is structured. The company privatized Brookfield Property Partners in 2021, allowing it to be selective about what it discloses about its real estate holdings. Things that were once a big deal can now be positioned as a drop in the bucket. The L.A. office portfolio, for example, which once made up 35 percent of Brookfield Property Partners’ core U.S. office holdings on a square footage basis, is nowhere to be found in its most recent quarterly or annual reports. The defaults are not mentioned. 

Going private allows Brookfield to restructure its assets behind closed doors. But it also makes its valuations opaque. (Brookfield claims its valuations are regularly appraised by third parties and audited.) As distress ripples through commercial real estate and one study estimates that U.S. office values will plummet by $500 billion by 2029, Brookfield wants to assure everyone it owns the good stuff, the market-beating stuff. 

The receipts, however, are hidden. 

Keiretsu

Brookfield’s predecessor, Edper, was launched in 1959 as a holding company for the “poor cousins” of the Bronfman family, the Canadian liquor titans. For decades, it was led by Jack Cockwell, a brash South African accountant who made quite a stir in Canada’s genteel business world. 

“They should keep that guy in the back, back, back room,” said a member of Parliament after Cockwell appeared in front of a government committee in 1986.

As Edper grew, Cockwell structured it as a web of 500 private companies and 40 public companies with 100,000 employees and $100 billion of assets. The New York Times referred to the organization using a Japanese term for a sprawling conglomerate, keiretsu. 

“Until recently, the Edper Group operated behind a wall of silence, disclosing what it felt it had to, but generally trying to stay out of the public eye,” the Toronto Star’s David Crane told the Times in 1992.

Overleveraged and overexposed to commercial real estate, Edper restructured in 1995 and emerged as Brookfield. It picked up prime assets from battered Olympia & York along the way, including the World Financial Center, the Lower Manhattan complex now known as Brookfield Place.

“Brookfield Corporation is not a real estate company, so it has a wider range of options to allocate its capital to.”
Brian Kingston, Brookfield

Brookfield also inherited its predecessor’s love for complexity. Its various satellite companies funnel fees to its parent, and the organization chart resembles a particularly incestuous family tree, with a wealth of related-party transactions.

Flatt took the reins from Cockwell in 2002, and he supercharged the company’s ambitions. That year, he bought Lehman Brothers’ stake in one of the World Financial Towers for just $128 a square foot, at a time when workers were concerned about safety in the wake of 9/11. 

Flatt turned to his former world to recruit top lieutenants. Brian Kingston, a former Ernst & Young auditor who said he never read a lease in his life before joining the company, was tapped to lead its real estate group.

Brookfield wanted a piece of everything. It bought malls — good ones from GGP and some not so good ones from Rouse — senior housing and townhomes. In 2013, it kicked off its most ambitious ground-up project to date in partnership with the Qatar Investment Authority: Manhattan West, a 7 million-square-foot complex in New York with a hotel, two office skyscrapers and more than 800 apartments. 

As it rose to meet its American Manifest Destiny, it stuck with its Canadian accounting methods: Unlike most of its GAAP-using rivals, Brookfield uses a standard known as the International Financial Reporting Standards.

IFRS has been touted as better at projecting the current value of an asset, and it gives management more discretion to value assets since it is principles-based, while GAAP is rules-based and relies on historical costs. 

Brookfield says that its IFRS values are audited by Deloitte and that it uses third-party appraisals on a portion of its assets every four years on a rotating basis. In 2022, those appraisals, it says, came within 1 percent of its internal valuations.

Valuations matter more now than ever, as there are big question marks across the country about what office assets are worth. There are very few active office deals by which to gauge comps, making valuations an educated guessing game. 

For trophy assets, those guesses are easier. In New York, One Manhattan West is almost fully occupied, as is Brookfield Place and its Dubai namesake, the 1 million-square-foot ICD Brookfield Place. 

It’s the tier below that’s trickier to navigate, the older, once-upon-a-time “Class A” towers in Midtown and the Financial District, and the ones in secondary markets. And even Class A malls.

And Brookfield owns a lot of them. 

