Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief in Multiple Jurisdictions -- Exemption granted from the requirement in item 14.2 of Form 51-102F5 to allow filer to include combined, rather than separate, financial statements in a management information circular for entities that will be formed as part of a reorganization -- exemption also granted from the requirement in section 14.2 of Form 51-105F5 and sections 3.2 and 3.14 of National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards (NI 52-107) to allow filer to prepare certain financial information to be included in management information circular to be prepared in accordance with United States generally accepted accounting principles rather than International Financial Reporting Standards, and from the requirement in section 14.2 of Form 51-105F5 and section 3.3 of NI 52-107 to allow certain financial information to be included in management information circular to be audited in accordance with auditing standards of the Public Company Accounting Oversight Board (United States of America) rather than Canadian generally accepted auditing standards -- management information circular will provide sufficient information to enable shareholders to understand the reorganization and make an informed decision.

Applicable Legislative Provisions

National Instrument 51-102 Continuous Disclosure Obligations, s. 13.1.

Form 51-102F5 Information Circular,s. 14.2.

National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards, ss. 3.2, 3.3, 3.14, 5.1.

October 11, 2012

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction),

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

GRANITE REAL ESTATE INC.

(the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for the following relief (the Exemption Sought):

(a) pursuant to section 13.1 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102), in connection with the proposed reorganization of the Filer by way of a plan of arrangement under section 414 of the Business Corporations Act (Québec) (the QBCA) to form a "stapled unit" real estate investment trust structure (the Conversion Transaction), that the Filer be exempted from the requirement under section 14.2 of Form 51-102F5 Information Circular (the Circular Form) to provide pro forma financial statements reflecting completion of the Conversion Transaction for each of the entities whose securities will be publicly held by former holders of common shares of the Filer and form the "stapled units" following completion of the Conversion Transaction, namely a newly-formed real estate investment trust (Granite REIT) and a newly-formed corporation (Granite GP), on a stand-alone basis, as at the most recent balance sheet date of the Filer and for the most recent annual and interim financial periods of the Filer for which it has filed financial statements, and instead to provide pro forma combined financial statements for Granite REIT and Granite GP as at such date and for such periods (Pro Forma Combined Financial Statements), in the management information circular of the Filer (the Circular) to be prepared and sent to Granite Common Shareholders (as defined below) in connection with the Conversion Transaction; and

(b) pursuant to section 13.1 of NI 51-102 and section 5.1 of National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards (NI 52-107), that the Filer be exempted from:

(i) the requirement under section 14.2 of the Circular Form and under sections 3.2 and 3.14 of NI 52-107 to prepare the historical opening financial statements of Granite REIT and Granite GP and the Pro Forma Combined Financial Statements, to be included in the Circular, in accordance with International Financial Reporting Standards (Canadian GAAP applicable to publicly accountable enterprises, as set forth in Part 1 of the Handbook of the Canadian Institute of Chartered Accountants) (IFRS), and instead permit them to be prepared in accordance with United States generally accepted accounting principles (U.S. GAAP), and

(ii) the requirement under section 14.2 of the Circular Form and under section 3.3 of NI 52-107 to have historical audited financial statements of Granite REIT and Granite GP, to be included in the Circular, audited in accordance with Canadian GAAS and instead permit them to be audited in accordance with auditing standards of the Public Company Accounting Oversight Board (United States of America) (U.S. PCAOB GAAS).

Further, the principal regulator in the Jurisdiction has received a request from the Filer for a decision that the Application and this decision be kept confidential and not be made public until the earlier of (i) filing by the Filer of a management information circular for the Conversion Transaction, and (ii) 90 days after the issue of the decision with respect to the Exemption Sought (the Confidentiality Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator for the Application;

(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, the Northwest Territories and Nunavut.

Interpretation

Terms defined in National Instrument 14-101 Definitions or MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filer:

1. The Filer is currently a corporation continued under the laws of the Province of Québec. The head office of the Filer is located in Toronto, Ontario. On June 13, 2012, the Filer changed its name from MI Developments Inc. to Granite Real Estate Inc. following approval of the name change by the holders (Granite Common Shareholders) of common shares (Granite Common Shares) of the Filer. The Filer expects to call and hold a special meeting of Granite Common Shareholders (the Granite Special Meeting) for the purpose of voting on a special resolution to approve the Conversion Transaction.

2. The Filer is a reporting issuer or the equivalent under the securities legislation of each of the provinces and territories of Canada and is not in default of securities legislation of any such jurisdiction.

