H&R REIT AND H&R FINANCE TRUST - MD&A - December 31, 2010  Significant costs associated with income properties are either capitalized and depreciated or expensed in the year incurred. As a  result, the REIT expects to incur the following costs:  Year  Total Amount  Expected to be Incurred  Amount  Expected to be Capitalized  Amount Expected to  be Expensed to  Property Operating  Costs  Total  Expected  Recovery  Amount  Expected to be  Recovered in the  Year Incurred  Amount Expected to  be Recovered  thereafter  2011  $22 million  $15 million  $7 million  $19 million  $12 million  $7 million  2012  $16 million  $10 million  $6 million  $13 million  $10 million  $3 million  The information contained in the table above is based on current tenancies in place and management’s estimates of these costs  being recovered through tenant’s leases.  Properties Under Development The REIT entered into agreements to develop the Bow, a 2 million square foot head office complex in Calgary, Alberta for a  budgeted cost of approximately $1.5 billion, including expected capitalized interest, and net of rent received during the construction  period. The budget includes the cost to construct 1,360 parking stalls. The REIT has entered into fixed price contracts amounting to  approximately 92% of the budgeted $1.1 billion of hard construction costs. As a result, together with the costs incurred to date, the  REIT has effectively locked in approximately 97% of the total budget before contingencies. See Section V for a discussion on  development and financing risk relating to the Bow.  The building is fully pre-leased, on a triple net basis, to EnCana Corporation for 25 years. The total annualized year one projected  income from the Bow is expected to be approximately $94 million. Rent step ups will be 0.75% per annum on the office space and  1.5% per annum on the parking income for the full 25-year term. During the year ended December 31, 2010, the REIT incurred  additional costs of $430.9 million in this project to bring the REIT’s total investment to $1,150.1 million (December 31, 2009 - $719.2  million). The erection of the main structure is substantially complete. The project is approximately 3 months behind schedule from  the first contractual tranche delivery date. The potential cost expected to be incurred in the form of free rent for the late delivery of  the tranches is approximately $4.7 million and is included in the budgeted soft costs. The $30.0 million contingency for the project  would be available for any additional delay costs.  The REIT is expecting to incur approximately $360.0 million of the Bow’s development costs over the next twelve months. See  “Liquidity and Capital Resources” for the budget breakdown and the anticipated sources of funds. Accrued Rent Receivable  Certain leases call for rental payments that increase over the lease term. To comply with Canadian GAAP, the rental revenue from  these leases are recorded on a straight-line basis, resulting in accruals for rents that are not billable or due until future periods. Accrued rent receivable has increased by 9% or $11.4 million from $125.2 million at December 31, 2009 to $136.6 million at  December 31, 2010 with a corresponding increase to rentals.  Page 20 of 45 