On the retail side, Moody’s projects Brookfield could stop making additional debt payments on its malls and said its issues are heightened because of its reliance on floating rate debt. It adds the retail portfolio will need “support from its parent” in order to avoid breaching its loan covenants.

The company’s 660 Fifth Avenue, which it bought from Kushner Companies in 2018 for $1.3 billion and spent $400 million renovating, is only about 50 percent leased, a Brookfield executive recently told New York Magazine. Brookfield and its partner, China Investment Corporation, recently pulled its listing on One New York Plaza, a 50-story office tower once valued at $1.4 billion. (The tower was reportedly being shopped for over $1 billion.) One Liberty Plaza, which Brookfield bought back a 49 percent stake in for $1 billion in March, has almost 870,000 square feet of space available. 

In Chicago, the company defaulted on a $280 million loan tied to a Loop office tower. In Denver, it recently worked out a deal with lenders on its Republic Plaza, the city’s tallest office building, after defaulting on a $134 million loan. 

And then of course, there’s L.A.

Fallen angel

In 2006, Brookfield bought William “Big Bill” Zeckendorf-founded Trizec Properties for $4.8 billion, a deal that gave the firm control of three of DTLA’s tallest towers: Bank of America Plaza, EY Plaza and Figueroa at Wilshire. 

It spent the next decade becoming the area’s largest office landlord, including making a marquee deal to acquire Robert Maguire’s MPG Office Trust, which commercial real executive John Cushman III likened to “putting together Chrysler, Ford and General Motors.” 

“They will totally control the high end of the market,” he added. 

The bet didn’t pan out too well. Occupancy levels were up and down, and many companies opted to base themselves in newer buildings in Century City. The pandemic made matters worse, and then, last year, interest rates began to soar. 

Given that most of its DTLA holdings were financed with floating-rate debt, Brookfield felt the whiplash. The loans, however, were all non-recourse, mostly CMBS deals, ensuring the worst that could happen was that the company would lose the buildings. 

In February, Brookfield defaulted on a first group of senior loans tied to two buildings totaling $784 million, according to public filings from Brookfield’s DTLA fund. Three months later, it defaulted on another $275 million loan. Another $763 million in loans tied to the Wells Fargo Center are coming due in October, filings show.

Brookfield tried to sell one of its buildings before the defaults, Figueroa at Wilshire, but Kingston, in an interview with The Real Deal, said that new buyers found it “very difficult to get financing.” 

Brookfield has yet to hand back the keys on any L.A. building and could still pressure its lenders into a deal. But the values of the towers have already been cut drastically. 

The Gas Company Tower is now valued at $270 million, 60 percent less than its 2021 valuation, the lenders reported to Morningstar — worse than industry researchers predicted for the market.

Daniel McNamara, whose Polpo Capital is shorting parts of the office market, described Brookfield’s defaults as “another wakeup call to our market.” 

“It definitely sent a scare to the CMBS credit market,” he added. 

Other office players were feeling the pain, too. Pimco’s Columbia Property Trust defaulted on $1.7 billion in office loans tied to seven buildings across the country the same month. Blackstone handed over the keys to a 26-story building at 1740 Broadway in Midtown to its lender.

Brookfield Property Partners never had to disclose any of these issues, or anything about L.A. at all. 

That’s because Brookfield Asset Management, now rebranded as Brookfield Corporation, privatized Brookfield Property Partners in 2021. To find information about L.A. deals, investors would have had to sift through filings from another Brookfield entity — the publicly traded fund that owned the L.A. portfolio. 

Without expertise in forensic accounting, investors would be hard-pressed to understand the impact of the defaults on the health of the company. 

Once private, Brookfield said it could reorganize and halve its real estate exposure over time. 

Reading Brookfield’s financial statements is a journey into the multiverse. There are multiple versions of Brookfield staring back at you, and Brookfield gets to decide which one it wants to be at a given moment. L.A. matters, and then it doesn’t. Most of New York matters. San Francisco is irrelevant — but it could be important in the future. 

“I think the privatization of BPY led us to reevaluate the portfolio,” Kingston said. “Brookfield Corporation is not a real estate company, so it has a wider range of options to allocate its capital to.”

Reshuffle, rebrand, add another layer. The cycle never ends. You’ll never understand it. And that’s by design.