H&R REIT AND H&R FINANCE TRUST - MD&A - December 31, 2010  d) Borrowing Costs  Testing & Implementation Phase  INTERNAL CONTROL OVER FINANCIAL REPORTING  SECTION V  RISKS AND UNCERTAINTIES  Unit Prices  The REIT has concluded that it will elect to capitalize amounts on qualifying assets which had not been previously capitalized  using the provisions of IAS 23. The effect of capitalizing amounts not previously capitalized would be an increase to the cost  of properties developed and an increase to retained earnings of approximately $11 million as at January 1, 2010 with no  impact for the year ended December 31, 2010. This adjustment may change depending on which income properties are  deemed fair value on initial adoption.  The reader should be cautioned that these optional exemptions are considered forward looking information and certain project  activities and choices may change. The process is on-going as new standards and recommendations are issued by the IASB.  The Trusts will be completing and testing its IFRS-IASB systems, processes, financial statements, notes, policies, internal controls  and internal reporting in preparation for the REIT’s first IFRS reporting period. Training of accounting and operational staff is well  underway.  No changes were made to the design of the Trusts’ internal control over financial reporting during the three months ended December  31, 2010 that have materially affected, or are reasonably likely to materially affect, the Trusts’ internal control over financial reporting. The financial statements and MD&A were reviewed by the respective audit committees and the Boards of Trustees, which approved  them prior to their publication.  The Trusts’ management, including the CEO and CFO, does not expect that the Trusts’ controls and procedures will prevent or  detect all misstatements due to error or fraud. Due to the inherent limitations in all control systems, an evaluation of controls can  provide only reasonable, not absolute assurance, that all control issues and instances of fraud or error, if any, within the Trusts have  been detected. The Trusts are continually evolving and enhancing its systems of controls and procedures.  The Trusts have also established adequate disclosure controls and procedures and internal control over financial reporting to provide  reasonable assurance regarding their responsibility of the Trusts’ financial reporting and the preparation of the financial statements  for external purposes in accordance with GAAP. The Trusts’ CEO and CFO assessed, or caused an assessment under their direct  supervision, of the effectiveness of the REIT’s disclosure controls and procedures and internal control over financial reporting (as  defined in  National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings)  as at December 31, 2010. Based on this assessment, it was determined that the Trusts’ disclosure controls and procedures and internal control over financial  reporting were effective as at December 31, 2010.  All income property investments are subject to a degree of risk and uncertainty. They are affected by various factors including  general market conditions and local market circumstances. An example of general market conditions would be the availability of  long-term mortgage financing whereas local conditions would relate to factors affecting specific properties such as an oversupply of  space or a reduction in demand for real estate in a particular area. Management attempts to manage these risks through  geographic, type of asset and tenant diversification in the REIT’s portfolio. The major risk factors are outlined below and in the  REIT’s Annual Information Form.  Publicly traded trust units will not necessarily trade at values determined solely by reference to the underlying value of trust assets. Accordingly, the Stapled Units may trade at a premium or a discount to the underlying value of the assets of the REIT and Finance  Trust. Investors in Stapled Units will be subject to all of the risks of an investment in units of Finance Trust and of an investment in  units of the REIT. Holders of Stapled Units should consult the Management’s Discussion and Analysis of Finance Trust and  specifically the risk factors therein. See also “Forward-Looking Disclaimer”.  One of the factors that may influence the market price of the Stapled Units is the annual yield on the Stapled Units. Accordingly, an  increase in market interest rates may lead investors in Stapled Units to demand a higher annual yield which could adversely affect  Page 38 of 45 