3. The Filer also has securities registered under section 12 of the U.S. Securities Exchange Act of 1934, as amended (the 1934 Act). As such, the Filer is an "SEC issuer" as that term is defined under NI 51-102 and NI 52-107.

4. The Granite Common Shares are listed on the Toronto Stock Exchange (TSX) under the symbol "GRT" and on the New York Stock Exchange (NYSE) under the symbol "GRP".

5. The Filer is a Canadian-based real estate company engaged, directly and through its subsidiaries, primarily in the acquisition, development, construction, leasing, management and ownership of a predominantly industrial rental portfolio of properties in North America and Europe.

6. As at June 30, 2012, there were approximately 46,818,376 Granite Common Shares outstanding.

7. The Filer is also the issuer of $265 million of 6.05% Senior Unsecured Debentures Series 1 due December 22, 2016 (the Debentures), which were issued in Canada under a base shelf prospectus dated March 19, 2004 and a prospectus supplement dated December 16, 2004.

The Conversion Transaction

8. On June 30, 2011, the Filer completed a reorganization (the 2011 Reorganization) pursuant to a plan of arrangement under the Business Corporations Act (Ontario) that resulted in (i) the transfer to the Filer's former controlling shareholder (a company controlled by the Stronach Trust) of the horseracing, gaming and certain related assets formerly held by the Filer, in return for the purchase and cancellation of the shares of the Filer held by such shareholder, and (ii) the elimination of the Filer's former dual-class share structure. Following the 2011 Reorganization, an entirely new board of directors took office and new senior management (including the chief executive officer and chief financial officer) was appointed.

9. On October 25, 2011 the Filer announced that, as part of its newly developed strategic plan following the 2011 Reorganization, it intends to convert to a real estate investment trust (a REIT). The purpose of the Conversion Transaction is to complete the conversion of the Filer from a corporate structure to a REIT. The Conversion Transaction will adopt the "stapled unit" structure described below in order to avoid an acquisition of control of the Filer for Canadian income tax purposes.

10. In connection with or as part of the Conversion Transaction, it is proposed that, among other things, the following transactions will occur:

(a) the Filer will form Granite GP as a new corporation under the Business Corporations Act (British Columbia), and Granite GP (as general partner) and the Filer (as initial limited partner) will form a new limited partnership (Granite LP) under the laws of Québec;

(b) the Filer will form Granite REIT as a new trust under the laws of Ontario;

(c) the Filer will transfer the equity of its Canadian and United States subsidiaries, and indebtedness owed to it by one or more United States subsidiaries (the U.S. Debtor Subsidiaries), to Granite LP, and will transfer indebtedness owed to it by certain European subsidiaries (the Euro Debtor Subsidiaries) to a newly created limited partnership that will be controlled indirectly by the Filer (Finance LP), in which the Filer will own the general partner (having a 0.01% economic interest) and an approximate 19.99% voting limited partnership interest, and Granite LP will own an approximate 80% non-voting limited partnership interest;

(d)

(i) Granite LP and Finance LP will agree to be bound by the terms of the trust indenture and of the Debentures as co-principal debtors in place of the Filer, and the Filer will guarantee all amounts payable under the Debentures, in accordance with the trust indenture, and Granite LP will assume substantially all of the other indebtedness and liabilities of the Filer, (ii) the Filer will agree to remain bound by the trust indenture and the Debentures as co-principal debtor, as permitted by the trust indenture, and (iii) each of Granite GP and Granite REIT will provide guarantees of all amounts payable under the Debentures, as permitted by the trust indenture;

(e) U.S. Debtor Subsidiaries and Euro Debtor Subsidiaries of the Filer will grant security for indebtedness owed by them to Granite LP or Finance LP through the grant by such U.S. Debtor Subsidiaries and Euro Debtor Subsidiaries of movable hypothecs over securities of their respective subsidiaries;

(f) through a series of steps, Granite Common Shareholders will exchange their Granite Common Shares for units of Granite REIT (Granite REIT Units) and common shares of Granite GP (Granite GP Common Shares) on a one-for-one basis;

(g) all of the Granite Common Shares will become owned by Granite LP; and

(h) all of the limited partnership units of Granite LP (which will represent approximately 99.99% of the economic entitlement in Granite LP) will become held by Granite REIT, with the general partnership interest (which will represent not more than approximately 0.01% of the economic entitlement in Granite LP) remaining held by Granite GP.

