Granite

Structure

Granite REIT, a TSX and NYSE listed Canadian mutual fund trust governed by Ontario law, will be the 99.999% limited partner of a Quebec LP ("Granite LP") which, in turn, will hold: Canadian real estate through a subsidiary Ontario LP; US real estate through a Delaware subsidiary LP ("US Holdco LP") which, in turn, will hold a US private REIT ("Granite America"); hypothecs owing by Granite America; the equity of European and Mexican real estate subsidiaries through Granite; and hypothecs (owing by the European subsidiaries) through a Quebec subsidiary LP ("Fin LP") in which Granite LP will be an 80% limited partner (with Granite, directly and through a GP, holding the other 20%). Granite GP, the general partner of Granite LP, will not be a subsidiary of Granite REIT. Instead, all its common shares will be held by the Granite REIT unitholders on a "stapled basis," so that what will trade on the TSX and NYSE will be stapled units consisting of one Granite REIT unit and one common share of Granite GP.

Setup of structure

The conversion occurs under a Quebec Plan of Arrangment (Granite having continued in June 2012 to Quebec):

• Granite transfers, to a wholly-owned Quebec LP ("Fin LP"), loans owing to it by various European subsidiaries;
• Granite contributes its Canadian and U.S. assets, which are held through subsidiary partnerships ("Canadian Realty LP" and "US Holdingo LP"), and its LP interest in Fin LP, to another subsidiary Quebec LP ("Granite LP"), of which a B.C. subsidiary of Granite (Granite GP) will be the general partner holding a 0.001% GP interest
• Granite transfers its LP units of Granite LP to Granite REIT (which had been settled by it previously) in consideration for the issuance of additional units, and the assumption of debenture debt
• employee stock options on Granite commons shares are exchanged for options on Granite REIT units and Granite GP common shares
• Granite purchases for cancellation all its outstanding common shares in consideration for:

• the issuance of Class X common shares of Granite (which are convertible common shares that subdivide or consolidate pro tanto with REIT units) in a number (the "Residual Number") that correspond to the relative value of the equity in the (principally European) subsidiaries which will be retained by Granite compared to the total consolidated equity value of Granite REIT once all the Granite assets are tucked underneath it, multiplied by the number of previously outstanding Granite common shares
• the immediate delivery, in the case of each of the 200 largest shareholders, of 25 Granite REIT units and 25 Granite GP non-voting common shares
• the obligation to make a deferred delivery of Granite REIT units and Granite GP non-voting common shares which are equal in number to the total number of outstanding Granite common shares minus the number of Class X shares which are issued as described above and minus the number of units and shares that are delivered to the 200 largest shareholders (which, therefore, reduce the number of Granite REIT units and Granite GP non-voting common shares which they otherwise would receive on a deferred basis)

• Granite REIT issues Granite REIT units (and delivers Granite GP non-voting shares) to the Class X shareholders in consideration for the right to require their Class X shares to be contributed to Granite LP (with the Class X shares subsequently being converted in the hands of Granite LP into common shares)
• Granite LP transfers all of its voting LP units of Fin LP (representing approximately a 20% partnership interest therein) to Granite in consideration for Granite common shares
• the Granite GP (voting) common share held by Granite is cancelled and the non-voting common shares of Granite GP (held by the public) are converted into (voting) common shares
• the European loans owing to Fin LP and the Granite America loan owing to Granite LP become hypothecs (i.e., loans secured by way of movable hypothec) through a pledge by the debtor of units or promissory notes of real estate subsidiaries of the debtor
• all the Granite GP common shares and all the Granite REIT units (other than 25 units held by the GP of Fin LP) commence to trade on a stapled basis, with each stapled unit consisting of one such share and one such unit

Distributions

Initially, $0.175 per month per stapled unit (all on the REIT unit component of stapled unit) with return-of -capital percentage for 2013 estimated at 20% to 30%.

Management

The Granite REIT trustees and the Granite GP directors initially will be the same seven individuals. Senior management will be employed by Granite LP.

Canadian tax treatment

Reason for stapled structure. "It was determined to be desirable to utilize a 'stapled unit' structure so as to to not have an acquisition of control of Granite for Canadian income tax purposes and thereby preserve significant capital loss carry-forwards."

Mutual fund trust status

The declaration of trust has the standard 49% non-resident ownership limitations, which it is anticipated will be met. In addition, it is anticipated that Granite REIT's only undertaking will be investing in subsidiaries (i.e., Granite LP) whose units or shares are not taxable Canadian property.

REIT status

Management anticipates that Granite REIT will satisfy the four REIT tests in 2013; and has no reason to anticipate that it will not continue to satisfy those tests thereafter. Respecting the non-portfolio property test: Granite REIT's units of Granite LP, and Granite LP's units of Canadian Realty LP will be qualified REIT property; Granite LP's shares of Granite and units of Fin LP will be securities of portfolio investment entities; and the Granite America hypothecs held by Granite LP and the European hypothecs held by Fin LP will be securities of entities that are not subject entities. Respecting the 75% revenue test, "a movable hypothec on units, shares or debts of a Subsidiary which qualify as (deemed) 'real or immovable property' can bear interest that qualifies as interest on a hypothec on 'real or immovable property'."

Consequences of reorganization to Granite

Although a taxable capital gain of around $160 million will be realized on the units of Canadian Realty LP, this taxable capital gain can be sheltered with net capital losses of around $340 million, assuming these losses were not (or will not be) lost due to an acquisition of control of Granite by a group of persons. Respecting a $6 million taxable capital gain to be realized on shares of Granite America, this gain could be eliminated through a s. 111(4)(e) designation.

