H&R REIT AND H&R FINANCE TRUST - MD&A - December 31, 2010  U.S. Holdco intends to treat the U.S. Holdco Notes as indebtedness for U.S. federal income tax purposes. If the Internal Revenue  Service (“IRS”) or a court were to determine that the U.S. Holdco Notes should be treated for U.S. federal income tax purposes as  equity rather than debt, the interest on the notes could be treated as a dividend, and interest on the notes would not be deductible for  U.S. federal income tax purposes. In addition, if the IRS were to determine that the interest rate on the U.S. Holdco Notes did not  represent an arm’s length rate, any excess amount over arm’s length would not be deductible and could be recharacterized as a  dividend payment instead of an interest payment. This would significantly increase the U.S. federal income tax liability of U.S.  Holdco, potentially including the tax liability for prior years in which U.S. Holdco has claimed a deduction for interest paid on the U.S.  Holdco Notes. In addition, U.S. Holdco could be subject to penalties. The increase in tax liability could materially adversely affect  U.S. Holdco’s ability to make interest payments on the U.S. Holdco Notes or the REIT’s ability to make distribution on its units. Additionally, payments of interest on the U.S. Holdco Notes to non-U.S. holders of Stapled Units could be subject to withholding  taxes. To the extent that the REIT or a related party provided debt financing to U.S. Holdco (e.g., by acquiring U.S. Holdco Notes), in  determining income for U.S. tax purposes, U.S. Holdco is subject to possible limitations on the deductibility of interest, if any, paid to  the REIT. Section 163(j) of the Internal Revenue Code (the “Code”) applies to defer U.S. Holdings’ deduction of interest paid on debt  to the REIT in years that (i) the debt to equity ratio of U.S. Holdings exceeded 1.5:1, and (ii) the net interest expense exceeds an  amount equal to 50% of its “adjusted taxable income” (generally, earnings before interest, taxes, depreciation, and amortization). The REIT intends to take the position that, due to the treatment of the Finance Trust as a grantor trust that is disregarded for U.S.  federal tax purposes, the interest paid to Finance Trust is treated as having been paid to the holders of the Finance Trust units and is  therefore not subject to section 163(j). If section 163(j) applied to interest paid to the Finance Trust, depending on the facts and  circumstances and the availability of net operating losses to U.S. Holdco (which are subject to normal assessment by the IRS), the  U.S. federal income tax liability of U.S. Holdings could increase. In such case, the amount of income available for distribution by the  REIT to its unitholders could be reduced.  A foreign corporation will be classified as a passive foreign investment company ("PFIC") for United States federal income tax  purposes if either (i) 75% or more of its gross income is passive income or (ii) on average for the taxable year, 50% or more of its  assets (by value) produce or are held for the production of passive income. The properties of the REIT are managed by a third party  rather than directly by its own employees. Although the REIT's officers and employees oversee the activities of the manager, it is  likely that the REIT will be characterized as a PFIC for U.S. federal income tax purposes, though this conclusion is uncertain. In the  absence of certain elections being made by a U.S. holder of REIT Units, any distributions in respect of the REIT Units which exceed  125% of the average amount of distributions in respect of such REIT Units during the preceding three years, or, if shorter, during the  preceding years in the U.S. holder's holding period ("excess distributions") and any gain on a sale or other disposition of the REIT  units will be treated as ordinary income and will be subject to special tax rules, including an interest charge. U.S. holders should  consult with their own tax advisors regarding the implications of these rules and the advisability of making one of the applicable PFIC  elections, taking into account their particular circumstances.  In compliance with U.S. Treasury Department Circular 230, which provides rules governing certain conduct of U.S. tax advisors  giving advice with respect to U.S. tax matters, please be aware that: (i) any U.S. federal tax advice contained herein is not intended  to be used and cannot be used by the reader for the purpose of avoiding penalties that may be imposed under the Code; (ii) such  advice was prepared in the expectation that it may be used in connection with the promotion or marketing (within the meaning of  U.S. Treasury Department Circular 230) of Stapled Units; and (iii) prospective investors should seek advice based on their particular  circumstances from an independent tax advisor.  As the Trusts distribute a substantial portion of its income to unitholders, the Trusts may need to obtain additional capital through  capital markets and the Trusts’ ability to access the capital markets through equity issues and forms of secured or unsecured debt  financing may affect the operations of the Trusts as such financing may be available only on disadvantageous terms, if at all. If  financing is not available on acceptable terms, further acquisitions or ongoing development projects may be curtailed and cash  available for distributions or to fund future commitments may be adversely affected.  The number of Stapled Units the Trusts are authorized to issue is unlimited. The trustees have the discretion to issue additional  Stapled Units in certain circumstances, including under the REIT’s Unit Option Plan. Any issuance of Stapled Units may have a  dilutive effect on the investors of Stapled Units.  Ability to Access Capital Markets  Dilution  Page 41 of 45 