11. Subject to approval by the Granite Common Shareholders, other required approvals and satisfaction of closing conditions, it is expected that the Conversion Transaction will be completed in late December 2012 or early January 2013.

12. At the conclusion of the Conversion Transaction, each Granite REIT Unit will be stapled to a Granite GP Common Share (together, a Stapled Unit) and the two securities will, subject to listing approval, trade together as a Stapled Unit on the TSX and the NYSE (the Stapled Structure). Assuming listing approval is granted, it is expected that the Stapled Units will be listed and posted for trading in substitution for the Granite Common Shares, which are currently listed and posted for trading. The Filer anticipates that the Granite REIT Units and Granite GP Common Shares forming the Stapled Units will be separately listed, but not separately posted for trading, on the TSX, as is the case with other stapled unit structures.

13. Upon completion of the Conversion Transaction, Granite REIT and Granite GP will enter into an agreement that will facilitate the Stapled Structure, including providing for the simultaneous issue of Granite REIT Units and Granite GP Common Shares, redemption of Granite REIT Units and Granite GP Common Shares, coordination of the declaration and payment of dividends and distributions, and other relevant matters.

14. The Granite REIT Units and the Granite GP Common Shares will only become unstapled (a) in the event that holders of Granite REIT Units vote in favour of the unstapling of Granite REIT Units and Granite GP Common Shares, such that the two securities will trade separately, or (b) at the sole discretion of the trustees of Granite REIT or the directors of Granite GP upon an event of bankruptcy or insolvency of either Granite REIT or Granite GP.

15. Immediately following completion of the Conversion Transaction, the authorized capital of Granite GP will include an unlimited number of Granite GP Common Shares, and all of the issued Granite GP Common Shares will be held by the former Granite Common Shareholders in the form of Stapled Units.

16. Immediately following completion of the Conversion Transaction, the authorized capital of Granite REIT will be an unlimited number of Granite REIT Units, and all of the issued Granite REIT Units will be held by the former Granite Common Shareholders in the form of Stapled Units.

17. Immediately upon completion of the Conversion Transaction, (a) the only material assets of Granite REIT will be the limited partnership interests in Granite LP, (b) the only significant asset of Granite GP will be its relatively nominal general partner interest in Granite LP, and (c) Granite REIT will not own any equity securities of Granite GP and Granite GP will not own any equity securities of Granite REIT.

18. Pursuant to the QBCA, the Granite Common Shareholders will be required to approve the Conversion Transaction by at least two-thirds of the votes cast by Granite Common Shareholders at the Granite Special Meeting. It is anticipated that the Granite Special Meeting will take place in mid-November 2012 and the Circular with respect to the Granite Special Meeting is expected to be mailed in mid-October 2012.

Governance and Management

19. Immediately upon completion of the Conversion Transaction, the initial directors of Granite GP are expected to be the individuals who are the directors of the Filer at the time of completion of the Conversion Transaction. Immediately upon completion of the Conversion Transaction, the initial trustees of Granite REIT are expected to be the individuals who are the directors of Granite GP or a smaller group of individuals, all of whom will be directors of Granite GP. Thereafter, the directors of Granite GP and the trustees of Granite REIT will be elected or appointed by the holders of Granite GP Common Shares and the holders of Granite REIT Units, respectively. It is expected that the chief executive officer and chief financial officer of Granite REIT will be the same as the chief executive officer and chief financial officer of Granite GP, and will initially be the individuals who are the chief executive officer and chief financial officer of the Filer at the time of completion of the Conversion Transaction.

20. Following the Conversion Transaction, the business and interests of Granite REIT and Granite GP (carried on through Granite LP and its subsidiaries) will effectively be one and the same. The economic interest of a holder of Stapled Units will be in Granite REIT and Granite GP together. Granite GP will have authority to act as the general partner of Granite LP, and Granite REIT and Granite GP will together own all of the partnership interests in Granite LP, which will own, directly and indirectly, the shares of the (reorganized) Filer and all of the subsidiaries, business and assets previously held by the Filer. The Conversion Transaction does not contemplate the acquisition of any additional operating assets from third parties or the disposition of any existing operating assets to third parties.

The Circular and the Requested Exemptions

21. The Conversion Transaction will be a "restructuring transaction" and will involve significant acquisitions by Granite REIT and Granite GP and therefore would require compliance with section 14.2 of the Circular Form.