US Holdco LP

Management anticipates that in 2013, the level of activity in Granite America will be such as to not give rise to foreign accrual property income ("fapi") to U.S. Holdco LP and, in any event, the level of dividends (based on the US REIT requirement for Granite America to distribute all its taxable income for Code purposes) paid to US Holdco LP is anticipated to exceed any potential fapi if such activity test is not satisfied. However, in these circumstances there could be fapi arising on asset dispositions, including asset dispositions which qualified for "like kind" exchange treatment under the Code.

Granite

Similar fapi issue may arise for Granite in respect of its European subsidiaries. Management's anticipation that Granite LP and Granite REIT will satisfy the 75% revenue test under the REIT rules for 2013 assumes that (following an election to cease to be a public corporation), most distributions by Granite will be paid-up capital distributions rather than dividends.

Reorganization consequences to resident Granite shareholders

Their exchange of Granite common shares for Granite common shares plus the receipt or right to receive (to-be-) stapled units will be under a s. 86 reorganization, giving rise to capital gain only if the fair market value of such stapled units exceeds the adjusted cost base of their common shares. A deemed dividend is unlikely given the paid-up capital per common share of around $45. However, the subsequent exchange of Class X shares will not occur on a rollover basis.

Non-resident unitholders

It is unclear whether qualifying U.S. residents (who otherwise would benefit under Article XXII of the Canada-US Convention from the 0% withholding tax rate applicable to distributions made out of income arising outside Canada, and a 15% rate applicable to income arising in Canada) would have that benefit denied under the anti-hybrid rule in Art. IV, para, 7(b). Return-of-capital distributions are not expected to be subject to Part XIII.2 tax given the relative propertion of Canadian real property.

U.S. tax treatment

Anti-stapling rule. The anti-stapling provisions of Code s. 269B should not apply adversely (so that Granite GP common shares should not be treated as stapled to Granite America, which in turn could potentially result in Granite America not qualifying as a U.S. REIT).

Granite REIT as partnership

Granite REIT will elect to be a partnership for Code purposes. As it will be a publicly traded partnership, its status as a partnership for Code purposes will dpend on 90% or more of its gross income for every taxable year consisting of qualifying income including dividends and interest. Canadian Realty LP will elect to be a corporation for Code purposes.

Debt

The hypothec debt owing by Granite America to Granite LP shold be treated as debt, with Granite America deducting the interest thereon, and with the interest thereon generally not giving rise to withholding tax to Granite REIT unitholders, based on the portfolio interest exemption.

Reorganization

The receipt of stapled units for Granite common shares will be taxable to US shareholders under the rules generally applicable to the distribution of property by a corporaton to its shareholders. Accordingly, US shareholders will be rqeuired to include the fair market value of the stapled units received in gross income to the extent of the current and accumulated earnings and profits of Granite (including any gain recognized by Granite on its disposition of the stapled units - which will be treated as a taxable distribution of property by it, resulting in the recognition of gain on Granite's interest in Granite America, but with such gain being offset by available losses). The excess of the fair market value of the distributed stapled units over current and accumulated earnings and profits will be treated, first, as a non-taxable return of capital to the extent of the US unitholoders' basis in their Granite comon shares, and then as a taxable exchange of Granite common shares for stapled units.

The contribution of Class X shares of Granite (viewed as being the remaining common shares of Granite) to Granite LP at the direction of Granite REIT will be deemed to be a transfer of those shares to Granite REIT in a non-taxable contirbution to a partnership for Code purposes, so that no gain or loss will be recognized on the contribution by a US shareholder.

Although the basis of the stapled units received by the US shareholders in two tranches will be separately computed because a partner in a partnership generally has a single basis in its partnership interest, each unitholder will have a combined basis in its Granite REIT units. (The fair market value of, and basis allocated to, Granite GP units is expected not to be material.)

PFIC rules

Granite believes that it and its subsidiaries and, following the Arrangement, the subsidiaries of Granite REIT, should not be classifed as PFICs.

On-going taxation of US unitholders

As a partnership, Granite REIT's income will be allocated to its partners, and US unitholders will be provided with K-1s.

On-going taxation of non-US unitholders

The applicable rates under the Canada-US Treaty of withholding on the share of a non-U.S. unitholder who qualifies for Treaty benefits should be 0% for RRSPs, pension plans and tax-exempt organizations and 15% for individuals who so qualify. Corporate unitholders including most mutual fund trusts should be subject to a 30% rate.

FIRPTA

Granite REIT does not intend to dispose of its shares of Granite America (which are US real property interests), has no plans for Granite America to make distributions in excess of the sum of Granite REIT's earnings and profits and Granite REIT's adjusted basis in its shares of Granite America, and intends to avoid Granite America making distributions which are attributable to FIRPTA gains - for example, it may dispose of property in like-kind exchanges.

Non-US unitholders who otherwise do not have US tax reporting or filing obligations will not have such obligations as a result of a sale of their Granite REIT units provided that they were considered to own 5% or less of the Granite REIT units that were listed for trading at the time of sale and at all times in the preceding five years, and Granite REIT met the regularly traded requirement for the quarter in which the sale occurred - and the transferee would on the same basis not be required to withhold and remit 10% of the sale proceeds. Granite REIT expects the Granite REIT units to satisfy the regularly traded standards.