22. Section 14.2 of the Circular Form requires, among other things, that the Circular contain the disclosure (including financial statements) prescribed under securities legislation for each entity resulting from the Conversion Transaction, if Granite's securityholders will have an interest in that entity after completion of the transaction, and described in the form of prospectus that entity would be eligible to use immediately prior to the sending and filing of the Circular for a distribution of its securities. As they are not currently reporting issuers, for Granite REIT and Granite GP, this would be disclosure required by Form 41-101F1 Information Required in a Prospectus (the Prospectus Form) under National Instrument 41-101 General Prospectus Requirements.

23. As an SEC issuer and a reporting issuer, the Filer currently prepares its financial statements in accordance with U.S. GAAP, as permitted under NI 52-107. The Filer's financial statements for 2011 and prior years are presented in U.S. dollars. Beginning on January 1, 2012, the Filer began reporting its financial results in Canadian dollars (including restating comparative prior periods in Canadian dollars).

24. Since Granite REIT and Granite GP will be newly created Canadian issuers and will not be SEC issuers at the time the Circular is prepared and mailed, they will not be able to prepare their financial statements in accordance with U.S. GAAP but would be required under NI 52-107 to use IFRS. Similarly, Canadian issuers that are not SEC issuers must have their financial statements audited in accordance with Canadian GAAS under section 3.3 of NI 52-107. Section 3.14 of NI 52-107 requires pro forma financial statements to be prepared using accounting principles that are permitted by the issuer's GAAP.

25. Granite REIT and Granite GP: (i) will become reporting issuers by operation of law in all provinces and territories other than Ontario following the completion of the Conversion Transaction; (ii) have applied to be designated as reporting issuers in Ontario following the completion of the Conversion Transaction; and (ii) expect to register securities under section 12 of the 1934 Act following the Conversion Transaction and as such will be "SEC issuers" as that term is defined under NI 51-102 and NI 52-107.

26. The Filer has determined, in consultation with its auditors Ernst & Young LLP, that under both U.S. GAAP and IFRS, (a) the financial statements of Granite REIT would consolidate the financial position and results of Granite LP and its subsidiaries, (b) in its own, stand-alone, financial statements, Granite GP would equity account for its relatively nominal general partner interest in Granite LP, and (c) Granite REIT and Granite GP will be able to prepare combined financial statements, so long as the Stapled Structure exists. If the Conversion Transaction is completed, Granite REIT and Granite GP will account for the transaction on a continuity of interests basis from the Filer.

27. Following completion of the Conversion Transaction, so long as the Stapled Units are not unstapled, the financial information most relevant to holders of Stapled Units will be that of Granite REIT and Granite GP together, on a combined basis.

28. The Circular will contain the following financial statements and information in connection with the Conversion Transaction:

(a) an opening balance sheet of Granite REIT, presented in Canadian dollars and prepared in accordance with U.S. GAAP;

(b) an opening balance sheet of Granite GP, presented in Canadian dollars and prepared in accordance with U.S. GAAP;

(c) audited annual consolidated financial statements of the Filer for the years ended December 31, 2011 and 2010, presented in U.S. dollars, and unaudited interim consolidated financial statements of Granite for the three and six month periods ended June 30, 2012 and 2011, presented in Canadian dollars, together in each case with related management's discussion and analysis, prepared in accordance with U.S. GAAP and incorporated by reference from the continuous disclosure record of the Filer, in compliance with section 14.2 of the Circular Form and Items 32 and 35 of the Prospectus Form; and

(d) Pro Forma Combined Financial Statements for Granite REIT and Granite GP, together, presented in Canadian dollars (with applicable adjustments to convert the Filer's 2011 financial information from U.S. dollars to Canadian dollars) and prepared in accordance with U.S. GAAP, reflecting completion of the Conversion Transaction, consisting of:

(i) a pro forma combined balance sheet as at June 30, 2012;

(ii) a pro forma combined income statement for the six months ended June 30, 2012; and

(iii) a pro forma combined income statement for the year ended December 31, 2011.

29. The Circular will contain prospectus-level disclosure in accordance with section 14.2 of the Circular Form (except as exemptions may be granted) and will contain sufficient information to enable a reasonable security holder to form a reasoned judgment concerning the nature and effect of the Conversion Transaction and the nature of the resulting issuers, being Granite REIT and Granite GP.

Decision

1. The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

2. The decision of the principal regulator under the Legislation is that the Exemption Sought is granted, provided that the Circular contains or incorporates by reference, as applicable, the items described in paragraphs 28 and 29, above.

3. The further decision of the principal regulator under the Legislation is that the Confidentiality Sought is granted.

"Jo-Anne Matear"
Manager, Corporate Finance
Ontario Securities Commission